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As filed with the Securities and Exchange Commission on May 12, 2006
Registration No. 333-          
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
Legacy Reserves LP
(Exact name of registrant as specified in its charter)
         
Delaware   1311   16-1751069
(State or other jurisdiction of
incorporation or organization) 		  (Primary Standard Industrial
Classification Code Number) 		  (I.R.S. Employer
Identification Number)
303 W. Wall Street, Suite 1600
Midland, Texas 79701
(432) 682-2516
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Steven H. Pruett
President and Chief Financial Officer
Legacy Reserves GP, LLC
303 W. Wall Street, Suite 1600
Midland, Texas 79701
(432) 682-2516
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Gislar Donnenberg
James V. Baird
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
(713) 220-4200
 
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
 
      If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.      þ
      If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.      o
      If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.      o
      If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.      o
CALCULATION OF REGISTRATION FEE
             
             
             
      Proposed Maximum      
Title of Each Class of     Aggregate     Amount of
Securities to be Registered     Offering Price(1)     Registration Fee
             
Units representing limited partner interests
    $71,569,218     $7,658
             
             
(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. No exchange or over-the -counter market exists for the registrant’s units. However, the registrant’s units issued to qualified institutional buyers in connection with its March 2006 private placement are eligible for the PORTAL ® Market. The registrant is not aware of any of the registrant’s units having been sold on the PORTAL ® Market since the closing of the private placement on March 15, 2006 when the registrant’s units were sold at a price of $17.00 per unit.
 
     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 

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The information in this preliminary prospectus is not complete and may be changed. Securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject To Completion, Dated May 12, 2006
PROSPECTUS
  Legacy Reserves LP
 
  4,209,954 Units
 
  Representing Limited Partner Interests
(LEGACY LOGO)
        This prospectus relates to up to 4,209,954 units, which may be offered for sale by the selling unitholders named in this prospectus. The selling unitholders acquired the units offered by this prospectus in a private equity offering. We are registering the offer and sale of the units to satisfy registration rights we have granted.
      We are not selling any units under this prospectus and will not receive any proceeds from the sale of units by the selling unitholders. The units to which this prospectus relates may be offered and sold from time to time directly from the selling unitholders or alternatively through underwriters or broker-dealers or agents. The units may be sold in one or more transactions, at fixed prices, at prevailing market prices at the time of sale or at negotiated prices. Because all of the units being offered under this prospectus are being offered by selling unitholders, we cannot currently determine the price or prices at which our units may be sold under this prospectus. We are not aware of any of our units having been sold on the PORTAL ® Market since the closing of our private equity offering on March 15, 2006 when our units were sold at a price of $17.00 per unit. Future prices will likely vary from that price and such sale may not be indicative of prices at which our units will trade. Please read “Plan of Distribution.”
      Prior to this offering, there has been no public market for our units.
      Investing in our units involves a high degree of risk. See “Risk Factors” beginning on page 18.
      These risks include the following:
  •  We may not have sufficient available cash to pay our estimated initial quarterly distribution.
 
  •  If commodity prices decline significantly for a prolonged period, we may be forced to reduce our distribution or not be able to pay distributions at all.
 
  •  If we are not able to acquire additional oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, results of operations and financial condition and our ability to make cash distributions to you.
 
  •  There is no existing market for our units, and a trading market that will provide you with adequate liquidity may not develop or be sustained. The price of our units may fluctuate significantly, and you could lose all or part of your investment.
 
  •  Our Founding Investors own a 72.6% limited partner interest in us and control our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner has conflicts of interest and limited fiduciary duties, which may permit it to favor its own interests to your detriment.
 
  •  Unitholders have limited voting rights and are not entitled to elect our general partner, and until we have completed an initial public offering or the owners of our general partner own less than 50% of our units, our unitholders will not be entitled to elect any of its directors.
 
  •  You will experience immediate and substantial dilution of $8.82 per unit.
 
  •  You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
 
      You should rely only on the information contained in this prospectus or any prospectus supplement or amendment. We have not authorized anyone to provide you with different information. Neither we nor the selling unitholders are not making an offer of these securities in any state where the offer is not permitted.
      Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is           , 2006.

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  Amended and Restated Agreement of Limited Partnership of Legacy Reserves LP   A-1
  Glossary of Terms   B-1
  Reserve Report   C-1
  Certificate of Limited Partnership
  Certificate of Formation
  Amended and Restated Limited Liability Company Agreement
  Registration Rights Agreement
  Credit Agreement
  Contribution, Conveyance and Assumption Agreement
  Omnibus Agreement
  Purchase/Placement Agreement
  Long-Term Incentive Plan
  Form of Long-Term Incentive Plan Restricted Unit Grant Agreement
  Employment Agreement - Carey D. Brown
  Employment Agreement - Steven H. Pruett
  Employment Agreement - Kyle A. McGraw
  Employment Agreement - Paul T. Horne
  Employment Agreement - William M. Morris
  List of Subsidiaries
  Consent of BDO Seidman, LLP
  Consent of Johnson, Miller & Co.
  Consent of LaRoche Petroleum Consultants, Ltd.

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SUMMARY
      This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma consolidated financial statements and the notes to those financial statements. You should read “— Legacy Reserves LP — Summary Risk Factors” and “Risk Factors” for information about important factors to consider before buying the units. We include a glossary of some of the terms used in this prospectus in Appendix B. LaRoche Petroleum Consultants, Ltd., an independent engineering firm, provided the estimates of proved oil and natural gas reserves as of December 31, 2005 included in this prospectus. These estimates are contained in a summary prepared by LaRoche Petroleum Consultants, Ltd. of its reserve report as of December 31, 2005 relating to our properties. This summary is located at the back of this prospectus as Appendix C and is referred to in this prospectus as the “reserve report.”
      References in this prospectus to “Legacy Reserves,” “we,” “our,” “us,” or like terms when used in a historical context for periods prior to March 15, 2006 refer to the oil and natural gas properties Legacy Reserves LP and its subsidiaries acquired in connection with its formation. When used in the present or future tense, those terms refer to Legacy Reserves LP and its subsidiaries. References in this prospectus to “Founding Investors” refer to the Moriah Group, the Brothers Group, H2K Holdings, Ltd. (an entity owned and controlled by Paul T. Horne) and MBN Properties LP (the owner of the properties purchased from the Prospective Investment and Trading Company Ltd. and its affiliates, or the PITCO properties), as each are described elsewhere in this prospectus. References in this prospectus to the limited partner interests and units of the Founding Investors include, unless the context clearly indicates otherwise, the restricted units and the limited partner interests represented thereby owned by certain members of our management and directors.
Legacy Reserves LP
      We are an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and exploitation of oil and natural gas properties primarily located in the Permian Basin of West Texas and southeast New Mexico. We were formed in October 2005 to own and operate the oil and natural gas properties that we acquired from our Founding Investors and three charitable foundations in connection with the closing of our private equity offering on March 15, 2006. Members of our management team have owned and operated the majority of these assets since 1999. Our primary business objective is to generate stable cash flows allowing us to make cash distributions to our unitholders and to increase quarterly cash distributions per unit over time through a combination of acquisitions of new and exploitation of our existing oil and natural gas properties.
      Based on our reserve report as of December 31, 2005 and our historical oil and natural gas production data:
  •  we had proved reserves of approximately 18 MMBoe, of which approximately 69% were oil and 83% were classified as proved developed;
 
  •  our proved reserves had estimated future net revenues discounted at 10%, or a PV-10, of $277.2 million;
 
  •  our average daily net production was 3,090 Boe/d for the twelve months ended December 31, 2005, including the historical production attributable to the PITCO properties, of which approximately 64% was from properties we operate; and
 
  •  our proved reserves to production ratio was approximately 16 years.
      We have grown primarily through two activities: the acquisition of producing oil and natural gas properties and the exploitation (as opposed to exploration) of our properties.
      During the period of January 1, 2002 through December 31, 2005 we acquired approximately 7.9 MMBoe of proved reserves and added approximately 8.8 MMBoe of proved reserves through extensions and discoveries, revisions of prior estimates and improved recovery.

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      Our reserves are located primarily in the Permian Basin, one of the largest and most prolific oil and natural gas producing basins in the United States. The Permian Basin extends over 100,000 square miles in West Texas and southeast New Mexico and has produced over 24 billion Bbls of oil since its discovery in 1921. The Permian Basin is characterized by oil and natural gas fields with long production histories, multiple producing formations, low rates of production decline and predictable low-risk reserves.
Acquisition Activities
      Our strategy is to make accretive acquisitions of producing properties. Accordingly, we have and will continue to focus on identifying, evaluating, executing, integrating and exploiting acquisitions of oil and natural gas properties in the Permian Basin, a large basin with fragmented ownership. During July 2005, there were more than 1,700 operators in the Permian Basin according to the Texas and New Mexico oil and natural gas regulatory commissions, and the top five operators accounted for less than 40% of the total oil production during that period. We believe that our track record and structure will allow us to favorably compete in the acquisition market.
      From January 1, 1999 through December 31, 2005, we invested approximately $114.2 million in 26 acquisitions. Based on internal reserve data prepared at the time of these acquisitions, we added a total of approximately 20.1 MMBoe of proved reserves at a reserve acquisition cost of $5.67 per Boe. These additions include our September 2005 acquisition of approximately 5.6 MMBoe of proved reserves, as evaluated by La Roche Petroleum Consultants, Ltd. as of September 30, 2005, from PITCO for $63.9 million in cash ($64.3 million, inclusive of asset retirement obligations), representing a reserve acquisition cost of $11.49 per Boe.
      We believe that the September 2005 acquisition of Permian Basin producing properties from PITCO has provided us with opportunities to apply our operational knowledge to increase production and reserves from a variety of known producing formations since many of the PITCO properties are near or in the same fields or formations as our other properties. We also believe that the PITCO acquisition positions us to capitalize on a substantial number of additional strategic and “tack-on” acquisitions in the Permian Basin. Tack-on acquisitions typically require little or no additional overhead to manage as they often increase our ownership in an existing field or in a property adjacent to our operations.
Exploitation Activities
      We have also grown reserves and production each year since 1999 through exploitation activities on our existing and acquired properties. Our exploitation activities include accessing additional productive formations in existing wellbores, formation stimulation, artificial lift equipment enhancement, infill drilling on closer well spacing, secondary (water injection) and tertiary (CO 2 injection) recovery projects, drilling for deeper formations and tight formation drilling and completions. From January 1, 2002 through December 31, 2005, we added approximately 8.8 MMBoe of proved reserves, through exploitation activities, excluding the PITCO properties which were acquired in September 2005. Over the same period our reserve replacement rate, or the ratio of added proved reserves to production, from exploitation activities, revisions to prior estimates and improved recovery was over 300%, excluding the PITCO properties. As of December 31, 2005, we have identified 96 proved undeveloped drilling locations, 12 recompletion projects and one tertiary recovery expansion project on our properties, approximately 85% of which we intend to execute over the next four years. We expect to make capital expenditures of approximately $8.25 million during 2006, including drilling 11 gross (6.7 net) development wells, executing nine recompletions and initiating one tertiary recovery expansion project. We currently have rigs operating or committed to drill 100% of our expected development wells for 2006.
Hedging Activities
      Our strategy includes hedging a majority of our oil and natural gas production over a three- to five-year period. We have hedged approximately 85% of our expected oil and natural gas production for 2006 from total proved reserves. We have also hedged approximately 65% of our expected oil and natural gas production

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from total proved reserves for 2007 through 2010. All of our hedges are in the form of fixed price swaps with average NYMEX prices of at least $61.00 per Bbl of oil and $8.00 per MMBtu of natural gas.
Business Strategy
      The key elements of our business strategy are to:
  •  make accretive acquisitions of producing properties generally characterized by long-lived reserves with stable production and reserve exploitation potential;
 
  •  grow proved reserves and maximize cash flow and production through exploitation activities and operational efficiencies;
 
  •  focus on the Permian Basin;
 
  •  maintain financial flexibility; and
 
  •  reduce commodity price risk through hedging.
Competitive Strengths
      We believe that we are positioned to successfully execute our business strategy because of the following competitive strengths:
  •  Proven acquisition and exploitation track record. We have historically grown our proved reserves and production through acquisitions and exploitation activities. Over the period of January 1, 2002 through December 31, 2005, we invested approximately $87.1 million and added approximately 16.7 MMBoe of proved reserves for a reserve replacement cost of $5.19 per Boe. The 16.7 MMBoe of proved reserve additions are comprised of approximately 8.8 MMBoe of extensions and discoveries, revisions of prior estimates and improved recovery and approximately 7.9 MMBoe of property acquisitions. Additionally, we have increased our production from 1,887 Boe/d for the year ended December 31, 2002, to 3,090 Boe/d for the year ended December 31, 2005, which includes the historical production attributed to the PITCO properties.
 
  •  Predictable, long-lived reserve base. Our properties are primarily located in mature fields characterized by a long history of stable production and low to moderate rates of production decline. According to the Texas and New Mexico oil and natural gas regulatory commissions, the properties in which we own interests have cumulatively produced over 900 MMBoe, gross. Technological advances have improved oil and natural gas recovery factors in the Permian Basin, resulting in positive revisions of our reserves and thereby extending the lives of our fields.
 
  •  Diversified operations. Our properties and operations are broadly distributed across the Permian Basin, producing from over 40 different formations. As of December 31, 2005, we produced oil and natural gas from a total of 1,658 wells. Our largest field in terms of total proved reserves, which includes approximately 99 producing wells, represents less than 8% of our total PV-10. We believe that our broad technical and operational expertise enables us to identify a wide range of production and reserve growth opportunities when evaluating acquisitions with reserve exploitation potential.
 
  •  Experienced management team with a vested interest in our success. The members of our management team have an average of over 20 years of experience in the oil and natural gas industry, with the majority of that time focused on the Permian Basin. During that time, which included several commodity price cycles, we made more than 20 acquisitions of producing oil and natural gas properties. We believe that our management’s experience in acquiring and developing oil and natural gas properties and its technical knowledge of the production characteristics of the formations and recovery methods in the Permian Basin will enable us to successfully identify, evaluate, execute, integrate and exploit acquisitions. Members of our management team, their families and their affiliated entities beneficially own a 65.2% limited partner interest in us. Please read “Security Ownership of Certain Beneficial Owners and Management.”

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Summary of Risk Factors
      An investment in our units involves risks associated with our business, this offering and our limited partnership structure and the tax characteristics of our units. The following list of risk factors is not exhaustive. Please read carefully these and the other risks under the caption “Risk Factors.”
Risks Related to Our Business
  •  We may not have sufficient available cash to pay our estimated initial quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.
 
  •  If we are unable to achieve the Minimum Estimated Adjusted EBITDA set forth in “Cash Distribution Policy and Restrictions on Distributions,” we may be unable to pay the full amount of the estimated initial quarterly distribution, or any amount, on the units, in which event the market price of our units may decline substantially.
 
  •  If commodity prices decline significantly for a prolonged period, we may be forced to reduce our distribution or not be able to pay distributions at all.
 
  •  If we are not able to acquire additional oil and natural gas reserves on economically acceptable terms, we may be forced to reduce our distribution or not be able to pay distributions at all.
 
  •  If we are not able to acquire additional oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, results of operations and financial condition and our ability to make cash distributions to you.
 
  •  Our credit facility has substantial restrictions and financial covenants, and we may have difficulty obtaining additional credit, which could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
 
  •  Our estimated reserves are based on many assumptions that may prove inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
 
  •  Our exploitation projects require substantial capital expenditures, which will reduce our cash available for distribution. We may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a decline in our oil and natural gas reserves.
 
  •  Shortages of drilling rigs, equipment and crews could delay our operations, adversely affect our ability to increase our reserves and production and reduce our cash available for distribution to you.
 
  •  Increases in the cost of drilling rigs, service rigs, pumping services and other costs in drilling and completing wells could reduce the viability of certain of our exploitation projects.
Risks Related to this Offering and Our Limited Partnership Structure
  •  There is no existing market for our units, and a trading market that will provide you with adequate liquidity may not develop or be sustained. The price of our units may fluctuate significantly, and you could lose all or part of your investment.
 
  •  Units eligible for future sale may have adverse effects on our unit price and the liquidity of the market for our units.
 
  •  Our Founding Investors own a 72.6% limited partner interest in us and control our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner has conflicts of interest and limited fiduciary duties, which may permit it to favor its own interests to your detriment.

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  •  Unitholders have limited voting rights and are not entitled to elect our general partner, and until we have completed an initial public offering or the owners of our general partner own less than 50% of our units, our unitholders will not be entitled to elect any of its directors.
 
  •  Even if unitholders are dissatisfied they cannot remove our general partner without the consent of unitholders owning at least 66 2 / 3 % of our units, including units owned by our general partner and its affiliates.
 
  •  Our partnership agreement restricts the voting rights of those unitholders owning 20% or more of our units.
 
  •  The owners of our general partner may sell all or part of the general partner to a third party without unitholder consent, which could result in a change of our management or business strategy or both and which would result in an event of default under our revolving credit facility, unless consent of our lenders is obtained.
 
  •  Our Founding Investors and their affiliates (other than our executive officers) may compete directly with us.
 
  •  Cost reimbursements due our general partner and its affiliates will reduce our cash available for distribution to you.
 
  •  Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute a breach of fiduciary duty.
 
  •  Our partnership agreement permits our general partner to redeem any partnership interest held by a limited partner who is a non-citizen assignee.
 
  •  You will experience immediate and substantial dilution of $8.82 per unit.
 
  •  We may issue an unlimited number of additional units without your approval, which would dilute your existing ownership interest in us.
Tax Risks to Unitholders
  •  Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to entity-level taxation for state tax purposes, taxes paid, if any, will reduce our cash available for distribution to you.
 
  •  You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
 
  •  A successful IRS contest of the federal income tax positions we take may adversely affect the market for our units, and the costs of any contest will reduce our cash available for distribution to you.
 
  •  Tax-exempt entities, regulated investment companies and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.

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Our Organizational Structure
      We are a Delaware limited partnership formed in October 2005 to own and operate oil and natural gas properties acquired from our Founding Investors and three charitable foundations primarily in the Permian Basin of West Texas and southeastern New Mexico in connection with the closing of our private equity offering on March 15, 2006. The following diagram depicts our organizational structure:
(FLOW CHART)

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Our Management
      Our general partner, Legacy Reserves GP, LLC, manages our operations and activities and its board of directors and officers make decisions on our behalf. Certain of the senior officers of our Founding Investors who managed the operations of the assets contributed to us at the closing of our private equity offering continue to manage us. For more information about these individuals, please read “Management — Directors and Executive Officers of Our General Partner.” Our general partner does not receive any management fee or other compensation in connection with the management of our business but it is entitled to be reimbursed for all direct and indirect expenses incurred on our behalf. Our general partner is also entitled to distributions on its 0.1% general partner interest, but is not entitled to receive any distributions (incentive or otherwise) in excess of its 0.1% general partner interest. Please read “Cash Distribution Policy and Restrictions on Distributions,” “Management — Executive Compensation” and “Certain Relationships and Related Transactions.”
      Unlike shareholders in a publicly traded corporation, our unitholders are not entitled to elect our general partner or, initially, its directors. Prior to an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, all of the directors of our general partner will be elected by its owners (currently our Founding Investors) and not by our unitholders, except in the following circumstances:
  •  if the owners of our general partner own less than 50% but at least 35% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect three of the seven directors;
 
  •  if the owners of our general partner own less than 35% but at least 20% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect five of the seven directors; and
 
  •  if the owners of our general partner own less than 20% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors.
Following an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, our unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors of our general partner. Please read “The Partnership Agreement — Meetings; Voting.”

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The Offering
Units offered by selling unitholders 4,209,954 units.
 
Use of proceeds We will not receive any proceeds from the sale of units by the selling unitholders.
 
Cash distributions We will distribute all of our cash on hand at the end of each quarter, after payment of fees and expenses, less reserves (including reserves for capital expenditures) established by our general partner in its discretion. Unlike most publicly traded partnerships, we will not pay incentive distributions to our general partner. In general, we will distribute 99.9% of our available cash each quarter to our unitholders and 0.1% of our available cash to our general partner. We refer to this cash as “available cash,” and we define its meaning in more detail in our partnership agreement and in the glossary of terms found in Appendix B. Our general partner has broad discretion in establishing reserves for the proper conduct of our business. These reserves, which could be substantial, will reduce the amount of cash available for distribution to you.
 
We intend to make an initial quarterly distribution of $0.41 per unit, or $1.64 on an annualized basis, to the extent we have sufficient available cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner in reimbursement for expenses incurred by it on our behalf. The amount of available cash, if any, at the end of any quarter may be greater than or less than the aggregate initial quarterly distribution to be distributed on all units.
 
We believe, based on the assumptions and considerations included in “Cash Distribution Policy and Restrictions on Distribution — Assumptions and Considerations,” that we will generate sufficient cash flow from operations to enable us to pay the initial quarterly distribution of $0.41 on all units for each quarter through December 31, 2006.
 
We will pay a prorated distribution for the first quarter ended March 31, 2006. This distribution will be paid for the period beginning on March 15, 2006 and ending on March 31, 2006. We expect to pay this cash distribution concurrently with the distribution attributable to the second quarter of 2006, which we expect to pay on or before August 14, 2006. However, we cannot assure you that any distributions will be declared or paid.
 
If we had completed our private equity offering and the related formation transactions, including the acquisition of our properties, on January 1, 2005, pro forma cash available to pay distributions during the year ended December 31, 2005 would have been approximately $22.9 million. This amount of pro forma cash available to pay distributions would have been sufficient to allow us to pay approximately 76% of the initial quarterly distributions on our units during this period. For a calculation of our ability to make distributions to you based on our pro forma results for the

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year ended December 31, 2005, please read “Cash Distribution Policy and Restrictions on Distributions.”
 
Issuance of additional units We can issue an unlimited number of additional units without the consent of our unitholders.
 
Agreement to be bound by limited partnership agreement; voting rights By purchasing a unit, you will be admitted as a limited partner of our partnership and will be deemed to have agreed to be bound by all of the terms of our partnership agreement. Our general partner manages and operates us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will not have the right to elect our general partner. And our general partner may not be removed except by a vote of the holders of at least 66 2 / 3 % of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. The Founding Investors, who are also the owners of our general partner, own an aggregate of 72.7% of our units. This gives the Founding Investors the ability to determine the outcome of substantially all unitholder votes, including the ability to block general partner’s removal.
 
Prior to an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, all of the directors of our general partner will be elected by its owners (currently our Founding Investors) and not by our unitholders, except in the following circumstances:
 
• if the owners of our general partner own less than 50% but at least 35% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect three of the seven directors;
 
• if the owners of our general partner own less than 35% but at least 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect five of the seven directors; and
 
• if the owners of our general partner own less than 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors.
 
Following an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, our unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors of our general partner. Please read “The Partnership Agreement — Meetings; Voting.”
 
Limited call right If at any time our general partner and its affiliates own more than 85% of our outstanding units, our general partner has the right, but not the obligation, to purchase all of the remaining units at a price not less than the then-current market price of the units.

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Estimated ratio of taxable income to distributions We estimate that if you own the units that you purchase in this offering through the record date for distributions for the period ending December 31, 2008, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than 10% of the cash distributed to you with respect to that period. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership” for the basis of this estimate.
 
Absence of Public Market There is no public market for our units and no public market will exist upon the completion of this offering.
 
Risk Factors An investment in our units involves a high degree of risk. Please read “Risk Factors” and other information included in this prospectus for a discussion of factors you should consider before investing in our units.

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Summary Historical and Pro Forma
Consolidated Financial and Operating Data
      We were formed in October 2005. Upon completion of our private equity offering and as a result of the related formation transactions on March 15, 2006, we acquired oil and natural gas properties and business operations from the Founding Investors and three charitable foundations. Although we were the acquiring entity for legal purposes, the formation transactions were treated as a purchase with Moriah Properties, Ltd. and its affiliates, or the Moriah Group, being considered, on a combined basis, as the acquiring entity for accounting purposes. As a result, the Moriah Group applied the purchase method of accounting to the assets and the liabilities of the oil and natural gas properties acquired from the Founding Investors (other than the Moriah Group) and the charitable foundations. Our financial statements for periods prior to March 15, 2006 only reflect the accounts of the Moriah Group.
      The following table shows summary historical financial and operating data for the Moriah Group and pro forma financial and operating data for Legacy Reserves LP for the periods and as of the dates indicated. The accompanying combined historical financial statements for the Moriah Group include the accounts of Moriah Resources, Inc., the general partner of Moriah Properties, Ltd., Moriah Properties, Ltd., the oil and natural gas interests individually owned by Dale A. and Rita Brown until October 1, 2005, when those interests were transferred to DAB Resources, Ltd., and the accounts of MBN Properties LP. The Moriah Group has consolidated MBN Properties LP as a variable interest entity with the portion of net income (loss) applicable to the other owners’ equity interests being eliminated through a non-controlling interest adjustment. Although MBN Management, LLC, the general partner of MBN Properties LP, is also a variable interest entity, it is accounted for by the Moriah Group using the equity method.
      We have not presented historical information for Legacy Reserves LP in this summary because Legacy Reserves LP did not have any operations from the time of its formation through March 15, 2006, and we believe a discussion of the results of Legacy Reserves LP would not be meaningful.
      The summary historical financial data of the Moriah Group for the years ended December 31, 2003, 2004 and 2005 are derived from the audited combined financial statements of the Moriah Group included elsewhere in this prospectus. Since the PITCO properties were not acquired by MBN Properties LP until September 14, 2005, the combined results of operations for the Moriah Group for the year ended December 31, 2005 only include the operating results for the PITCO properties for the period of September 14, 2005 through December 31, 2005.
      The unaudited summary pro forma financial data of Legacy Reserves LP for the year ended December 31, 2005 are derived from the unaudited pro forma financial statements of Legacy Reserves LP included elsewhere in this prospectus. The pro forma statement of operations gives pro forma effect to (i) the formation of MBN Properties LP and its acquisition of properties from PITCO and (ii) the private equity offering and the related formation transactions. The pro forma balance sheet gives pro forma effect to the private equity offering and the related formation transactions. The pro forma adjustments have been prepared as if the transactions had taken place as of January 1, 2005, in the case of the pro forma statement of operations for the year ended December 31, 2005, and on December 31, 2005, in the case of the pro forma balance sheet. The unaudited summary pro forma financial data are not necessarily indicative of operating results or the financial position that would have been achieved had the events described above been completed on those dates and are not necessarily indicative of future operating results.
      You should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Moriah Group’s financial statements and related notes included elsewhere in this prospectus. You should also read the pro forma information together with the unaudited pro forma financial statements of Legacy Reserves LP and related notes included elsewhere in this prospectus.

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      The following table presents the non-GAAP financial measures which we are required to report to our lenders in order to satisfy financial covenants under our revolving credit facility, Ratio of Adjusted EBITDA to Interest Expense and Adjusted Current Ratio. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.” These measures are not calculated or presented in accordance with generally accepted accounting principles, or GAAP. These measures are presented because such information is relevant and is used to assess compliance with our loan covenants. Adjusted EBITDA is also used as a supplemental performance measure by our management and by external users of our financial statements to assess the financial performance, operating performance and return of capital of our assets as compared to other companies in the exploration and production industry without regard to financing methods, capital structure or historical cost basis. We explain these measures below and reconcile them to the most directly comparable financial measures calculated and presented in accordance with GAAP in “— Non-GAAP Financial Measures” beginning on page 15.
                                     
                Legacy
        Reserves LP
    Moriah Group Historical   Pro Forma
         
        Year Ended
    Year Ended December 31,   December 31,
         
    2003   2004   2005(a)   2005
                 
                (Unaudited)
    (In thousands)
Statement of Operations Data:
                               
Revenues:
                               
 
Oil sales
  $ 7,919     $ 10,998     $ 18,225     $ 38,178  
 
Natural gas sales
    3,697       3,945       7,318       15,428  
 
Realized and unrealized gain (loss) on oil and natural gas swaps
    (283 )     (633 )     (6,159 )     (11,048 )
                         
   
Total revenues
    11,333       14,310       19,384       42,558  
                         
Expenses:
                               
 
Oil and natural gas production
    3,496       4,345       6,376       12,038  
 
Production and other taxes
    661       928       1,636       3,457  
 
General and administrative
    543       731       1,354       3,878  
 
Dry hole costs
    1,465       1       —       206  
 
Depletion, depreciation, amortization and accretion
    766       883       2,291       15,093  
 
Impairment of long-lived assets
    471       —       —       5  
 
(Gain) loss on sale of assets
    —       —       20       (299 )
                         
   
Total expenses
    7,402       6,888       11,677       34,378  
                         
 
Operating income
    3,931       7,422       7,707       8,180  
Other income (expense):
                               
 
Interest income
    56       419       185       639  
 
Interest expense
    (94 )     (213 )     (1,584 )     (5,159 )
 
Gain on sale of partnership investment
    —       1,292       —       —  
 
Equity in income (loss) of partnerships
    311       183       (495 )     —  
 
Other
    3       92       45       141  
                         
   
Income before non-controlling interest
    4,207       9,195       5,858       3,801  
 
Non-controlling interest
    —       —       1       —  
                         
   
Income from continuing operations
    4,207       9,195       5,859     $ 3,801  
                         
 
Discontinued operations:
                               
   
Income from operations
    10       15       —          
   
Gain on disposal
    233       7       —          
                         
 
Income from discontinued operations
    243       22       —          
                         
 
Cumulative effect of accounting change
    (223 )     —       —          
                         
 
Net Income
  $ 4,227     $ 9,217     $ 5,859          
                         

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                Legacy
        Reserves LP
    Moriah Group Historical   Pro Forma
         
        Year Ended
    Year Ended December 31,   December 31,
         
    2003   2004   2005(a)   2005
                 
                (Unaudited)
    (In thousands)
Earnings per unit from continuing operations:
                               
 
Basic and fully diluted
  $ 0.44     $ 0.96     $ 0.61     $ 0.21  
                         
Cash Flow Data:
                               
 
Net cash provided by operating activities
  $ 6,799     $ 8,586     $ 14,409          
 
Net cash provided by (used in) investing activities
  $ (8,475 )   $ 1,023     $ (68,965 )        
 
Net cash provided by (used in) financing activities
  $ 1,717     $ (8,958 )   $ 55,742          
 
Capital expenditures
  $ 4,047     $ 3,325     $ 66,915          
Other Financial Information (unaudited):
                               
 
Adjusted EBITDA(b)
  $ 4,907     $ 9,397     $ 12,877     $ 27,785  
 
Ratio of Adjusted EBITDA to Interest Expense(c)
    52.2x       44.1x       8.1x       5.4x  
 
(a)  Reflects MBN Properties LP’s purchase of the PITCO properties on September 14, 2005. Consequently, the operations of the PITCO properties are only included for the period of September 14, 2005 through December 31, 2005.
(b)  Please read “— Non-GAAP Financial Measure” beginning on page 15.
(c)  Our revolving credit facility requires us to maintain consolidated net income plus interest expense, income taxes, depreciation, depletion, amortization and other similar charges, minus all non-cash income added to consolidated net income, and giving pro forma effect to any acquisitions or capital expenditures, to interest expense of not less than 2.5 to 1.0.
                                     
        Legacy Reserves LP
    Moriah Group Historical   Pro Forma
         
    As of December 31,   As of December 31,
         
    2003   2004   2005(a)   2005
                 
                (Unaudited)
    (In thousands)
Balance Sheet Data:
                               
 
Cash and cash equivalents
  $ 117     $ 769     $ 1,955     $ 464  
 
Other current assets
    7,826       5,799       6,316       47  
 
Oil and natural gas properties, net of accumulated depletion, depreciation, and amortization
    9,954       12,224       77,172       225,697  
 
Other assets
    651       —       1,499       746  
                         
   
Total assets
  $ 18,548     $ 18,792     $ 86,942     $ 226,954  
                         
 
Current liabilities
  $ 9,157     $ 4,898     $ 4,562     $ 1,374  
 
Long-term debt
    —       —       52,473       67,800  
 
Other long-term liabilities
    2,113       1,872       19,998       7,881  
 
Owner’s equity
    7,278       12,022       9,909       149,899  
                         
   
Total liabilities and owners’ equity
  $ 18,548     $ 18,792     $ 86,942     $ 226,954  
                         
Other Financial Information (unaudited):
                               
 
Adjusted Current Ratio(b)
                            61.3x  
 
Current Ratio
                            0.37x  
 
(a)  Reflects MBN Properties LP’s purchase of the PITCO properties on September 14, 2005.
(b)  Our revolving credit facility requires us to maintain consolidated current assets, including the unused amount of the total commitments, to consolidated current liabilities of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under SFAS No. 133, which includes the current portion of oil, natural gas and interest rate swaps.

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Summary Reserve and Operating Data
      The following table sets forth a summary of the Moriah Group’s historical combined net proved reserves and our combined net proved reserves as of the dates indicated. Our combined reserve data presented in this prospectus include the proved reserves of the Moriah Group, the Brothers Group, MBN Properties LP, H2K Holdings and the three charitable foundations, which we acquired on March 15, 2006. Estimates of the Moriah Group’s net proved reserves and our combined net proved reserves as of December 31, 2005 are based on reserve reports prepared by LaRoche Petroleum Consultants, Ltd., an independent petroleum engineering firm. A summary of the reserve reports are attached to this prospectus as Appendix C. You should refer to “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business — Oil and Natural Gas Data — Proved Reserves” and the reserve report included in this prospectus in evaluating the information presented below.
                                       
        Legacy Reserves LP
    Moriah Group Historical   Combined
         
    As of December 31,    
        As of December 31,
    2003   2004   2005(b)   2005(c)
                 
Reserve Data:
                               
 
Estimated net proved reserves:
                               
   
Oil (MMBbls)
    3.3       4.1       8.1       12.3  
   
Natural gas (Bcf)
    10.3       10.5       24.5       33.8  
     
Total (MMBoe)
    5.0       5.9       12.2       17.9  
 
Proved developed reserves (MMBoe)
    5.0       5.9       9.8       14.9  
 
Proved undeveloped reserves (MMBoe)
    —       —       2.4       3.0  
 
Proved developed reserves as a percentage of total proved reserves
    100 %     100 %     80 %     83 %
 
PV-10 (in millions)(a)
  $ 41.4     $ 60.4     $ 192.2     $ 277.2  
Oil and Natural Gas Prices:
                               
 
Oil — NYMEX WTI per Bbl
  $ 32.52     $ 43.45     $ 61.05     $ 61.05  
 
Natural gas — NYMEX Henry Hub per MMBtu
  $ 6.19     $ 6.15     $ 11.25     $ 11.25  
 
(a)  PV-10 is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the period end date) without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depletion, depreciation and amortization and discounted using an annual discount rate of 10%. PV-10 does not give effect to derivative transactions, such as commodity swaps. The PV-10 is based on the period end date NYMEX prices shown for oil and natural gas as of such date, with these index prices adjusted as appropriate to wellhead prices based on historical price differentials. For a description of our derivative transactions, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cash Flow from Operating Activities.”
(b)  Includes 3.2 MMBbls of oil, 13.0 Bcf of natural gas and $93.3 million of PV-10 held by MBN Properties LP of which 1.7 MMBbls of oil, 7.0 Bcf of natural gas and $50.2 million of PV-10 is owned by the non- controlling interest.
(c)  Our December 31, 2005 combined proved reserves estimates give effect to our acquisition of the oil and natural gas properties from the Founding Investors and the charitable foundations.

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      The following table shows summary unaudited information with respect to the Moriah Group’s production and sales of oil and natural gas for the periods indicated and summary unaudited information with respect to our production and sales of oil and natural gas on a combined basis for the periods indicated. The following table excludes production and sales of oil and natural gas relating to discontinued operations. You should refer to “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business — Oil and Natural Gas Data — Production and Price History” and the reserve report included in this prospectus in evaluating the information presented below.
                                     
                Legacy
                Reserves LP
                Combined
         
    Moriah Group Historical    
         
    Year Ended December 31,   Year Ended
        December 31,
    2003   2004   2005   2005
                 
Net Production:
                               
 
Oil (MBbls)
    279       286       354       748  
 
Natural gas (MMcf)
    848       783       1,027       2,282  
   
Total (MBoe)
    420       416       525       1,128  
   
Average daily (Boe/d)
    1,152       1,138       1,438       3,090  
Average Sales Prices (including hedges):
                               
 
Oil (per Bbl)
  $ 28.40     $ 36.24     $ 38.95 (a)   $ 38.42 (a)
 
Natural gas (per Mcf)
  $ 4.02     $ 5.04     $ 5.45     $ 6.06  
 
Combined (per Boe)
  $ 26.96     $ 34.36     $ 36.92     $ 37.73  
Average Sales Prices (excluding hedges):
                               
 
Oil (per Bbl)
  $ 28.38     $ 38.45     $ 51.50     $ 51.08  
 
Natural gas (per Mcf)
  $ 4.36     $ 5.04     $ 7.13     $ 6.76  
 
Combined (per Boe)
  $ 27.64     $ 35.88     $ 48.65     $ 47.53  
Average Unit Costs Per Boe:
                               
 
Oil and natural gas production expenses
  $ 8.32     $ 10.43     $ 12.14     $ 10.67  
 
Production taxes
  $ 1.57     $ 2.23     $ 3.12     $ 3.06  
 
General and administrative expenses
  $ 1.29     $ 1.76     $ 2.58     $ 3.43  
 
Depletion, depreciation, amortization and accretion
  $ 1.82     $ 2.12     $ 4.36     $ 13.38  
 
(a)  Includes the effects of approximately $3.5 million of derivative premiums for the year ended December 31, 2005 to cancel and reset 2006 oil swaps from $51.31 to $59.38 per Bbl and approximately $0.8 million of premiums paid on July 22, 2005 for an option to enter into a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
Non-GAAP Financial Measures
Adjusted EBITDA
      Adjusted EBITDA is a financial measurement that we report to our lenders and use as a gauge for compliance with our EBITDA-to -interest covenant in our revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.”
      Adjusted EBITDA is defined in our revolving credit facility as net income (loss) plus:
  •  Interest expense;
 
  •  Depletion, depreciation, amortization and accretion;
 
  •  Impairment of long-lived assets;
 
  •  (Gain) on sale of partnership investment;
 
  •  (Gain) loss on sale of assets;

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  •  Equity in (income) loss of partnerships; and
 
  •  Unrealized (gain) loss on oil and natural gas swaps.
      Adjusted EBITDA is also used as a supplemental performance measure by our management and by external users of our financial statements such as industry analysts, investors, lenders, rating agencies and others to assess:
  •  the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
 
  •  our operating performance and return on capital as compared to those of other companies in the exploration and production industry, without regard to financing or capital structure.
      Our Adjusted EBITDA should not be considered as an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
     Adjusted Current Ratio
      Adjusted Current Ratio is a financial measure that we report to our lenders and use as a gauge for compliance with our Current Ratio covenant in our revolving credit facility. We are required to maintain a ratio of consolidated current assets, including the unused amount of the total commitments, to consolidated current liabilities of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under SFAS No. 133, which includes the current portion of oil, natural gas and interest rate swaps. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.”

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      The following table presents a reconciliation of our net income to Adjusted EBITDA, the EBITDA to Interest Expense Ratio and calculation of our Adjusted Current Ratio:
                                   
        Legacy Reserves LP
    Moriah Group Historical   Pro Forma
         
        Year Ended
    Year Ended December 31,   December 31,
         
    2003   2004   2005   2005
                 
    (In thousands)
Net income
  $ 4,227     $ 9,217     $ 5,859     $ 3,801  
Plus:
                               
 
Interest expense
    94       213       1,584       5,159  
 
Depletion, depreciation, amortization and accretion
    766       883       2,291       15,093  
 
Impairment of long-lived assets
    471       —       —       5  
 
(Gain) loss on sale of assets
    —       —       20       (300 )
 
(Gain) on sale of partnership investment
    —       (1,292 )     —       —  
 
Equity in (income) loss of partnerships
    (311 )     (183 )     495       —  
 
Unrealized (gain) loss on oil and natural gas swaps
    (340 )     559       2,628       4,027  
                         
 
Adjusted EBITDA
  $ 4,907     $ 9,397     $ 12,877     $ 27,785  
                         
 
Interest expense
  $ 94     $ 213     $ 1,584     $ 5,159  
 
Adjusted EBITDA to interest expense
    52.2x       44.1x       8.1x       5.4x  
         
    Legacy
    Reserves LP
    Pro Forma
    December 31,
    2005
     
Current assets
  $ 511  
Plus: Unused total commitments
    62,200  
Less: FAS 133 non-cash assets
    (47 )
       
Adjusted current assets
  $ 62,664  
       
Current liabilities
  $ 1,374  
Less: FAS 133 non-cash obligations
    (351 )
Less: Current maturities of revolver debt
    —  
       
Adjusted current liabilities
  $ 1,023  
       
Adjusted current ratio
    61.3x  
Current ratio
    0.37x  

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RISK FACTORS
      Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should consider carefully the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our units.
      The following risks could materially and adversely affect our business, financial condition or results of operations. If any of the events described below were to occur, we might not be able to pay the initial quarterly distribution on our units, the trading price of our units could decline and you could lose all or part of your investment.
Risks Related to Our Business
We may not have sufficient available cash to pay our estimated initial quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.
      We may not have sufficient available cash each quarter to pay our estimated initial quarterly distribution. Under the terms of our partnership agreement, the amount of cash otherwise available for distribution will be reduced by our operating expenses and the amount of any cash reserves that our general partner establishes to provide for future operations, future capital expenditures, future debt service requirements and future cash distributions to our unitholders. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
  •  the amount of oil and natural gas we produce;
 
  •  the price at which we are able to sell our oil and natural gas production;
 
  •  whether we are able to acquire additional oil and natural gas properties at economically attractive prices;
 
  •  whether we are able to continue our exploitation activities at economically attractive costs;
 
  •  the level of our operating costs, including payments to our general partner;
 
  •  the level of our interest expenses, which depends on the amount of our indebtedness and the interest payable thereon; and
 
  •  the level of our capital expenditures.
      In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:
  •  the cost of acquisitions, if any;
 
  •  our debt service requirements;
 
  •  reduction in our borrowing base below our outstanding debt balance;
 
  •  fluctuations in our working capital needs;
 
  •  timing and collectibility of receivables;
 
  •  restrictions on distributions contained in our credit facility;
 
  •  our ability to make working capital borrowings under our credit facility to pay distributions;
 
  •  prevailing economic conditions; and
 
  •  the amount of cash reserves established by our general partner for the proper conduct of our business.

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      As a result of these factors, the amount of cash we distribute in any quarter to our unitholders may fluctuate significantly from quarter to quarter and may be significantly less than our estimated initial quarterly distribution.
      The amount of available cash we will need to pay the initial quarterly distribution for four quarters on the units and general partner interest outstanding is approximately $30.1 million. If we had completed our private equity offering and related formation transactions, including the acquisition of our properties, on January 1, 2005, pro forma available cash to pay distributions generated during the year ended December 31, 2005 would have been approximately $22.9 million. This amount of pro forma cash available to pay distributions would have been sufficient to allow us to pay approximately 76% of the initial quarterly distributions on our units during this period. For a calculation of our ability to make distributions to you based on our pro forma results for the year ended December 31, 2005, please read “Cash Distribution Policy and Restrictions on Distributions.”
      We are prohibited from borrowing under our revolving credit facility to pay distributions to unitholders if the amount of borrowings outstanding under our revolving credit facility reaches or exceeds 90% of the borrowing base, which is the amount of money available for borrowing, as determined semi-annually by our lenders in their sole discretion. The lenders will redetermine the borrowing base based on an engineering report with respect to our oil and natural gas reserves, which will take into account the prevailing oil and natural gas prices at such time. Any time our borrowings exceed 90% of the then specified borrowing base, our ability to pay distributions to our unitholders in any such quarter is solely dependent on our ability to generate sufficient cash from our operations. Giving effect to the private equity offering and related formation transactions, our borrowings under the credit facility as of December 31, 2005 would have been approximately $67.8 million, or 52% of our initial borrowing base of $130 million.
If we are unable to achieve the Minimum Estimated Adjusted EBITDA set forth in “Cash Distribution Policy and Restrictions on Distributions,” we may be unable to pay the full amount of the estimated initial quarterly distribution, or any amount, on the units, in which event the market price of our units may decline substantially.
      The Minimum Estimated Adjusted EBITDA set forth in “Cash Distribution Policy and Restrictions on Distributions” is $42.9 million for the year ending December 31, 2006. Our management has prepared the financial forecast and we have not received an opinion or report on it from any independent accountants. In addition, “Cash Distribution Policy and Restrictions on Distributions” includes a calculation of Minimum Estimated Adjusted EBITDA based on the financial forecast. The assumptions underlying this calculation are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those expected. If we do not achieve the expected results, we may not be able to pay the full, or any, amount of the initial quarterly distribution on the units, in which event the market price of our units may decline substantially.
If commodity prices decline significantly for a prolonged period, we may be forced to reduce our distribution or not be able to pay distributions at all.
      Our revenue, profitability and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and a decline in prices can significantly affect our financial results and impede our growth. Changes in oil and natural gas prices have a significant impact on the value of our reserves and on our cash flow. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:
  •  the domestic and foreign supply of and demand for oil and natural gas;
 
  •  the price and quantity of imports of crude oil and natural gas;
 
  •  overall domestic and global economic conditions;

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  •  political and economic conditions in other oil and natural gas producing countries, including embargoes and continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage;
 
  •  the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
 
  •  the level of consumer product demand;
 
  •  weather conditions;
 
  •  technological advances affecting energy consumption;
 
  •  domestic and foreign governmental regulations and taxation;
 
  •  the impact of energy conservation efforts;
 
  •  the proximity and capacity of oil and natural gas pipelines and other transportation facilities;
 
  •  the impact of the U.S. dollar exchange rates on oil and natural gas prices; and
 
  •  the price and availability of alternative fuels.
      In the past, the prices of oil and natural gas have been extremely volatile, and we expect this volatility to continue. For example, during the twelve months ended December 31, 2004, the NYMEX monthly oil index price ranged from a high of $53.09 per Bbl to a low of $34.22 per Bbl and the NYMEX natural gas index price (last day) ranged from a high of $8.14 per MMBtu to a low of $5.08 per MMBtu. During the year ended December 31, 2005, the NYMEX monthly oil index price ranged from a high of $65.55 per Bbl to a low of $46.85 per Bbl and the NYMEX gas index price (last day) ranged from a high of $13.91 per MMbtu to a low of $6.12 per MMBtu.
      Lower oil and natural gas prices may not only decrease our revenues, but also reduce the amount of oil and natural gas that we can produce economically. Furthermore, substantial decreases in oil and natural gas prices as were experienced as recently as 2002, when prices of less than $20.00 per Bbl of oil and $2.00 per Mcf of natural gas were received at the wellhead in the Permian Basin, would render a significant portion of our exploitation projects uneconomic. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs, or if our estimates of development costs increase, production data factors change or drilling results deteriorate, accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties for impairments. We are required to perform impairment tests on our assets whenever events or changes in circumstances lead to a reduction of the estimated useful life or estimated future cash flows that would indicate that the carrying value may not be recoverable or whenever management’s plans change with respect to those assets. We may incur impairment charges in the future, which could have a material adverse effect on our results of operations in the period taken and our ability to borrow funds under our credit facility to pay distributions to our unitholders.
If we are not able to acquire additional oil and natural gas reserves on economically acceptable terms, we may be forced to reduce our distribution or not be able to pay distributions at all.
      Our ability to maintain distributions to unitholders will be dependent on our ability to make acquisitions on economically acceptable terms. We may be unable to make such acquisitions because we are:
  •  unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;
 
  •  unable to obtain financing for these acquisitions on economically acceptable terms; or
 
  •  outbid by competitors.
In any such case, our ability to maintain distributions will be limited. Furthermore, even if we make acquisitions on economically acceptable terms, these acquisitions may nevertheless result in a decrease in pro

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forma cash available to pay distributions per unit because any such acquisition would likely result in the incurrence of indebtedness and an increase in interest expense.
      Any acquisition involves potential risks, including, among other things:
  •  mistaken assumptions about revenues and costs, including synergies;
 
  •  mistaken assumptions about the value of oil and natural gas reserves;
 
  •  an inability to integrate successfully the businesses we acquire;
 
  •  the assumption of unknown liabilities;
 
  •  limitations on rights to indemnity from the seller;
 
  •  the diversion of management’s attention from other business concerns; and
 
  •  customer or key employee losses at the acquired businesses.
      If we consummate any future acquisitions, our capitalization and results of operation may change significantly. Further, our future acquisition costs may be higher than those we have achieved historically.
If we are not able to acquire additional oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, results of operations and financial condition and our ability to make cash distributions to you.
      Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Based on our December 31, 2005 combined reserve report, our average decline rate for proved reserves is 4.6% during the first five years, 7.3% in the next five years and approximately 6.5% thereafter. Because total estimated proved reserves include our proved undeveloped reserves at December 31, 2005, production will decline at this rate even if those proved undeveloped reserves are developed and the wells produce as expected. This rate of decline may increase if production from our existing wells declines more rapidly than we have estimated. Thus, our future oil and natural gas reserves and production and, therefore, our cash flow and income are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs, which would adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
Our credit facility has substantial restrictions and financial covenants, and we may have difficulty obtaining additional credit, which could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
      We will depend on our revolving credit facility for future capital needs. Our revolving credit facility restricts, among other things, our ability to incur debt, including the ability to obtain additional financing, make investments, pay dividends, lease equipment, pledge or sell assets and engage in business combinations. We also are required to comply with certain financial covenants and ratios. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants under the revolving credit facility could result in a default under our revolving credit facility. In addition, unless the lenders’ consent is obtained, a change of control would result in a default under the revolving credit facility. A default under the revolving credit facility could cause all of our existing indebtedness to be immediately due and payable.
      The revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion, based upon projected revenues from the oil and natural gas properties securing our loan. Semi-annually, the lenders can unilaterally adjust the borrowing base and the borrowings permitted to be outstanding under the revolving credit facility. Any increase in the borrowing base requires the consent of all the lenders and any decrease in the borrowing base must be approved by the lenders

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holding 66 2 / 3 % of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the credit facility. If the required lenders do not agree on an increase or decrease, then the borrowing base will be the highest borrowing base acceptable to the lenders holding 66 2 / 3 % of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the credit facility so long as it does not increase the borrowing base then in effect. Outstanding borrowings in excess of the borrowing base must be prepaid, and, if mortgaged properties represent less than 80% of total value of oil and gas properties evaluated in the most recent reserve report, we must pledge other oil and natural gas properties as additional collateral. We do not have any unpledged properties, and we may not have the financial resources in the future to make any mandatory principal prepayments required under the revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities.”
Our estimated reserves are based on many assumptions that may prove inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
      No one can measure underground accumulations of oil and natural gas in an exact way. Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, production levels, and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Our independent petroleum engineers prepare estimates of our proved reserves. Over time, our independent petroleum engineers may make material changes to reserve estimates taking into account the results of actual drilling, and production. Some of these reserve estimates are made without the benefit of a lengthy production history, which are less reliable than estimates based on a lengthy production history. Also, our independent petroleum engineers make certain assumptions regarding future oil and natural gas prices, production levels, and operating and development costs that may prove incorrect. Any significant variance from these assumptions by actual figures could greatly affect these estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery, and estimates of the future net cash flows. Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of oil and natural gas we ultimately recover being different from our reserve estimates.
      The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net cash flows from our proved reserves on prices and costs in effect on the day of estimate. However, actual future net cash flows from our oil and natural gas properties also will be affected by factors such as:
  •  actual prices we receive for oil and natural gas;
 
  •  the amount and timing of actual production;
 
  •  supply of and demand for oil and natural gas; and
 
  •  changes in governmental regulations or taxation.
      The timing of both our production and our incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor used when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves which could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.

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Our exploitation projects require substantial capital expenditures, which will reduce our cash available for distribution. We may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a decline in our oil and natural gas reserves.
      The oil and natural gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the exploitation, development, production and acquisition of oil and natural gas reserves. These expenditures will reduce our cash available for distribution. To date, these capital expenditures have been financed primarily with capital contributions from the Founding Investors, proceeds from bank borrowings and cash generated by operations. We intend to finance our future capital expenditures with cash flow from operations and borrowings under our revolving credit facility; however, our financing needs may require us to alter or increase our capitalization substantially through the issuance of debt or equity securities. The issuance of additional debt will require that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use cash flow to fund working capital, capital expenditures, acquisitions or to pay distributions to you. The issuance of additional equity securities could have an adverse effect on our ability to pay our estimated initial quarterly distribution on all units and a dilutive effect on the value of your units. Our cash flow from operations and access to capital are subject to a number of variables, including:
  •  our proved reserves;
 
  •  the level of oil and natural gas we are able to produce from existing wells;
 
  •  the prices at which our oil and natural gas are sold; and
 
  •  our ability to acquire, locate and produce new reserves.
      If our revenues or the borrowing base under our credit facility decrease as a result of lower oil and/or natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. Our credit facility restricts our ability to obtain new financing. If additional capital is needed, we may not be able to obtain debt or equity financing. If cash generated by operations or available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our prospects, which in turn could lead to a decline in our oil and natural gas reserves, and could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
Shortages of drilling rigs, equipment and crews could delay our operations, adversely affect our ability to increase our reserves and production and reduce our cash available for distribution.
      Higher oil and natural gas prices generally increase the demand for drilling rigs, equipment and crews and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. Shortages of, or increasing costs for, experienced drilling crews and oil field equipment and services could restrict our ability to drill the wells and conduct the operations which we currently have planned. Any delay in the drilling of new wells or significant increase in drilling costs could adversely affect our ability to increase our reserves and production and reduce our revenues and cash available for distribution.
Increases in the cost of drilling rigs, service rigs, pumping services and other costs in drilling and completing wells could reduce the viability of certain of our exploitation projects.
      The rig count and the cost of rigs and oil field services necessary to implement our exploitation projects have risen significantly with the increases in oil and natural gas prices. Increased capital requirements for our projects will result in higher reserve replacement costs which could reduce cash available for distribution. Higher project costs could cause certain of our projects could become uneconomic and therefore not be implemented, reducing our production and cash available for distribution.

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Our business depends on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities would interfere with our ability to market the oil and natural gas we produce.
      The marketability of our oil and natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties. The amount of oil and natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system, or lack of contracted capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we are provided only with limited, if any, notice as to when these circumstances will arise and their duration. In addition, some of our wells are drilled in locations that are not serviced by gathering and transportation pipelines, or the gathering and transportation pipelines in the area may not have sufficient capacity to transport the additional production. As a result, we may not be able to sell, or may have to transport by more expensive means, the oil and natural gas production from these wells until the necessary gathering and transportation systems are constructed. Any significant curtailment in gathering system or pipeline capacity, or significant delay in the construction of necessary gathering and transportation facilities, could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
We do not control all of our operations and exploitation projects and failure of an operator of wells in which we own partial interests to adequately perform could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
      Much of our business activities are conducted through joint operating agreements under which we own partial interests in oil and natural gas wells. On a combined basis, at December 31, 2005 we operated 506 gross productive wells and owned non-operated interests in 1,152 gross productive wells.
      If we do not operate wells in which we own an interest, we do not have control over normal operating procedures, expenditures or future development of underlying properties. The success and timing of our exploitation activities on properties operated by others therefore depends upon a number of factors outside of our control, including the operator’s:
  •  timing and amount of capital expenditures;
 
  •  expertise and financial resources; and
 
  •  inclusion of other participants in drilling wells.
      Since we do not have a majority interest in most wells we do not operate, we may not be in a position to remove the operator in the event of poor performance. The failure of an operator of wells in which we own partial interests to adequately perform operations, or an operator’s breach of the applicable agreements, could reduce our production and revenues and could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
Our business is difficult to evaluate because we have a limited combined operating history.
      We were formed in October 2005 but conducted no operations and generated no revenues until March 15, 2006 when we acquired oil and natural gas properties from our Founding Investors and the charitable foundations simultaneously with the closing of our private equity offering, including oil and natural gas properties from MBN Properties LP which our Founding Investors have operated only since September 2005. We may not be able to successfully integrate these businesses. In addition, the assembled management team may not be able to successfully oversee the combined businesses and effectively implement our operating and growth strategies.
      Our pro forma combined financial results cover periods during which the oil and natural gas properties that we acquired were not under common control or management and therefore may not be indicative of our future financial or operating results. Our success will depend upon management’s ability to integrate the oil

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and natural gas properties that we acquired and our failure to integrate these properties may have a significant adverse effect on our financial condition and operations and our ability to make distributions to you.
Many of our leases are in areas that have been partially depleted or drained by adjacent wells.
      Our key project areas are located in the most active drilling areas in the Permian Basin which has been a prolific oil and natural gas producing area since the 1920s. As a result, many of our leases are in areas that have already been partially depleted or drained by earlier drilling. This may inhibit our ability to find economically recoverable quantities of oil or natural gas in these areas.
Our identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.
      Our management team has specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our acreage. We have identified, as of December 31, 2005, 96 proved undeveloped drilling locations. These identified drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of factors, including the availability of capital, seasonal conditions, regulatory approvals, oil and natural gas prices, costs and drilling results. Our final determination on whether to drill any of these drilling locations will be dependent upon the factors described above as well as, to some degree, the results of our drilling activities with respect to our proved drilling locations. Because of these uncertainties, we do not know if the numerous drilling locations we have identified will be drilled within our expected timeframe or will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may be materially different from those presently identified, which could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to you.
      Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil and natural gas can be uneconomic, not only from dry holes, but also from productive wells that do not produce sufficient revenues to be commercially viable. Our efforts will be uneconomic if we drill dry holes or wells that are productive but do not produce enough to be commercially viable after drilling, operating and other costs. Over the period from January 1, 2002 through December 31, 2005, we drilled 31 gross (6.4 net) development wells, excluding activities that occurred on the PITCO properties prior to our acquisition of them, of which 30 gross (6.1 net) produce oil or natural gas in commercial quantities. We drilled 7 gross (1.8 net) exploratory wells during this period, of which 2 gross (0.2 net) produce oil or natural gas in commercial quantities. The analogies we draw from available data from other wells, more fully explored prospects or producing fields may not be applicable to our drilling prospects. If we drill additional wells that we identify as dry holes in our current and future prospects, our drilling success rate would decline and may have a significant adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to you.
      In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other factors, including:
  •  the high cost, shortages or delivery delays of equipment and services;
 
  •  unexpected operational events;
 
  •  adverse weather conditions;
 
  •  decreases in oil and natural gas prices;
 
  •  limitations in the market for oil and natural gas;
 
  •  facility or equipment malfunctions;

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  •  title disputes;
 
  •  pipeline ruptures or spills;
 
  •  collapses of wellbore, casing or other tubulars;
 
  •  compliance with environmental and other governmental requirements;
 
  •  unusual or unexpected geological formations;
 
  •  loss of drilling fluid circulation;
 
  •  formations with abnormal pressures;
 
  •  fires;
 
  •  blowouts, craterings and explosions;
 
  •  changes in below-ground pressure in a formation that cause surface collapse or cratering;
 
  •  uncontrollable flows of oil, natural gas or well fluids; and
 
  •  pressure forcing oil or natural gas out of the wellbore at a dangerous velocity coupled with the potential for fire or explosion.
      Any of these events can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination, loss of wells and regulatory penalties.
      We ordinarily maintain insurance against various losses and liabilities arising from our operations; however, insurance against all operational risks is not available to us. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could therefore occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our business, results of operations, financial condition and our ability to make cash distributions to you.
There were no arm’s-length negotiations with respect to the terms of the formation transactions.
      There were no arm’s-length negotiations with our Founding Investors with respect to the terms of our acquisition of their oil and natural gas properties. The agreements entered into with our Founding Investors may contain provisions that are less favorable to us than those found in similar agreements negotiated at arm’s-length. Additionally, our Founding Investors received substantial economic benefits as a result of the formation transactions. Further, in the course of structuring the formation transactions, our Founding Investors had the ability to influence the type and level of benefits that they and our other executive officers will receive from us.
We may have assumed unknown liabilities in connection with the formation transactions.
      As part of the formation transactions, our properties may be subject to existing liabilities, some of which may have been unknown at the closing of our private equity offering. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed or unknown environmental conditions, claims of vendors or other persons (that had not been asserted or threatened prior to this offering), tax liabilities and accrued but unpaid liabilities incurred in the ordinary course of business.
Properties that we buy may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against such liabilities.
      One of our growth strategies is to acquire additional oil and natural gas reserves. However, our reviews of acquired properties are inherently incomplete because it generally is not feasible to review in depth every

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individual property involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, we often assume environmental and other risks and liabilities in connection with acquired properties.
Our hedging activities could result in financial losses, could reduce our income and may limit potential gains.
      To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of oil and natural gas, we have entered into, and we may in the future enter into, hedging arrangements for a significant portion of our oil and natural gas production. Many derivative instruments that we employ require us to make cash payments to the extent the applicable index exceeds a predetermined price, thereby limiting our ability to realize the benefit of increases in oil and natural gas prices. For example, on a combined basis our average unhedged sales price for oil during 2005 was $51.08 per Bbl and our average sales price including the effects of hedging was $38.42 per Bbl. The year ended December 31, 2005 included approximately $3.5 million of premiums paid to cancel and reset 2006 oil swaps and, in connection with the PITCO acquisition, approximately $0.8 million of premiums paid for an option to enter an oil swap over the period of 2006-2010 that was not exercised. On a combined basis for the year ended December 31, 2005, our average unhedged sales price for natural gas was $6.76 per Mcf and our average sales price for natural gas including the effects of hedging was $6.06 per Mcf. On a pro forma basis our realized and unrealized hedge losses in 2005 were approximately $11.0 million, excluding any hedges that PITCO may have had and including the previously noted $4.3 million of hedge premiums paid. Approximately 15% of our expected oil and natural gas production for 2006 from total proved reserves is unhedged and approximately 35% of our expected oil and natural gas production from total proved reserves for 2007 through 2010 is unhedged.
      If our actual production and sales for any period are less than our hedged production and sales for that period (including reductions in production due to operational delays), we might be forced to satisfy all or a portion of our hedging obligations without the benefit of the cash flow from our sale of the underlying physical commodity, resulting in a substantial diminution of our liquidity. Lastly, an attendant risk exists in hedging activities that the counterparty in any derivative transaction cannot or will not perform under the instrument and that we will not realize the benefit of the hedge. It is also important to note that it is not practical to hedge the cash flows relating to all of our production, and we therefore retain the risk of a price decrease on our unhedged volumes.
The inability of one or more of our customers to meet their obligations may adversely affect our financial condition and results of operations.
      Substantially all of our accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the energy industry. This concentration of customers and joint interest owners may impact our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. In addition, our oil and natural gas hedging arrangements expose us to credit risk in the event of nonperformance by counterparties.
We depend on a limited number of key personnel who would be difficult to replace.
      Our operations are dependent on the continued efforts of our executive officers, senior management and key employees. The loss of any member of our senior management or other key employees could negatively impact our ability to execute our strategy.

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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.
      Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public reporting company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.
We may be unable to compete effectively with larger companies, which could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to you.
      The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources than us. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration and exploitation activities during periods of low oil and natural gas market prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to you.
We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.
      Our oil and natural gas exploration and production operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. All such costs may have a negative effect on our business, results of operations, financial condition and ability to make cash distributions to you.
      Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for and the production of, oil and natural gas. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to you. Please read “Business — Operations — Environmental Matters and Regulation” and “Business — Operations — Other Regulation of the Oil and Natural Gas Industry” for a description of the laws and regulations that affect us.

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Our operations expose us to significant costs and liabilities with respect to environmental and operational safety matters.
      We may incur significant costs and liabilities as a result of environmental and safety requirements applicable to our oil and natural gas exploration and production activities. These costs and liabilities could arise under a wide range of federal, state and local environmental and safety laws and regulations, including regulations and enforcement policies, which have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, and to a lesser extent, issuance of injunctions to limit or cease operations. In addition, claims for damages to persons or property may result from environmental and other impacts of our operations.
      Strict, joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we were not able to recover the resulting costs through insurance or increased revenues, our ability to make cash distributions to you could be adversely affected. Please read “Business — Operations — Environmental Matters and Regulation” for more information.
Risks Related to this Offering and Our Limited Partnership Structure
There is no existing market for our units, and a trading market that will provide you with adequate liquidity may not develop or be sustained. The price of our units may fluctuate significantly, and you could lose all or part of your investment.
      There is no established trading market for our units and we cannot assure you as to:
  •  the likelihood that an active market will develop for the units;
 
  •  the liquidity of any such market;
 
  •  the ability of our unitholders to sell their units; or
 
  •  the price that our unitholders may obtain for their units.
      The price of our units may also be influenced by many factors, some of which are beyond our control, including:
  •  our quarterly distributions;
 
  •  our quarterly or annual earnings or those of other companies in our industry;
 
  •  loss of a large customer;
 
  •  announcements by us or our competitors of significant contracts or acquisitions;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  general economic conditions;
 
  •  publication of research reports about us or our industry;
 
  •  future sales of our units; and
 
  •  the other factors described in these “Risk Factors.”
Units eligible for future sale may have adverse effects on our unit price and the liquidity of the market for our units.
      We cannot predict the effect of future sales of our units, or the availability of units for future sales, on the market price of or the liquidity of the market for our units. Sales of substantial amounts of units, or the

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perception that such sales could occur, could adversely affect the prevailing market price of our units. Such sales, or the possibility of such sales, could also make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. In addition, if no active trading market develops for our units, sales of units or the possibility of such sales could have a greater adverse effect on the market price of our units than would be the case if an active market existed. Factors affecting the likely volume of future sales of our units, and the possible consequences of such sales, include the following:
  •  All of our units outstanding upon the completion of our private equity offering are “restricted securities” within the meaning of Rule 144 under the Securities Act. In general, upon satisfaction of certain conditions, Rule 144 permits the sale of certain amounts of restricted securities one year following the date of acquisition of the restricted securities from us or our affiliates and, after two years, permits unlimited sales by persons unaffiliated with us. As our units become eligible for sale under Rule 144, the volume of sales of our units may increase, which could reduce the market price of our units.
 
  •  The Founding Investors and their affiliates own approximately 72.7% of our outstanding units. We granted the Founding investors certain registration rights to have their units registered under the Securities Act. Upon registration, these units will be eligible for sale into the market. Because of the substantial size of the Founding Investors’ holdings, the sale of a significant portion of these units, or a perception in the market that such a sale is likely, could have a significant impact on the market price of our units.
 
  •  We granted purchasers in our private equity offering certain registration rights to have the resale of their units registered under the Securities Act. If purchasers in our private equity offering were to resell a substantial portion of their units, it could reduce the market price of our outstanding units.
Please read “Registration Rights” and “Material Tax Consequences — Disposition of Units — Constructive Termination.”
Our Founding Investors own a 72.6% limited partner interest in us and control our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner has conflicts of interest and limited fiduciary duties, which may permit it to favor its own interests to your detriment.
      Our Founding Investors own a 72.6% limited partner interest in us and control our general partner. Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to its owners, our Founding Investors and their affiliates. Conflicts of interest may arise between our Founding Investors and their affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:
  •  neither our partnership agreement nor any other agreement requires our Founding Investors or their affiliates, other than our executive officers, to pursue a business strategy that favors us;
 
  •  our general partner is allowed to take into account the interests of parties other than us, such as our Founding Investors, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
 
  •  our Founding Investors and their affiliates (other than our executive officers and their affiliates) may engage in competition with us;
 
  •  our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing units, unitholders

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  consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;
 
  •  our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional partnership securities, and reserves, each of which can affect the amount of cash that is distributed to our unitholders;
 
  •  our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is a maintenance capital expenditure, which reduces operating surplus, or a growth capital expenditure, which does not. Such determination can affect the amount of cash that is distributed to our unitholders;
 
  •  our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
 
  •  our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;
 
  •  our general partner intends to limit its liability regarding our contractual and other obligations;
 
  •  our general partner controls the enforcement of obligations owed to us by it and its affiliates; and
 
  •  our general partner decides whether to retain separate counsel, accountants, or others to perform services for us.

Please read “Certain Relationships and Related Transactions” and “Conflicts of Interest and Fiduciary Duties.”
Unitholders have limited voting rights and are not entitled to elect our general partner and until we have completed an initial public offering or the owners of our general partner own less than 50% of our units, our unitholders will not be entitled to elect any of its directors.
      Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management decisions regarding our business. Unitholders did not elect our general partner or its board of directors, and will have no right to elect our general partner in the future. The board of directors of our general partner will initially be chosen by the members of our general partner. Once we have completed an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market or the owners of our general partner own less than 50% of our units, all unitholders will have certain rights to participate in the election of our general partner’s board of directors. Please read “Management,” and “The Partnership Agreement — Meetings; Voting.” As a result of these limitations, the price at which the units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Even if unitholders are dissatisfied they cannot remove our general partner without the consent of unitholders owning at least 66 2 / 3 % of our units, including units owned by our general partner and its affiliates.
      The unitholders are unable initially to remove our general partner without its consent because our general partner’s affiliates own sufficient units to be able to prevent our general partner’s removal. The vote of the holders of at least 66 2 / 3 % of all outstanding units voting together as a single class is required to remove the general partner. Affiliates of our general partner own 72.7% of our units.
Our partnership agreement restricts the voting rights of those unitholders owning 20% or more of our units.
      Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general

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partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
The owners of our general partner may sell all or part of the general partner to a third party without unitholder consent, which could result in a change of our management or business strategy or both and which would result in an event of default under our revolving credit facility, unless consent of our lenders is obtained.
      Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of the owners of our general partner from transferring their ownership in our general partner to a third party. The new owners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers of our general partner until the owners of our general partner own less than 35% of our outstanding units or we have completed an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market. Please read “Management.”
      Additionally, certain change of control events would result in an event of default under our revolving credit facility that would allow the lenders to accelerate the maturity of our credit agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.”
Our Founding Investors and their affiliates (other than our executive officers and their affiliates) may compete directly with us.
      Our Founding Investors and their affiliates, other than our general partner and our executive officers and their affiliates, are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, our Founding Investors or their affiliates, other than our general partner and our executive officers and their affiliates, may acquire, develop and operate oil and natural gas properties or other assets in the future, without any obligation to offer us the opportunity to acquire, develop or operate those assets.
Cost reimbursements due our general partner and its affiliates will reduce our cash available for distribution to you.
      Prior to making any distribution on our outstanding units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf. Any such reimbursement will be determined by our general partner in its sole discretion. These expenses will include all costs incurred by our general partner and its affiliates in managing and operating us. Please read “Certain Relationships and Related Transactions” and “Conflicts of Interest and Fiduciary Duties — Conflicts of Interest.” The reimbursement of expenses of our general partner and its affiliates could adversely affect our ability to pay cash distributions to you.
Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
      Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:
  •  permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and

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  factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any unitholder;
 
  •  provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decision was in the best interests of our partnership;
 
  •  provides that our general partner is entitled to make other decisions in “good faith” if it believes that the decision is in our best interest;
 
  •  provides generally that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us, as determined by our general partner in good faith, and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and
 
  •  provides that our general partner and its officers and directors will not be liable for monetary damages to us, our unitholders or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct.

      By purchasing a unit, a unitholder will become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties.”
Our partnership agreement permits our general partner to redeem any partnership interests held by a limited partner who is a non-citizen assignee.
      If we are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, our general partner may redeem the units held by the limited partner at their current market price. In order to avoid any cancellation or forfeiture, our general partner may require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible citizen, our general partner may elect to treat the limited partner as a non-citizen assignee. A non-citizen assignee is entitled to an interest equivalent to that of a limited partner for the right to share in allocations and distributions from us, including liquidating distributions. A non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in kind upon our liquidation.
You will experience immediate and substantial dilution of $8.82 per unit.
      The assumed purchase price of $17.00 per unit exceeds our pro forma net tangible book value of $8.18 per unit. Based on the assumed purchase price of $17.00 per unit, you will incur immediate and substantial dilution of $8.82 per unit. This dilution will occur primarily because the assets contributed by the Moriah Group are recorded at their historical cost, and not their fair value, in accordance with GAAP and the Moriah Group acquired interests in us at equivalent per unit prices lower than the offering price. Please read “Dilution.”

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We may issue an unlimited number of additional units without your approval, which would dilute your existing ownership interest in us.
      Our general partner, without the approval of our unitholders, may cause us to issue an unlimited number of additional units. The issuance by us of additional units or other equity securities of equal or senior rank will have the following effects:
  •  your proportionate ownership interests in us will decrease;
 
  •  the amount of cash available for distribution on each unit may decrease;
 
  •  the risk that a shortfall in the payment of the estimated initial quarterly distribution will increase;
 
  •  the relative voting strength of each previously outstanding unit may be diminished; and
 
  •  the market price of the units may decline.
Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
      A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. In some states, including Delaware, a limited partner is only liable if he participates in the “control” of the business of the partnership. These statutes generally do not define control, but do permit limited partners to engage in certain activities, including, among other actions, taking any action with respect to the dissolution of the partnership, the sale, exchange, lease or mortgage of any asset of the partnership, the admission or removal of the general partner and the amendment of the partnership agreement. You could, however, be liable for any and all of our obligations as if you were a general partner if:
  •  a court or government agency determined that we were conducting business in a state but had not complied with that particular state’s partnership statute; or
 
  •  your right to act with other unitholders to take other actions under our partnership agreement that constitute “control” of our business.
      For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement — Limited Liability.”
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
      Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the distribution, limited partners who received an impermissible distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to such substitute limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
As a public reporting company, we will incur increased costs.
      We have no history operating as a public reporting company. As a public reporting company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition,

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the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the stock exchanges and markets, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a public reporting company, our general partner will be required to have three independent directors, create additional board committees, and maintain and report on internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our public reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for our general partner to obtain director and officer liability insurance and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for our general partner to attract and retain qualified persons to serve on its board of directors or as executive officers. We estimate these costs will be $2.2 million annually in excess of the costs we estimate would be incurred if we were a private company and $422,000 higher than our pro forma 2005 general and administrative costs, which include approximately $1.8 million of costs associated with our private equity offering.
Tax Risks to Unitholders
      You should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of units.
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to entity-level taxation for state tax purposes, taxes paid, if any, will reduce our cash available for distribution to you.
      The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter that affects us.
      If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rates, currently at a maximum rate of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed as corporate distributions, and no income, gain, loss, deduction or credit would flow through to you. Because a tax may be imposed on us as a corporation, our cash available for distribution to our unitholders could be reduced. Therefore, any treatment of us as a corporation could result in a material reduction in the anticipated cash flow and after-tax return to our unitholders and therefore result in a substantial reduction in the value of our units.
      Current law or our business may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, the cash available for distribution to you would be reduced.
You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
      You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from your share of our taxable income.

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A successful IRS contest of the federal income tax positions we take may adversely affect the market for our units, and the costs of any contest will reduce our cash available for distribution to you.
      We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter that affects us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take and a court may disagree with some or all of those positions. Any contest with the IRS may materially and adversely impact the market for our units and the price at which they trade. In addition, our costs of any contest with the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.
Tax-exempt entities, regulated investment companies and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.
      Investment in units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as IRAs), regulated investment companies and non-U.S.  persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to such a unitholder. Distributions to non-U.S.  persons will be reduced by withholding taxes imposed at the highest effective applicable tax rate, and non-U.S.  persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. A regulated investment company must derive at least 90% of its gross income from permitted sources including income from qualified publicly traded partnerships. Until we are treated as a qualified publicly traded partnership, our income will not be income from a permitted source.
Tax gain or loss on the disposition of our units could be more or less than expected because prior distributions in excess of allocations of income will decrease your tax basis in your units.
      If you sell any of your units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those units. Prior distributions to you in excess of the total net taxable income you were allocated for a unit, which decreased your tax basis in that unit, will, in effect, become taxable income to you if the unit is sold at a price greater than your tax basis in that unit, even if the price you receive is less than your original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you. In addition, if you sell units, you may incur a tax liability in excess of the amount of cash you receive from the sale.
We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of the units.
      Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of units and could have a negative impact on the value of our units or result in audits of and adjustments to our unitholders’ tax returns. Please read “Material Tax Consequences — Uniformity of Units” for a further discussion of the effect of the depreciation and amortization positions we will adopt.
You may be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our units.
      In addition to federal income taxes, you will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if you do not reside in any of those jurisdictions. You will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, you may be subject to penalties for

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failure to comply with those requirements. We will initially do business and own assets in Texas, New Mexico, Oklahoma and Mississippi. As we make acquisitions or expand our business, we may do business or own assets in other states in the future. It is the responsibility of each unitholder to file all United States federal, foreign, state and local tax returns that may be required of such unitholder. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in the units.
We will be considered to have terminated for tax purposes due to a sale or exchange of 50% or more of our interests within a twelve-month period.
      We will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. A constructive termination results in the closing of our taxable year for all unitholders and in the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, may result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination occurring on a date other than December 31 will result in us filing two tax returns (and unitholders receiving two Schedule K-1s) for one fiscal year and the cost of the preparation of these returns will be borne by all unitholders.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
      This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
  •  business strategy;
 
  •  financial strategy;
 
  •  drilling locations;
 
  •  oil and natural gas reserves;
 
  •  technology;
 
  •  realized oil and natural gas prices;
 
  •  production volumes;
 
  •  lease operating expenses, general and administrative costs and finding and development costs;
 
  •  future operating results; and
 
  •  plans, objectives, expectations and intentions.
      All of these types of statements, other than statements of historical fact included in this prospectus, are forward-looking statements. These forward-looking statements may be found in the “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and other sections of this prospectus. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.
      The forward-looking statements contained in this prospectus are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this prospectus are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in the “Risk Factors” section and elsewhere in this prospectus. All forward-looking statements speak only as of the date of this prospectus. The forward-looking statements in this prospectus speak only as of the date of this prospectus; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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USE OF PROCEEDS
      We will not receive any of the proceeds from the sale of units offered by this prospectus. Any proceeds from the sale of the units offered by this prospectus will be received by the selling unitholders.
CAPITALIZATION
      The following table shows:
  •  the historical capitalization of the Moriah Group as of December 31, 2005; and
 
  •  our pro forma capitalization as of December 31, 2005, which gives effect to the private equity offering and the related formation transactions.
      We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the audited historical and unaudited pro forma consolidated balance sheet at December 31, 2005 included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
                     
    As of December 31, 2005
     
    Moriah Group   Legacy
    Combined   Reserves LP
    Historical   Pro Forma
         
        (Unaudited)
    (In thousands)
Debt and other obligations:
               
 
Credit facility
  $ 52,473     $ 67,800  
 
Subordinated notes payable
    14,717       —  
             
   
Total debt and other obligations
    67,190       67,800  
Equity Capital:
               
 
Total equity
    9,909       149,899  
             
   
Total capitalization
  $ 77,099     $ 217,699  
             

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DILUTION
      Dilution is the amount by which the price paid by the purchasers of units sold by the selling unitholders identified in this prospectus will exceed our net tangible book value per unit. Net tangible book value is our total tangible assets less total liabilities. On a pro forma basis as of December 31, 2005, our net tangible book value was $149.9 million, or $8.18 per unit. Based on an assumed sales price of $17.00 per unit (the price at which the units were sold by us to the selling unitholders in the March 2006 private equity offering), purchasers of units pursuant to this prospectus will experience substantial and immediate dilution, as illustrated in the following table:
         
Assumed offering price per unit
  $ 17.00  
Less: Pro forma net tangible book value per unit
    8.18  
       
Immediate dilution in net tangible book value per unit to purchasers of units
  $ 8.82  
       
      The discussion and table above are based upon the total number of units actually outstanding as of May 8, 2006 (18,313,933 units and the 0.1% general partner interest having a dilutive effect equivalent to 18,332 units) and our pro forma net tangible book value. As of May 8, 2006, we had 40,000 unit options outstanding at an exercise price of $17.00 per unit, none of which were vested as of May 8, 2006. To the extent the market value of our units is greater than $17.00 per unit or any of these options are exercised, there may be further dilution to new investors.

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
General
Rationale for our Cash Distribution Policy
      Our cash distribution policy reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it. The amount of available cash will be determined by our general partner for each fiscal quarter of our operation after March 15, 2006. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash on a quarterly basis. Under our partnership agreement, available cash is defined generally to mean, cash on hand at the end of each quarter, plus working capital borrowings made after the end of the quarter, less cash reserves determined by our general partner, in its sole discretion, to be necessary and appropriate to provide for the conduct of our business (including reserves for future capital expenditures, future debt service requirements, and our anticipated capital needs), comply with applicable law, any of our debt instruments or other agreements or provide for future distributions to our unitholders for any one of the upcoming four quarters. Please read “How We Make Cash Distributions.” Because we are not subject to an entity-level federal income tax, we have more cash to distribute to you than would be the case if we were subject to such tax.
Limitations on our Ability to Make Quarterly Distributions
      There is no guarantee that unitholders will receive quarterly distributions from us. Our cash distribution policy is subject to limitations and restrictions, including the following:
  •  Our general partner has broad discretion to establish reserves for the prudent conduct of our business. The establishment of those reserves could result in a reduction in the amount of cash available to pay distributions.
 
  •  Our ability to make distributions of available cash will depend primarily on our cash flow from operations. Although our partnership agreement provides for quarterly distributions of available cash, we have no prior history of making distributions to our unitholders.
 
  •  If we fail to make acquisitions on economically attractive terms, we will not be able to replace our declining oil and natural gas reserves at a level that allows us to maintain our expected initial quarterly distribution.
 
  •  We will be prohibited from borrowing under our revolving credit facility to make distributions to unitholders if the amount of borrowing outstanding under our revolving credit facility reaches or exceeds 90% of our borrowing base. Further, we may enter into future debt arrangements that could subject our ability to pay distributions to compliance with certain tests or ratios or otherwise restrict our ability to pay distributions.
 
  •  Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.
 
  •  Although our partnership agreement requires us to distribute our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement can be amended with the approval of a majority of the outstanding units. Our Founding Investors and their affiliates own approximately 72.7% of the outstanding units, and acting jointly have the ability to amend our partnership agreement.
Our Cash Distribution Policy May Limit Our Ability to Grow
      Because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest most or all of their available cash to expand ongoing operations. We generally intend to rely upon external financing sources, including borrowings and issuances of debt and equity securities, to fund a substantial portion of our acquisition expenditures and a portion of our exploitation project capital

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expenditures. However, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.
Our Cash Distribution Policy
      Our partnership agreement provides for the distribution of available cash on a quarterly basis. Available cash, which is defined in the partnership agreement attached as Appendix A and the glossary attached as Appendix B hereto, for any quarter consists of cash on hand at the end of that quarter, plus working capital borrowings made after the end of the quarter, less cash reserves determined by our general partner in its sole discretion, to be necessary and appropriate to provide for the conduct of our business (including reserves for future capital expenditures, future debt service requirements, and our anticipated capital needs), comply with applicable law, any of our debt instruments or other agreements or provide for future cash distributions to our unitholders for any one of the upcoming four quarters. Please read “How We Can Make Cash Distributions — Definitions of Available Cash.” The amount of available cash will be determined by our general partner for each calendar quarter of our operations.
Cash Distributions
Overview
      We expect that the amount of the initial quarterly distribution will be $0.41 per unit, or $1.64 per unit on an annualized basis. The amount of available cash, which we also refer to as cash available to pay distributions, needed to pay the initial quarterly distribution on all of the units and the 0.1% general partner interest outstanding for one quarter and for four quarters will be approximately:
                         
        Estimated Quarterly Distribution
         
    Number of Units   One Quarter   Four Quarters
             
Units
    18,313,933     $ 7,508,712     $ 30,034,848  
0.1% general partner interest
    —       7,516       30,064  
                   
Total
    18,313,933     $ 7,516,228     $ 30,064,912  
                   
Our Initial Distribution Rate
      We expect to be able to pay the initial quarterly distribution on all of our outstanding units for each quarter through December 31, 2006. Within 45 days after the end of each quarter, beginning with the quarter ending June 30, 2006, we will distribute all of our available cash to unitholders of record on the applicable record date. We will prorate the initial quarterly distribution for the period from March 15, 2006 through March 31, 2006.
      In the sections that follow, we present in detail the basis for our belief that we will have sufficient available cash to pay the initial quarterly distribution on all of our outstanding units for each quarter through December 31, 2006. In those sections, we present two tables:
  •  “Unaudited Pro Forma Cash Available to Pay Distributions,” in which we present the amount of available cash we would have generated on a pro forma basis in 2005; and
 
  •  “Minimum Estimated Adjusted EBITDA,” in which we present certain operating and financial assumptions for the year ending December 31, 2006.
Pro Forma Cash Available to Pay Distributions for the Year Ended December 31, 2005
      You should be aware that our pro forma cash available to pay distributions for the year ended December 31, 2005 would not have been sufficient to pay the full annualized initial quarterly distribution of $1.64 per unit on all units outstanding.
      If we had completed our private equity offering and related formation transactions, including the acquisition of our properties, on January 1, 2005, pro forma cash available to pay distributions generated during the year ended December 31, 2005 would have been approximately $22.9 million. This amount of pro

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forma cash available to pay distributions would have been sufficient to allow us to pay approximately 76% of the initial quarterly distributions on our units during this period.
      The following table illustrates, on a pro forma basis, for the year ended December 31, 2005, the amount of cash available to pay distributions to our unitholders, assuming that our private equity offering and the related formation transactions had been consummated at the beginning of such period.
      We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had our private equity offering and related formation transactions actually been completed as of January 1, 2005. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma cash available to pay distributions only as a general indication of the amount of cash available to pay distributions that we might have generated had we been formed in earlier periods.
Legacy Reserves LP
Unaudited Pro Forma Cash Available to Pay Distributions
           
    Pro Forma
    Year Ended
    December 31,
    2005
     
    (In thousands,
    except per
    unit amounts)
Net Income
  $ 3,801  
Plus:
       
 
Interest expense
    5,159  
 
Depletion, depreciation, amortization and accretion
    15,093  
 
Impairment of long-lived assets
    5  
 
Gain on sale of assets
    (300 )
 
Unrealized loss on oil and natural gas swaps
    4,027  
       
Adjusted EBITDA
  $ 27,785  
       
Less:
       
 
Cash interest expense(a)
    5,049  
 
Pro forma additional expense of being a public reporting company(b)
    422  
Add:
       
 
Realized loss on cancelled swaps(c)
    4,319  
       
Pro forma operating cash flow
  $ 26,633  
       
 
Less: Exploitation capital expenditures(d)
    3,761  
       
Pro forma cash available to pay distributions
  $ 22,872  
       
Pro forma cash distributions
       
 
Annualized initial quarterly distribution per unit
  $ 1.64  
       
 
Total distributions
  $ 30,065  
       
Shortfall
  $ (7,193 )
       
 
(a) Interest expense has been adjusted to exclude amortization of deferred financing fees which are non-cash items.
 
(b) As a result of becoming a public reporting company, we expect our incremental general and administrative expenses to include costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees,

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incremental insurance costs, fees of independent directors, accounting fees and legal fees. We estimate these costs will be $2.2 million annually in excess of the costs we estimate would be incurred if we were a private company and $422,000 higher than our pro forma 2005 general and administrative costs, which include approximately $1.8 million of costs associated with our private equity offering.
 
(c) Includes approximately $3.5 million of derivative premiums for the year ended December 31, 2005 to cancel and reset 2006 oil swaps from $51.31 to $59.38 per Bbl and approximately $0.8 million of premiums paid on July 22, 2005 for an option to enter into a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
 
(d) Does not include capital expenditures associated with the PITCO properties prior to our acquisition on September 14, 2005.

      As a result of the factors described in “— Minimum Estimated Adjusted EBITDA” and “— Assumptions and Considerations” below, we believe we will be able to pay the initial quarterly distribution of $0.41 per unit on all units for each quarter from the closing of this offering through December 31, 2006.
Minimum Estimated Adjusted EBITDA
      In order to fund the initial quarterly distribution of $0.41 per unit for the year ending December 31, 2006, our cash available to pay distributions must be at least $30.1 million over that period. We have calculated the minimum estimated Adjusted EBITDA for the year ending December 31, 2006 that is necessary to generate the amount of available cash necessary to pay the initial quarterly distribution over that period, which we refer to as the Minimum Estimated Adjusted EBITDA.
      We define Adjusted EBITDA as net income (loss) plus:
  •  Interest expense;
 
  •  Depletion, depreciation, amortization and accretion;
 
  •  Impairment of long-lived assets;
 
  •  (Gain) on sale of partnership investment;
 
  •  (Gain) loss on sale of assets;
 
  •  Equity in (income) loss of partnerships; and
 
  •  Unrealized (gain) loss on oil and natural gas swaps.
      Adjusted EBITDA is a financial measurement that we will report to our lenders and use as a gauge for compliance with our EBITDA-to -interest covenant in our revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.”
  •  the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
 
  •  our operating performance and return on capital as compared to those of other companies in the exploration and production industry, without regard to financing or capital structure.
      Our Adjusted EBITDA should not be considered as an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
      In the table below entitled “Minimum Estimated Adjusted EBITDA,” we calculate that our Minimum Estimated Adjusted EBITDA must be approximately $42.9 million for the year ending December 31, 2006 for us to be able to generate cash available to pay distributions of $30.1 million. Although we believe that we will be able to achieve these results based on the assumptions and considerations set forth later in this

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section, we can give you no assurance that we will actually generate the Minimum Estimated Adjusted EBITDA and estimated available cash needed to pay the initial quarterly distributions through December 31, 2006. There will likely be differences between these amounts and our actual results and those differences could be material. If we are not able to achieve the Minimum Estimated Adjusted EBITDA described above, we may not be able to pay the full initial quarterly distribution or any amount on our outstanding units.
      In calculating the Minimum Estimated Adjusted EBITDA, we have included estimates of capital expenditures for the year ending December 31, 2006. The Minimum Estimated Adjusted EBITDA includes our assumption that we will make capital expenditures associated with the drilling of 11 gross (6.7 net) development wells and the execution of nine recompletions and one tertiary recovery expansion project during the year ending December 31, 2006 that will be funded with cash flow from operations. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
      You should read “— Assumptions and Considerations” below for a discussion of the material assumptions underlying our belief that we will be able to generate the Minimum Estimated Adjusted EBITDA in the amount disclosed for the year ending December 31, 2006. Our belief is based on certain assumptions and reflects our judgment, as of the date of this prospectus, regarding conditions we expect to exist and the course of action we expect to take over the year ending December 31, 2006. The assumptions we disclose are those that we believe are significant to our ability to generate the Minimum Estimated Adjusted EBITDA shown. If these estimates prove to be materially incorrect, we may not be able to pay the full initial quarterly distribution or any amount on our outstanding units.
      Our calculation of Minimum Estimated Adjusted EBITDA for the year ending December 31, 2006 has been prepared by our management. Our independent auditors have not examined, compiled, or otherwise applied procedures to our Minimum Estimated Adjusted EBITDA for the year ending December 31, 2006 and, accordingly, do not express an opinion or any other form of assurance on this estimate.
      When considering our Minimum Estimated Adjusted EBITDA for the year ending December 31, 2006, you should keep in mind the risk factors and other cautionary statements in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and results of operations to vary materially from those set forth in the table below. In addition, we do not undertake any obligation to release the results of any future revisions we may make to these estimates or to update these estimates to reflect events or circumstances after the date of this prospectus. Therefore, we caution you not to place undue reliance on this information.
Legacy Reserves LP
Minimum Estimated Adjusted EBITDA
             
    Year Ending
    December 31,
    2006
     
    (In thousands,
    except per unit
    amounts)
Minimum Estimated Adjusted EBITDA
  $ 42,868  
Less:
       
 
Cash interest expense(a)
    4,555  
 
Capital expenditures(b)
    8,248  
       
Minimum cash available to pay distributions
  $ 30,065  
       
Estimated cash distributions
       
 
Annualized initial quarterly distribution per unit
  $ 1.64  
       
 
Distributions to new investors
  $ 8,200  
 
Distributions to Founding Investors
    21,835  
 
Distributions to our general partner
    30  
       
   
Total distributions paid
  $ 30,065  
       

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(a) Cash interest expense is based on our estimated average debt balance and an assumed interest rate of 6.86%.
 
(b) We expect we will make capital expenditures associated with the drilling of 11 gross (6.7 net) development wells and the execution of nine recompletions and one tertiary recovery expansion project during the year ending December 31, 2006.
      As reflected in the table below, to generate our Minimum Estimated Adjusted EBITDA for the year ending December 31, 2006, we have assumed the following regarding our operations, revenues and expenses for that period:
                 
    Year Ending
    December 31,
    2006
     
Net Production(a):
       
 
Oil (MBbls)
    755  
 
Natural gas and products (MMcf)
    2,216  
     
Total oil equivalent production (MBoe)
    1,125  
     
Average oil equivalent daily production (Boe/d)
    3,081  
Average Oil Sales Price per Bbl(b):
       
 
Average NYMEX sales price (hedged volumes)
  $ 62.05  
 
Average NYMEX sales price (unhedged volumes)
  $ 65.00  
 
Percent of total oil production hedged
    88.3 %
   
(Discount) to NYMEX
  $ (3.55 )
 
Weighted average net sales price
  $ 58.84  
Average Natural Gas Sales Price per Mcf(c):
       
 
Average NYMEX sales price (hedged volumes)
  $ 11.22  
 
Average NYMEX sales price (unhedged volumes)
  $ 8.00  
 
Percent of total natural gas production hedged
    78.1 %
 
(Discount) to NYMEX
  $ (1.55 )
 
Weighted average net sales price
  $ 8.97  
Minimum Estimated Adjusted EBITDA:
       
 
Total revenue(d)
  $ 64,350  
 
Operating expenses(e)
    (16,950 )
 
General and administrative expenses(f)
    (4,300 )
       
   
Estimated Adjusted EBITDA
    43,100  
     
less:
       
     
Excess Estimated Adjusted EBITDA(g)
    232  
       
       
Minimum Estimated Adjusted EBITDA
  $ 42,868  
       
 
(a) Net production volumes are based on oil and natural gas production in our reserve report (as of December 31, 2005).
 
(b) Our weighted average oil sales price of $58.84 per Bbl is calculated taking into account the volume of oil we have hedged for 2006 (667,224 Bbls, or approximately 88% of total forecasted oil production volume) at a weighted average price of $62.05 per Bbl and unhedged oil production volumes at an assumed price of $65.00 per Bbl.
 
(c) Our weighted average net natural gas sales price of $8.97 per Mcf is calculated by taking into account the volume of natural gas we have hedged for the forecast period (1,730,925 MMBtu, or approximately 78% of total forecasted production volume) at a weighted average NYMEX price of $11.22 per MMBtu and unhedged natural gas production volumes at an assumed price of $8.00 per MMBtu.

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(d) Revenue is equal to (i) the product obtained by multiplying total net oil production by the weighted average net oil sales prices, plus (ii) the product obtained by multiplying total net natural gas production by the weighted average net natural gas sales prices.
 
(e) Operating expenses consist of the lease operating expenses, labor, field office rent, vehicle expenses, supervision, transportation, minor maintenance, tools and supplies, production taxes and other customary charges.
 
(f) General and administrative expenses are based on our estimate of the costs of our employees and our general partner’s executive officers, related benefits, office leases, professional fees, other costs not directly associated with field operations and the additional costs associated with being a public reporting company.
 
(g) We are required by the terms of our partnership agreement to distribute all of our available cash in each quarter to the extent there is any after the establishment of cash reserves. Please read “How We Make Cash Distributions — Definition of Available Cash.” Should we generate amounts in excess of the Minimum Estimated Adjusted EBITDA our general partner may establish cash reserves that would prevent us from having available cash in excess of the amount required to pay the initial quarterly distribution on all units.
Assumptions and Considerations
      We believe, based on the specific assumptions with respect to the year ending December 31, 2006 that are outlined below, that we will generate sufficient cash flow from operations to enable us to pay the initial quarterly distribution on all units for each quarter through December 31, 2006. While we believe that these assumptions are reasonable in light of management’s current expectations concerning future events, the estimates underlying these assumptions are inherently uncertain and are subject to significant business, economic, regulatory, environmental and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions do not materialize, the amount of actual cash available to pay distributions could be substantially less than the amount we currently estimate and could, therefore, be insufficient to permit us to pay the full initial quarterly distribution, or any amount, on all units, in which event the market price of our units may decline substantially. Consequently, the statement that we believe that we will generate sufficient available cash to pay the full initial quarterly distribution on all units for each quarter through December 31, 2006 should not be regarded as a representation by us or any other person that we will make these distributions. When reading this section, you should keep in mind the risk factors and other cautionary statements in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus. Any of the risks discussed in this prospectus could cause our actual results to vary significantly from our estimates.
Operations and Revenue
  •  We expect to drill 11 gross (6.7 net) development wells and to execute nine recompletions and one tertiary recovery expansion project during the year ending December 31, 2006, 100% of which we assume will be successful in producing oil or natural gas in commercial quantities. Over the period January 1, 2002 through December 31, 2005, we drilled 31 gross (6.4 net) development wells, excluding activities that occurred on the PITCO properties prior to our acquisition of them, of which 30 gross (6.1 net) produce oil or natural gas in commercial quantities.
 
  •  We estimate, based on our reserve report, that our total net production will be 1,125 MBoe for the year ending December 31, 2006. Our net production on a combined basis including production from the PITCO properties for the year ended December 31, 2005 was 1,128 MBoe. The decrease in our estimate of total net production for the year ending December 31, 2006 compared to the year ended December 31, 2005 is attributable to normal decline partially offset by increased drilling and recompletion activity.
 
  •  We estimate that we will achieve a weighted average oil sales price of approximately $58.84 for the year ending December 31, 2006, based on the fact that we have hedged approximately 88% of our forecasted oil production for the period (667,224 Bbls) at a weighted average NYMEX oil price of

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  $62.05 per Bbl. We have assumed a NYMEX oil price of $65.00 per Bbl for our unhedged volumes. Our estimated weighted average oil price also includes an assumed discount of $3.55 per Bbl, which accounts for our estimate of the Permian Basin basis differential relative to the NYMEX price, less gathering fees. On a combined basis including production from the PITCO properties for year ended December 31, 2005, our average oil sales prices (including hedges) were $38.42 per Bbl.
 
  •  We estimate that we will achieve a weighted average natural gas sales price of approximately $8.97 Mcf for the year ending December 31, 2006, based on the fact that we have hedged approximately 78% of our forecasted natural gas production for the period (1,730,925 MMBtu) at a weighted average NYMEX natural gas price of $11.22 per MMBtu. We have assumed a NYMEX natural gas price of $8.00 per MMBtu for our unhedged volumes. Our estimated weighted average natural gas sales price also includes an assumed discount of $1.55 per Mcf, which accounts for our estimate of the Permian Basin basis differential relative to the NYMEX price and positive Btu adjustments, less gathering fees. On a combined basis including production from the PITCO properties for the year ended December 31, 2005 our average natural gas sales prices (including hedges) was $6.06 per Mcfe.
 
  •  We estimate that we will generate revenues of approximately $64.4 million for the year ending December 31, 2006, which we have calculated by multiplying the total estimated net oil and natural gas production by the respective weighted average oil and natural gas sales price estimates described above. For the year ended December 31, 2005, we generated oil and natural gas sales of $53.6 million prior to the effects of hedging. The estimated increase in revenues for the year ending December 31, 2006 compared to the year ended December 31, 2005, is attributable to a full year of benefit from exploitation projects executed in 2005 and increases in the average oil and natural gas sales prices. Realized hedge losses for the year ended December 31, 2005 were $6.3 million. The realized hedge losses for the year ended December 31, 2005 include approximately $3.5 million of payments to terminate 2006 oil swaps priced at $51.31 per Bbl and enter into swaps on the same oil volumes priced at $59.38 per Bbl, and approximately $0.8 million of premiums paid for an option to enter into a $55.00 per Bbl oil swap related to the PITCO properties acquisition that was not exercised. We believe that we will not incur similar costs during the year ending December 31, 2006.

Capital Expenditures and Expenses
  •  We estimate that our capital expenditures for the year ending December 31, 2006 will be approximately $8.25 million, based on our expectation of drilling 11 gross (6.7 net) development wells and executing nine recompletions and one tertiary recovery expansion project during the year. We expect to finance these capital expenditures with cash flow from operations. Excluding the PITCO properties prior to our purchase on September 14, 2005, for the year ended December 31, 2005 we drilled 12 gross (3 net) development wells, resulting in capital expenditures of $3.5 million. The increase in estimated capital expenditures for the year ending December 31, 2006 compared to the year ended December 31, 2005 is attributable to our expanded property base with the PITCO properties, to the drilling and recompletion of more net wells and increases in drilling costs.
 
  •  We estimate that our operating expenses for the year ending December 31, 2006 will be approximately $17.0 million. For the year ended December 31, 2005, our pro forma operating expenses were approximately $15.5 million.
 
  •  We estimate that our general and administrative expenses for the year ending December 31, 2006 will be approximately $4.3 million. For the year ended December 31, 2005, our pro forma general and administrative expenses were $3.9 million. The increase in estimated general and administrative expenses for the year ending December 31, 2006 compared to the results for the year ended December 31, 2005 is attributable to hiring additional personnel needed to implement our business plan and the expenses of preparing for an IPO.
 
  •  We estimate that our interest expense for the year ending December 31, 2006 will be approximately $4.6 million, based on our expected average debt balance of $64.8 million and an assumed interest

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  rate of 6.86%. For the year ended December 31, 2005, our pro forma interest expense was $5.2 million. The decrease in estimated interest expense for the year ending December 31, 2006 compared to the expense for the year ended December 31, 2005 is attributable to lower average debt balances. Our average interest rate for the year ended December 31, 2005 was 7.67%, including the interest on the subordinated notes payable, which were paid in full on March 15, 2006.

Other
  •  We assume that we will not incur expenses relating to the cancellation of commodity swaps.
 
  •  We assume that there will be no material nonperformance or credit-related defaults by equipment suppliers, drillers, customers or counterparties to our oil and natural gas swaps.
 
  •  We assume that no material accidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated material events will occur in either our existing operations or our planned drilling program.
 
  •  We assume that market, regulatory and overall economic conditions will not change substantially.

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HOW WE MAKE CASH DISTRIBUTIONS
Definition of Available Cash
      We define available cash in the glossary, and it generally means, for each fiscal quarter, all cash on hand at the end of the quarter:
  •  less the amount of cash reserves established by our general partner, in its sole discretion, to:
 
  •  provide for the proper conduct of our business (including reserves for future capital expenditures, future debt service requirements, and for our anticipated credit needs);
 
  •  comply with applicable law, any of our debt instruments or other agreements; or
 
  •  provide funds for distribution to our unitholders for any one or more of the next four quarters;
 
  •  plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter for which the determination is being made. Working capital borrowings are generally borrowings that will be made under our revolving credit facility and in all cases are used solely for working capital purposes or to pay distributions to unitholders.
Distributions of Cash Upon Liquidation
      If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
Adjustments to Capital Accounts
      We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders and our general partner in the same manner as we allocate gain or loss upon liquidation.

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SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA
      We were formed in October 2005. Upon completion of our private equity offering and as a result of the related formation transactions on March 15, 2006, we acquired oil and natural gas properties and business operations from the Founding Investors and the three charitable foundations. Although we were the surviving entity for legal purposes, the formation transactions were treated as a purchase with Moriah Properties, Ltd. and its affiliates, or the Moriah Group, being considered, on a combined basis, as the acquiring entity for accounting purposes. As a result, the Moriah Group applied the purchase method of accounting to the separable assets, and the liabilities of the oil and natural gas properties acquired from the Founding Investors (other than the Moriah Group) and the charitable foundations. Our financial statements for periods prior to March 15, 2006 only reflect the accounts of the Moriah Group.
      The following table shows selected historical financial and operating data for the Moriah Group and pro forma financial and operating data for Legacy Reserves LP for the periods and as of the dates indicated. The accompanying combined historical financial statements for the Moriah Group include the accounts of Moriah Resources, Inc. as the general partner of Moriah Properties, Ltd., Moriah Properties, Ltd., the oil and natural gas interests individually owned by Dale A. and Rita Brown until October 1, 2005 when those interests were transferred to DAB Resources, Ltd. and the accounts of MBN Properties LP. The Moriah Group has consolidated MBN Properties LP as a variable interest entity with the portion of net income (loss) applicable to the other owners’ equity interests being eliminated through a non-controlling interest adjustment. Although MBN Management, LLC, the general partner of MBN Properties LP, is also a variable interest entity, it is accounted for by the Moriah Group using the equity method.
      We have not presented historical information for Legacy Reserves LP in this table because we have not had any operations since our formation and we believe a discussion of the results of Legacy Reserves LP would not be meaningful.
      The selected historical financial data of the Moriah Group for the years ended December 31, 2001 and 2002 is derived from the combined financial statements of the Moriah Group. The selected historical financial data of the Moriah Group for the years ended December 31, 2003, 2004 and 2005 are derived from the audited combined financial statements of the Moriah Group included elsewhere in this prospectus. Since the PITCO properties were not acquired by MBN Properties LP until September 14, 2005, the combined results of operations for the Moriah Group for the year ended December 31, 2005 only include the operating results for the PITCO properties for the period from September 14, 2005 through December 31, 2005.
      The unaudited selected pro forma financial data of Legacy Reserves LP for the year ended December 31, 2005 is derived from the unaudited pro forma financial statements of Legacy Reserves LP included elsewhere in this prospectus. The pro forma statement of operations gives pro forma effect to (i) the formation of MBN Properties LP and its acquisition of properties from PITCO and (ii) the private equity offering and the related formation transactions. The pro forma balance sheet gives pro forma effect to the private equity offering and the related formation transactions. The pro forma adjustments have been prepared as if the transactions had taken place on as of January 1, 2005, in the case of the pro forma statement of operations for the year ended December 31, 2005, or on December 31, 2005, in the case of the pro forma balance sheet. The unaudited selected pro forma financial data are not necessarily indicative of operating results or the financial position that would have been achieved had the events described above been completed on those dates and are not necessarily indicative of future operating results.
      You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. You should also read the pro forma information together with the unaudited pro forma financial statements of Legacy Reserves LP and related notes included elsewhere in this prospectus.

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      The following table presents the non-GAAP financial measures which we are required to report to our lenders in order to satisfy financial covenants under our revolving credit facility, Adjusted EBITDA and Adjusted Current Ratio. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Our Revolving Credit Facility.” These measures are not calculated or presented in accordance with generally accepted accounting principles, or GAAP. These measures are presented because such information is relevant and is used to assess compliance with loan covenants. Adjusted EBITDA is also used as a supplemental performance measure by our management and by external users of our financial statements to assess the financial performance, operational performance and return on capital of our assets as compared to other companies in the exploration and production industry without regard to financing methods, capital structure or historical cost basis. We explain these measures below and reconcile them to the most directly comparable financial measures calculated and presented in accordance with GAAP in “— Non-GAAP Financial Measures” beginning on page 15.
                                                   
        Legacy Reserves LP
    Moriah Group Historical   Pro Forma
         
    Year Ended December 31,   Year Ended
        December 31,
    2001   2002   2003   2004   2005(a)   2005
                         
    (Unaudited)                   (Unaudited)
    (In thousands)
Statement of Operations Data:
                                               
Revenues:
                                               
 
Oil sales
  $ 5,590     $ 5,494     $ 7,919     $ 10,998     $ 18,225     $ 38,178  
 
Natural gas sales
    3,340       2,204       3,697       3,945       7,318       15,428  
 
Realized and unrealized gain (loss) on oil and natural gas swaps
    (167 )     (594 )     (283 )     (633 )     (6,159 )     (11,048 )
                                     
Total revenues
    8,763       7,104       11,333       14,310       19,384       42,558  
                                     
Expenses:
                                               
 
Oil and natural gas production
    2,735       2,586       3,496       4,345       6,376       12,038  
 
Production and other taxes
    541       459       661       928       1,636       3,457  
 
General and administrative
    261       230       543       731       1,354       3,878  
 
Dry hole costs
    173       261       1,465       1       —       206  
 
Depletion, depreciation, amortization and accretion
    1,405       649       766       883       2,291       15,093  
 
Impairment of long-lived assets
    205       —       471       —       —       5  
 
(Gain) loss on sale of assets
    (228 )     —       —       —       20       (299 )
                                     
 
Total expenses
    5,092       4,185       7,402       6,888       11,677       34,378  
                                     
 
Operating income
    3,671       2,919       3,931       7,422       7,707       8,180  
Other income (expense):
                                               
 
Interest income
    7       14       56       419       185       639  
 
Interest expense
    (154 )     (50 )     (94 )     (213 )     (1,584 )     (5,159 )
 
Gain on sale of partnership investment
    —       —       —       1,292       —       —  
 
Equity in income (loss) of partnerships
    —       (44 )     311       183       (495 )     —  
 
Other
    4       4       3       92       45       141  
                                     
 
Income (loss) before non-controlling interest
    3,528       2,843       4,207       9,195       5,858       3,801  
 
Non-controlling interest
    —       —       —       —       1       —  
                                     
 
Income (loss) from continuing operations
    3,528       2,843       4,207       9,195       5,859     $ 3,801  
                                     
Discontinued operations:
                                               
 
Income (loss) from operations
    —       (192 )     10       15       —          
 
Gain on disposal
    —       463       233       7       —          
                                     
 
Income from discontinued operations
    —       271       243       22       —          
                                     
Cumulative effect of accounting change
    —       —       (223 )     —       —          
                                     
 
Net Income
  $ 3,528     $ 3,114     $ 4,227     $ 9,217     $ 5,859          
                                     
Earnings per unit from continuing operations:
                                               
 
Basic and fully diluted
  $ 0.37     $ 0.30     $ 0.44     $ 0.96     $ 0.61     $ 0.21  

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        Legacy Reserves LP
    Moriah Group Historical   Pro Forma
         
    Year Ended December 31,   Year Ended
        December 31,
    2001   2002   2003   2004   2005(a)   2005
                         
    (Unaudited)                   (Unaudited)
    (In thousands)
Cash Flow Data:
                                               
 
Net cash provided by operating activities
  $ 4,680     $ 3,941     $ 6,799     $ 8,586     $ 14,409          
 
Net cash provided by (used in) investing activities
  $ 1,874     $ (1,895 )   $ (8,475 )   $ 1,023     $ (68,965 )        
 
Net cash provided by (used in) financing activities
  $ (6,571 )   $ (1,993 )   $ 1,717     $ (8,958 )   $ 55,742          
 
Capital expenditures
  $ 1,223     $ 2,741     $ 4,047     $ 3,325     $ 66,915          
Other Financial Information (unaudited):
                                               
 
Adjusted EBITDA(b)
          $ 4,417     $ 4,907     $ 9,397     $ 12,877     $ 27,785  
 
Ratio of Adjusted EBITDA to Interest Expense(c)
            88.3 x     52.2 x     44.1 x     8.1 x     5.4 x
 
(a)  Reflects MBN Properties LP’s purchase of the PITCO properties on September 14, 2005. Consequently, the operations of the PITCO properties are only included for the period of September 14, 2005 to December 31, 2005.
 
(b)  Please read “— Non-GAAP Financial Measures” beginning on page 15.
 
(c)  The revolving credit facility requires us to maintain consolidated net income plus interest expense, income taxes, depreciation, depletion, amortization and other similar charges, minus all non-cash income added to consolidated net income, and giving pro forma effect to any acquisitions or capital expenditures, to interest expense of not less than 2.5 to 1.0.
                                                   
        Legacy Reserves LP
    Moriah Group Historical   Pro Forma
         
    As of December 31,   As of
        December 31,
    2001   2002   2003   2004   2005(a)   2005
                         
    (Unaudited)                   (Unaudited)
    (In thousands)
Balance Sheet Data:
                                               
 
Cash and cash equivalents
  $ 22     $ 76     $ 117     $ 769     $ 1,955     $ 464  
 
Other current assets
    1,002       2,643       7,826       5,799       6,316       47  
 
Oil and natural gas properties, net of accumulated depletion, depreciation and amortization
    6,823       7,558       9,954       12,224       77,172       225,697  
 
Other assets
    78       497       651       —       1,499       746  
                                     
 
Total assets
  $ 7,925     $ 10,774     $ 18,548     $ 18,792     $ 86,942     $ 226,954  
                                     
 
Current Liabilities
  $ 407     $ 3,925     $ 9,157     $ 4,898     $ 4,562     $ 1,374  
 
Long-term debt
    —       —       —       —       52,473       67,800  
 
Other long-term liabilities
            —       2,113       1,872       19,998       7,881  
 
Owners’ equity
    7,518       6,849       7,278       12,022       9,909       149,899  
                                     
 
Total liabilities and owners’ equity
  $ 7,925     $ 10,774     $ 18,548     $ 18,792     $ 86,942     $ 226,954  
                                     
Other Financial Information (unaudited):
                                               
 
Adjusted Current Ratio(b)
                                            61.3 x
 
Current Ratio
                                            0.37 x
 
(a)  Reflects MBN Properties LP’s purchase of the PITCO properties on September 14, 2005. Consequently, the operations of the PITCO properties are only included for the period of September 14, 2005 to December 31, 2005.
 
(b)  The revolving credit facility requires us to maintain consolidated current assets, including the unused amount of the total commitments, to consolidated current liabilities of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under SFAS No. 133, which includes the current portion of oil, natural gas and interest rate swaps.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      The following discussion and analysis should be read in conjunction with the “Selected Historical and Pro Forma Consolidated Financial Data” and the accompanying financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for natural gas, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this prospectus, particularly in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
Overview
      We were formed in October 2005. Upon completion of our private equity offering and as a result of the related formation transactions on March 15, 2006, we acquired oil and natural gas properties and business operations from our Founding Investors and three charitable foundations. Although we were the surviving entity for legal purposes, the formation transactions are treated as a purchase with Moriah Properties, Ltd. and its affiliates, or the Moriah Group, being considered, on a combined basis, as the acquiring entity for accounting purposes.
      The Moriah Group owned and operated oil and natural gas producing properties located primarily in the Permian Basin of West Texas and southeast New Mexico. The Moriah Group includes the accounts of Moriah Resources, Inc. as the general partner of Moriah Properties, Ltd., the oil and natural gas interests individually owned by Dale A. and Rita Brown until October 1, 2005 when those interests were transferred to DAB Resources, Ltd. and the accounts of MBN Properties LP. The Moriah Group consolidated MBN Properties LP as a variable interest entity with the portion of net income (loss) applicable to the other owners’ equity interests eliminated through a non-controlling interest adjustment. Although MBN Management, LLC, the general partner of MBN Properties LP, is also a variable interest entity, it is accounted for by the Moriah Group using the equity method.
      Because of rapid growth through acquisitions and development of properties, historical results of operations and period-to -period comparisons of these results and certain financial data may not be meaningful or indicative of future results. Since the PITCO properties were not acquired by MBN Properties LP until September 14, 2005, the combined results of operations for the Moriah Group for the year ended December 31, 2005 only include the operating results for the PITCO properties for the period of September 14, 2005 through December 31, 2005.
      Acquisitions had been financed with a combination of proceeds from bank borrowings and cash flow from operations. Post-acquisition activities are focused on evaluating and exploiting the acquired properties and evaluating potential add-on acquisitions.
Legacy Reserves LP
      Our revenues, cash flow from operations and future growth depend substantially on factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

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      Higher oil and natural gas prices have led to higher demand for drilling rigs, operating personnel and field supplies and services, and have caused increases in the costs of those goods and services. To date, the higher sales prices have more than offset the higher drilling and operating costs. Given the inherent volatility of oil and natural gas prices, which are influenced by many factors beyond our control, we plan our activities and budget based on sales price assumptions which historically have been lower than the average sales prices received. We focus our efforts on increasing oil natural gas production and reserves while controlling costs at a level that is appropriate for long-term operations.
      We face the challenge of natural production declines. As initial reservoir pressures are depleted, oil and natural gas production from a given well or formation decreases. We attempt to overcome this natural decline by utilizing multiple types of recovery techniques such as secondary (water injection) and tertiary (CO 2 injection) recovery methods to repressure the reservoir and recover additional oil, drilling to find additional reserves and acquiring more reserves than we produce. Our future growth will depend on our ability to continue to add reserves in excess of production. We will maintain our focus on adding reserves through acquisitions and exploitation projects. Our ability to add reserves through acquisitions and exploitation projects is dependent upon many factors including our ability to raise capital, obtain regulatory approvals and contract drilling rigs and personnel.
      Our revenues are highly sensitive to changes in oil and natural gas prices and to levels of production. As set forth under “Cash Flow from Operations” below, we have hedged a significant portion of our expected production, which allows us to mitigate, but not eliminate, oil and natural gas price risk. We continuously conduct financial sensitivity analyses to assess the effect of changes in pricing and production. These analyses allow us to determine how changes in oil and natural gas prices will affect our ability to execute our capital investment programs and to meet future financial obligations. Further, the financial analyses allow us to monitor any impact such changes in oil and natural gas prices may have on the value of our proved reserves and their impact, if any, on any redetermination to our borrowing base under our credit facility.
      The Moriah Group does not specifically designate derivative instruments as cash flow hedges; therefore, the mark-to -market adjustment reflecting the unrealized gain or loss associated with these instruments is recorded in current earnings.
Production and Operating Costs Reporting
      We strive to increase our production levels to maximize our revenue and cash available for distribution. Additionally, we continuously monitor our operations to ensure that we are incurring operating costs at the optimal level. Accordingly, we continuously monitor our production and operating costs per well to determine if any wells or properties should be shut in, recompleted or sold.

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Moriah Group Operating Data
      The following table sets forth selected financial and operating data of the Moriah Group for the periods indicated.
                             
    Moriah Group Historical
     
    Year Ended December 31,
     
    2003   2004   2005
             
    (In thousands)
Revenues:
                       
 
Oil sales
  $ 7,919     $ 10,998     $ 18,225  
 
Natural gas sales
    3,697       3,945       7,318  
 
Realized and unrealized gain (loss) on oil and natural gas swaps
    (283 )     (633 )     (6,159 )
                   
   
Total revenue
  $ 11,333     $ 14,310     $ 19,384  
                   
Expenses:
                       
 
Oil and natural gas production
  $ 3,496     $ 4,345     $ 6,376  
 
Production and other taxes
  $ 661     $ 928     $ 1,636  
 
General and administrative
  $ 543     $ 731     $ 1,354  
 
Depletion, depreciation, amortization and accretion
  $ 766     $ 883     $ 2,291  
Production:
                       
 
Oil (MBbl)
    279       286       354  
 
Natural gas (MMcf)
    848       783       1,027  
 
Total (MBoe)
    420       416       525  
 
Average daily production (Boe per day)
    1,152       1,138       1,438  
Average Sale Prices (including hedges):
                       
 
Oil (per Bbl)
  $ 28.40     $ 36.24     $ 38.95 (a)
 
Natural gas (per Mcf)
  $ 4.02     $ 5.04     $ 5.45  
 
Combined (per Boe)
  $ 26.96     $ 34.36     $ 36.92  
Average Sale Prices (excluding hedges):
                       
 
Oil (per Bbl)
  $ 28.38     $ 38.45     $ 51.50  
 
Natural gas (per Mcf)
  $ 4.36     $ 5.04     $ 7.13  
 
Combined (per Boe)
  $ 27.64     $ 35.88     $ 48.65  
Average unit costs per Boe:
                       
 
Oil and natural gas production expenses
  $ 8.32     $ 10.43     $ 12.14  
 
Production taxes
  $ 1.57     $ 2.23     $ 3.12  
 
General and administrative expenses
  $ 1.29     $ 1.76     $ 2.58  
 
Depletion, depreciation, amortization and accretion
  $ 1.82     $ 2.12     $ 4.36  
 
(a) Includes approximately $2.0 million for the year ended December 31, 2005 of derivative premiums to cancel and reset 2006 oil swaps from $51.31 to $59.38 per Bbl and approximately $0.8 million of premiums paid on July 22, 2005 for an option to enter into a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
Results of Operations
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
      The Moriah Group’s revenues from the sale of oil were $18.2 million for the year ended December 31, 2005 and $11.0 million for the year ended December 31, 2004. The Moriah Group’s revenues from the sale of natural gas were $7.3 million for the year ended December 31, 2005 and $3.9 million for the year ended December 31, 2004. The $7.2 million increase in oil revenues reflects an increase in oil production of 67.9 MBbls (24%) due primarily to the PITCO acquisition while the realized price excluding the effects of hedging increased $13.05 per Bbl. The $3.4 million increase in natural gas revenues reflects an increase in

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natural gas production of approximately 244 MMcf (31%) due primarily to the PITCO acquisition while the realized price per Mcf excluding the effects of hedging increased $2.09 per Mcf. For the year ended December 31, 2005, the Moriah Group recorded $6.2 million of losses on oil and natural gas swaps comprised of a realized loss of $3.5 million and unrealized losses of $2.6 million, as compared to a realized loss of $73,830 for the year ended December 31, 2004 and an unrealized loss of $558,953. Unrealized losses represent a current period mark-to -market adjustment for commodity derivatives which will be settled in future periods. The realized loss of $3.5 million included a $2.0 million loss incurred in June 2005 when the Moriah Group cancelled its existing oil swap contracts which involved fixed prices of approximately $51.31 per Bbl and entered into new oil swaps at fixed prices of $59.38 per Bbl, and includes a premium of $819,000 for an option to enter into a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
      The Moriah Group’s oil and natural gas production expenses, excluding production and other taxes, increased to $6.4 million for the year ended December 31, 2005, from $4.3 million for the year ended December 31, 2004. Production expenses increased primarily because of (i) $1.6 million related to the PITCO acquisition and (ii) increased production and increased cost of services and certain operating costs that are directly related to higher commodity prices, particularly the cost of electricity, which powers artificial lift equipment and pumps involved in the production of oil.
      The Moriah Group’s production and other taxes were $1.6 million and $927,657 for the years ended December 31, 2005 and 2004, respectively. Production and other taxes increased primarily because of (i) approximately $400,000 related to the PITCO Acquisition and (ii) increased production and increased oil and natural gas prices which is the basis on which severance taxes are paid (percentage of revenue) while ad valorem or property taxes are based on property values, which increase directly with higher oil and natural gas prices.
      The Moriah Group’s general and administrative expenses were $1.35 million and $731,200 for the years ended December 31, 2005 and 2004, respectively. General and administrative expenses increased approximately $623,200 between periods primarily due to increased employee costs related to business expansion and costs incurred in connection with our private equity offering.
      The Moriah Group’s depletion, depreciation, amortization and accretion expense, or DD&A, was $2.3 million and $883,457 for the years ended December 31, 2005 and 2004, respectively, reflecting primarily $1.6 million of DD&A related to the PITCO Acquisition.
      The Moriah Group recorded interest income of $185,308 for the year ended December 31, 2005 and $419,257 for the year ended December 31, 2004. The decrease of $233,949 is a direct result of lower average cash balances for the current period.
      Interest expense was $1.58 million and $213,711 for the years ended December 31, 2005 and 2004, respectively, reflecting higher average borrowings and higher average interest rates in the current period.
      No gain on sale of partnership investment was recorded for the year ended December 31, 2005. The Moriah Group realized a gain on sale of partnership investment of $1.3 million for the year ended December 31, 2004 related to the sale of the Accord partnership.
      The Moriah Group recorded equity in loss of partnerships of $495,295 for the year ended December 31, 2005 and a gain of $183,474 for the year ended December 31, 2004. The decrease in partnership income is a result of the sale of the Accord partnership interest in April 2004. The Moriah Group recorded equity in loss of partnership of $495,295 related to its investment in MBN Management, LLC, which includes the Moriah Group’s 58.36% share of 100% of the MBN Management, LLC loss since the Founding Investors have reported 100% of this loss.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
      The Moriah Group’s revenues from the sale of oil were $11.0 million and $7.9 million for the years ended December 31, 2004 and 2003, respectively. The Moriah Group’s revenues from the sale of natural gas

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were $3.9 million and $3.7 million for the years ended December 31, 2004 and 2003, respectively. The $3.1 million increase in oil revenues reflects an increase in oil production of approximately 7.0 MBbls (2%) while the realized price excluding the effects of hedging increased $10.07 per Bbl. The $248,443 increase in natural gas revenues reflects a decrease in natural gas production of approximately 65 MMcf (8%) while the realized price excluding the effects of hedging increased $0.68 per Mcf. For the year ended December 31, 2004, the Moriah Group recorded $632,783 of losses on oil and natural gas swaps comprised of realized losses of $73,830 and of unrealized losses of $558,953, as compared to net hedge losses of $282,872 comprised of an unrealized gain of $340,179 and a realized loss of $623,051 for the year ended December 31, 2003.
      The Moriah Group’s oil and natural gas production expenses, excluding production and other taxes, were $4.3 million and $3.5 million for 2004 and 2003, respectively. Production expenses increased primarily because of increased cost of services and certain costs that are directly related to higher commodity prices, particularly the cost of electricity, which powers artificial lift equipment and pumps involved in the production of oil.
      The Moriah Group’s production and other taxes were $927,657 and $661,563 for 2004 and 2003, respectively. Production and other taxes increased because of increased oil and natural gas prices which is the basis on which severance taxes are paid (percentage of revenue) while ad valorem or property taxes are based on property values, which increase directly with higher oil and natural gas prices.
      The Moriah Group’s general and administrative expenses were $731,200 and $543,221 for 2004 and 2003, respectively. General and administrative expenses increased $187,979 between periods due to business expansion.
      The Moriah Group had $822 of dry hole cost for the year ended December 31, 2004 and $1.5 million for the year ended December 31, 2003. The reduction in dry hole expense was a result of the Moriah Group’s decision to eliminate exploratory activities during 2004.
      The Moriah Group’s DD&A was $883,457 and $765,620 for 2004 and 2003, respectively, reflecting higher levels of capital spending in the prior period, adding to the depreciable book basis in 2004 from 2003 activity.
      The Moriah Group had no impairment expense for the year ended December 31, 2004 and $471,394 for the year ended December 31, 2003. The impairment expense in 2003 related to prospect costs related to an exploratory dry hole drilled in 2003.
      The Moriah Group recorded interest income of $419,257 for the year ended December 31, 2004 and $56,390 for the year ended December 31, 2003. The increase of $362,867 is a direct result of higher average cash balances and higher interest rates received on invested funds.
      The Moriah Group’s interest expense was $213,711 and $94,284 for 2004 and 2003, respectively. The $119,427 increase was due to higher interest rates and higher average outstanding borrowings during 2004 as compared to 2003.
      The Moriah Group realized gain on sale of partnership investment of $1.3 million in 2004 as the result of the sale of the Accord partnership interest in April 2004. For the year ended December 31, 2003, the Moriah Group recorded no gain or loss on sale of partnership investment.
      The Moriah Group recorded equity in income of partnership of $183,474 for the year ended December 31, 2004 and $311,367 for the year ended December 31, 2003. The decrease in partnership income is a result of the sale of the Accord partnership interest in April 2004.
Capital Resources and Liquidity
Moriah Group
      The Moriah Group’s primary sources of capital and liquidity have been proceeds from bank borrowings and cash flow from operations. To date, the Moriah Group’s primary use of capital has been for the

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acquisition and exploitation of oil and natural gas properties. During the year ended December 31, 2005, the Moriah Group cancelled (before their original settlement date) a portion of the NYMEX WTI oil swaps covering periods in 2006 and realized a loss of $2.0 million. The Moriah Group, through its ownership of MBN Properties LP, paid a $0.8 million premium for an option to enter a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised. As a result, the Moriah Group’s working capital was reduced by $2.8 million at December 31, 2005.
Legacy Reserves LP
      As we pursue growth, we continually monitor the capital resources available to us to meet our future financial obligations and planned capital expenditures. Our future success in growing reserves and production will be highly dependent on capital resources available to us and our success in acquiring and exploiting additional reserves. We actively review acquisition opportunities on an ongoing basis. If we were to make significant additional acquisitions for cash, we would need to borrow additional amounts under our credit facility, if available, or obtain additional debt or equity financing. Our credit facility will impose certain restrictions on our ability to obtain additional debt financing. Based upon current oil and natural gas price expectations for 2006, we anticipate that the proceeds of this offering, our cash flow from operations and available borrowing capacity under our credit facility will exceed our planned capital expenditures and other cash requirements for 2006. Please read “— Financing Activities — Our Revolving Credit Facility.”
Cash Flow from Operations
Moriah Group
      The Moriah Group’s net cash provided by operating activities was $14.4 million and $8.6 million for the years ended December 31, 2005 and 2004, respectively. The increase in net cash provided by operating activities during the year ended December 31, 2005 was due to higher oil and natural gas prices and increased oil and natural gas volumes for that period, partially offset by increased expenses, as discussed above in “Results of Operations.”
      The Moriah Group’s net cash provided by operating activities was $8.6 million and $6.8 million for the years ended 2004 and 2003, respectively. The increase in net cash provided by operating activities in 2004 was partially due to increased revenues from higher oil and natural gas prices and increased oil volumes, partially offset by lower natural gas volumes and increased expenses, as discussed above in “Results of Operations.”
Legacy Reserves LP
      Our cash flow from operations is subject to many variables, the most significant of which is the volatility of oil and natural gas prices. Oil and natural gas prices are determined primarily by prevailing market conditions, which are dependent on regional and worldwide economic activity, weather and other factors beyond our control. Our future cash flow from operations will depend on our ability to maintain and increase production through acquisitions and exploitation projects, as well as the prices of oil and natural gas.
      We enter into hedging arrangements to reduce the impact of oil and natural gas price volatility on our operations. Currently, we use swaps to hedge NYMEX oil and natural gas prices, which do not include the additional net discount that we typically realize in the Permian Basin. At December 31, 2005, we had in place oil and natural gas swaps covering significant portions of our estimated 2006 through 2010 oil and natural gas production. We have hedged approximately 85% of our expected 2006 production. We have also hedged approximately 65% of our currently expected oil and natural gas production for 2007 through 2010 from existing total proved reserves.
      By removing the price volatility from a significant portion of our oil and natural gas production, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flow from operations for those periods. While mitigating negative effects of falling commodity prices, these derivative contracts also limit the benefits we would receive from increases in commodity prices. It is our policy to enter into

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derivative contracts only with counterparties that are major, creditworthy financial institutions deemed by management as competent and competitive market makers.
      The following table summarizes, for the periods indicated, our oil and natural gas swaps currently in place through December 31, 2010. We use swaps as our mechanism for hedging commodity prices whereby we pay the counterparty floating prices and receive fixed prices from the counterparty, which serves to hedge the floating prices we are paid by purchasers of our oil and natural gas. These transactions are settled based upon the NYMEX price of oil at Cushing, Oklahoma, and NYMEX price of natural gas at Henry Hub on the average of the three final trading days of the month and settlement occurs on the fifth day of the production month.
                                                                   
    Moriah Group(a)     Legacy Reserves LP Combined
           
    Oil   Gas     Oil   Gas
                   
    Hedged   Fixed   Hedged   Fixed     Hedged   Fixed   Hedged   Fixed
    Volume   Price   Volume   Price     Volume   Price   Volume   Price
Period   (Bbl)   ($/Bbl)   (MMBtu)   ($/MMBtu)     (Bbl)   ($/Bbl)   (MMBtu)   ($/MMBtu)
                                   
2006
    454,492     $ 62.85       1,281,535     $ 11.02         667,224     $ 62.05       1,730,925     $ 11.22  
2007
    342,451     $ 61.62       1,151,107     $ 9.44         536,345     $ 61.55       1,558,498     $ 9.56  
2008
    313,213     $ 61.16       1,048,183     $ 8.54         495,634     $ 61.37       1,422,736     $ 8.61  
2009
    309,379     $ 62.48       964,445     $ 8.26         456,959     $ 62.72       1,316,354     $ 8.38  
2010
    287,633     $ 61.32       889,612     $ 7.87         426,687     $ 61.51       1,218,946     $ 8.00  
 
(a)  Includes swaps placed by MBN Properties LP without giving effect to any non-controlled interest adjustment.
Investing Activities — Acquisitions and Capital Expenditures
Moriah Group
      The Moriah Group’s capital expenditures were $66.9 million and $3.3 million for the years ended December 31, 2005 and 2004, respectively. The total for the year ended December 31, 2005 includes $63.9 million in cash ($64.3 million, inclusive of asset retirement obligations) for the acquisition of producing oil and natural gas properties from PITCO and $1.9 million for exploitation projects. The total for the year ended December 31, 2004 includes $1.6 million for acquisitions and $1.7 million for exploitation projects and of producing properties. The PITCO acquisition was made in anticipation of the formation of Legacy Reserves LP.
      The Moriah Group’s capital expenditures were $3.3 million for the year ended December 31, 2004 and $4.0 million for the year ended December 31, 2003. The total for 2004 includes $1.6 million for acquisitions and $1.7 million for exploitation projects. The total for 2003 includes $2.4 million for acquisitions and $1.6 million for exploitation projects.
      During the year ended December 31, 2005, the Moriah Group cancelled (before their original settlement date) a portion of the hedges and realized a loss of $2.0 million, all of which related to canceling and replacing 2006 oil swaps. The Moriah Group, through its ownership of MBN Properties LP, paid a $0.8 million premium for an option to enter a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
Legacy Reserves LP
      We currently anticipate that our drilling budget, which predominantly consists of drilling and recompletion projects and one tertiary recovery project will be $8.25 million for 2006. Our borrowing capacity under our revolving credit facility is $62.6 million, as of May 8, 2006. The amount and timing of our capital expenditures is largely discretionary and within our control, with the exception of certain projects managed by other operators. If oil and natural gas prices decline below levels we deem acceptable, we may defer a portion of our planned capital expenditures until later periods. Accordingly, we routinely monitor and adjust our capital expenditures in response to changes in oil and natural gas prices, drilling and acquisition

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costs, industry conditions and internally generated cash flow. Matters outside our control that could affect the timing of our capital expenditures include obtaining required permits and approvals in a timely manner and the availability of rigs and labor crews. Based upon current oil and natural gas price expectations for 2006, we anticipate that the proceeds of this offering, our cash flow from operations and available borrowing capacity under our credit facility will exceed our planned capital expenditures and other cash requirements for 2006. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures.
Financing Activities
Moriah Group Credit Agreement
      On July 29, 1999, the Moriah Group entered into a Credit Agreement that permitted borrowings up to the lesser of the borrowing base, or $20 million. The borrowing base was originally set at $8 million, was re-determined annually by the lender and decreased monthly based upon a schedule determined by the terms of the Agreement. Borrowings under the Credit Agreement bore interest at a rate equal to the three-month LIBOR plus an add-on rate which increased from a minimum of 2.0% to a maximum of 3.5% based upon the amount borrowed as a percentage of the borrowing base with the interest payable monthly. The Agreement was secured by substantially all the oil and natural gas assets of the Moriah Group. The Moriah Group had $7.2 million and $9.2 million available on the borrowing base as of December 31, 2004 and 2003, respectively. The Moriah Group had $2.0 million outstanding at a rate of 4.1% and $6.5 million outstanding at a rate of 4.0% as of December 31, 2004 and 2003, respectively. The Moriah Group paid interest expense of $18,323, $239,324 and $74,567 for the years ended December 31, 2005, 2004 and 2003, respectively. The Credit Agreement provided for certain restrictions, including but not limited to, limitations on additional borrowings, restrictions on use of proceeds, sales of collateral, and distributions to owners. It also required the Moriah Group to maintain certain quarterly debt service ratios. At December 31, 2004 and 2003, the Moriah Group was in compliance with all aspects of the Credit Agreement. This Credit Agreement was replaced by the Moriah Group Senior Credit Facility described below.
Moriah Group Senior Credit Facility
      On September 13, 2005, the Moriah Group replaced its Credit Agreement with a Senior Credit Facility with a new lending group that permitted borrowings in the lesser amount of (i) the borrowing base or (ii) $75 million. The borrowing base under the Senior Credit Facility, initially set at $40 million, was re-determined every six months and was adjusted based upon changes in the estimated future net revenues of the Moriah Group’s oil and natural gas assets. Interest on the Senior Credit Facility is payable in accordance with the LIBOR period selected by the Moriah Group (one, three or six months) at the applicable LIBOR period rate plus 1.5% to 2.0%, or the applicable base rate (ABR, closely related to the prime interest rate) up to a maximum of ABR plus 0.50%, dependent on the percentage of the borrowing base which is drawn. On September 13, 2005, the Moriah Group borrowed approximately $55.9 million under the Senior Credit Facility to provide for general corporate purposes, to fund a $4.2 million distribution to Cary Brown and Dale Brown and to advance additional subordinated notes receivable in the amount of $17.6 million to MBN Properties LP, a Delaware limited partnership formed to acquire oil and natural gas producing properties from PITCO. The Moriah Group’s interest rate on this facility at December 31, 2005 was 6.0%. We believe that as of December 31, 2005 the Moriah Group was in compliance with the terms of the Senior Credit Facility. Legacy Reserves LP replaced the Moriah Group Senior Credit Facility concurrently with the closing of our private equity offering with the credit facility described below.
Moriah Group Notes Advanced to MBN Properties LP and MBN Management, LLC
      MBN Properties LP and MBN Management, LLC, a Delaware limited liability company, (collectively the “MBN Group”) were formed to acquire oil and natural gas producing properties from PITCO in partnership with Brothers Production Properties, Ltd., and certain third party minority investors. On July 21, 2005, Moriah Properties, Ltd. funded $462.21 of paid in capital to MBN Properties LP. On July 22, 2005, Moriah

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Properties, Ltd. entered into a $6.5 million Loan Agreement with MBN Properties LP and advanced $1,648,670 in the form of subordinated notes receivable from MBN Properties LP which utilized the notes to fund a deposit with PITCO and its affiliates for a purchase of oil and natural gas properties in the Permian Basin.
      The Moriah Group also advanced $654,099 to fund the expenses of MBN Management, LLC, the general partner of MBN Properties LP. Of this amount, $467 is paid in capital and the balance of $653,632 is a note receivable from MBN Management, LLC under a $2.0 million Loan Agreement. The MBN Management Note bore interest at 7.0% accrued and payable when the Note was retired upon demand by a majority of the lenders, which included the Brothers Group, H2K Holdings Ltd. and the Newstone Group or July 15, 2012. The lenders were not obligated to advance additional notes after July 22, 2006.
      On September 13, 2005, the Moriah Group became a party to a $34.0 million Amended and Restated Loan Agreement (amended and replaced the $6.5 million Loan Agreement above) with MBN Properties LP as the borrower. The Moriah Group was issued a Note in the amount of $19,651,100, which reflects Moriah’s share of the $34.0 million facility. On September 14, 2005, the Moriah Group advanced an additional $17.6 million ($19.5 million including the July 22, 2005 advance and a $263,970 loan origination fee) to MBN Properties LP to provide capital for MBN to close the purchase of properties from PITCO. The Loan Agreement as amended provided for cash interest payments at the interest rate that the Moriah Group pays on its Senior Credit Facility or 6.0%, whichever was less, payable quarterly, with an additional 4.0% interest accrued and payable at maturity of the earlier of (i) the payoff demanded by a majority of the subordinated lenders, which included the Brothers Group, H2K Holdings Ltd. and the Newstone Group, or (ii) July 15, 2012. The notes payable to the other investors (which have not been eliminated in consolidation) are reflected as subordinated notes payable-partners in the combined balance sheet of the Moriah Group included in this prospectus. The Moriah Group entered into a Subordination Agreement with the lending group participating in the Senior Credit Facility whereby no payments of principal could be made to the Subordinated Lenders until the Senior Credit Facility was retired in full by MBN Properties LP. MBN Properties LP and the Moriah Group have the same agent bank and participants in the lending group, but have two separate credit agreements with no cross-collateral or joint guarantees. Concurrently with the closing of our private equity offering, a credit agreement between Legacy Reserves LP and the lending group was used to purchase properties from MBN Properties LP, which in turn retired its senior debt with the Senior Credit Facility lending group and its the subordinated debt payable to the Moriah Group, the Brothers Group, H2K Holdings, Ltd and the Newstone Group.
      On March 15, 2006, MBN Properties LP and MBN Management LLC fully repaid their subordinated notes payable to both Moriah Group and the Brothers Group, including accrued interest.
Our Revolving Credit Facility
      At the closing of our private equity offering, we entered into a new, four-year, $300 million revolving credit facility that was negotiated with BNP Paribas, the agent bank for the lenders under the then-existing credit facilities for each of Moriah Properties, Ltd., Brothers Production Properties, Ltd. and MBN Properties LP. Our obligations under the credit facility are secured by mortgages on all of our oil and gas properties as well as a pledge of all of our ownership interests in our operating subsidiaries. The amount available for borrowing at any one time is limited to the borrowing base, which was initially set at $130 million. The borrowing base is subject to semi-annual redeterminations on April 1 and October 1 of each year. Additionally, either us or the lenders, each may elect to redetermine the borrowing base between the scheduled redeterminations.
      We may elect that borrowing be comprised entirely of alternate base rate (“ABR”) loans or Eurodollar loans. Interest on the loans is determined as follows:
  •  with respect to ABR Loans, the alternate base rate equals the higher of the prime rate or the Federal funds effective rate plus 0.50%, plus an applicable margin between 0% and 0.375%, or

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  •  with respect to any Eurodollar loans for any interest period, the London interbank rate, or LIBOR plus an applicable margin between 1.25% and 1.875% per annum.
      Interest is generally payable quarterly for ABR loans and on the last day of the applicable interest period for any Eurodollar loans.
      Our revolving credit facility also contains various covenants that limit our ability to:
  •  incur indebtedness;
 
  •  enter into certain leases;
 
  •  grant certain liens;
 
  •  enter into certain swaps;
 
  •  make certain loans, acquisitions, capital expenditures and investments;
 
  •  make distributions other than from available cash;
 
  •  merge, consolidate or allow any material change in the character of its business; or
 
  •  engage in certain asset dispositions, including a sale of all or substantially all of our assets.
      Our credit facility also contains covenants that, among other things, require us to maintain specified ratios or conditions as follows:
  •  consolidated net income plus interest expense, income taxes, depreciation, depletion, amortization and other similar charges excluding unrealized gains and losses under SFAS No. 133, minus all non-cash income added to consolidated net income, and giving pro forma effect to any acquisitions or capital expenditures, to interest expense of not less than 2.5 to 1.0; and
 
  •  consolidated current assets, including the unused amount of the total commitments, to consolidated current liabilities of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under SFAS No. 133, which includes the current portion of oil, natural gas and interest rate swaps.
      If an event of default exists under our revolving credit facility, the lenders will be able to accelerate the maturity of the credit agreement and exercise other rights and remedies. Each of the following would be an event of default:
  •  failure to pay any principal when due or any reimbursement amount, interest, fees or other amount within certain grace periods;
 
  •  a representation or warranty is proven to be incorrect when made;
 
  •  failure to perform or otherwise comply with the covenants or conditions contained in the credit agreement or other loan documents, subject, in certain instances, to certain grace periods;
 
  •  default by us on the payment of any other indebtedness in excess of $1.0 million, or any event occurs that permits or causes the acceleration of the indebtedness;
 
  •  bankruptcy or insolvency events involving us or any of our subsidiaries;
 
  •  after this delivery, the loan documents cease to be in full force and effect our failing to create a valid lien, except in limited circumstances;
 
  •  a change of control, which will occur upon (i) the acquisition by any person or group of persons of beneficial ownership of more than 35% of the aggregate ordinary voting power of our equity securities, (ii) the first day on which a majority of the members of the board of directors of our general partner are not continuing directors (which is generally defined to mean members of our board of directors as of the closing of this offering and persons who are nominated for election or elected to our general partner’s board of directors with the approval of a majority of the continuing directors who were members of such board of directors at the time of such nomination or election), (iii) the

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  direct or indirect sale, transfer or other disposition in one or a series of related transactions of all or substantially all of the properties or assets (including equity interests of subsidiaries) of us and our subsidiaries to any person, (iv) the adoption of a plan related to our liquidation or dissolution or (v) Legacy Reserves GP, LLC ceasing to be our sole general partner.
 
  •  the entry of, and failure to pay, one or more adverse judgments in excess of $1.0 million or one or more non-monetary judgments that could reasonably be expected to have a material adverse effect and for which enforcement proceedings are brought or that are not stayed pending appeal; and
 
  •  specified ERISA events relating to our employee benefit plans that could reasonably be expected to result in liabilities in excess of $1,000,000 in any year.

Contractual Obligations
Legacy Reserves LP
      A summary of our pro forma contractual obligations as of December 31, 2005 is provided in the following table.
                                         
    Obligations Due in Period
     
Contractual Cash Obligations   2006   2007-2008   2009-2010   Thereafter   Total
                     
Long-term debt
  $ —     $ —     $ 67,800,000     $ —     $ 67,800,000  
Interest on long-term debt (a)
    4,651,080       9,302,160       5,620,055       —       19,573,295  
Commodity derivatives
    351,403       3,896,399       505,430       —       4,753,232  
Management compensation (b)
    915,000       1,830,000       1,830,000       —       4,575,000  
Office Lease
    82,056       102,570       —       —       184,626  
                               
Total contractual cash obligations
  $ 5,999,539     $ 15,131,129     $ 75,755,485     $ —     $ 96,886,153  
                               
 
(a) Based upon an initial effective interest rate of 6.86% under our revolving credit facility.
 
(b) Does not include any liability associated with management compensation subsequent to the 2009-2010 period as there is no estimated termination date of the employment agreements.
Critical Accounting Policies and Estimates
      The discussion and analysis of the Moriah Group’s and our financial condition and results of operations are based upon the combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Estimates and assumptions are evaluated on a regular basis. The Moriah Group based its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of the financial statements. Below is an expanded discussion of the more significant accounting policies, estimates and judgments.
      Upon the closing of our private equity offering, the consolidated historical financial statements of the Moriah Group became the historical financial statements of Legacy Reserves LP. Consequently, the critical accounting policies and estimates of the Moriah Group became our critical accounting policies and estimates. We believe these accounting policies reflect the more significant estimates and assumptions used in preparation of the financial statements. Please read Note 1 of the Notes to the Combined Financial Statements for a discussion of additional accounting policies and estimates made by management.

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Oil and Natural Gas Properties
      We account for oil and natural gas properties by the successful efforts method. Leasehold acquisition costs are capitalized. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Under this method of accounting, costs relating to the development of proved areas are capitalized when incurred.
      Depreciation and depletion of producing oil and natural gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. Statement of Financial Accounting Standards (SFAS) No. 19  — Financial Accounting and Reporting for Oil and Gas Producing Companies  — requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves. As more fully described in Note 14 of the Notes to the Consolidated Financial Statements, proved reserves are estimated by an independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., and are subject to future revisions based on availability of additional information. As described in Note 10 of the Notes to the Consolidated Financial Statements, we follow SFAS No. 143 — Accounting for Asset Retirement Obligations. Under SFAS No. 143, estimated asset retirement costs are recognized when the asset is placed in service, and are amortized over proved reserves using the units of production method. Asset retirement costs are estimated by our engineers using existing regulatory requirements and anticipated future inflation rates.
      Geological, geophysical, and dry hole costs on oil and natural gas properties relating to unsuccessful wells are charged to expense as incurred.
      Upon sale or retirement of complete fields of depreciable or depleted property, the differences between the book value thereof and the proceeds or salvage value are recognized in income. On sale or retirement of a partial unit of proved property the proceeds are credited to accumulated depreciation and depletion unless that accounting would significantly affect amortization rates.
      Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. We assess impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using expected prices. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. As of December 31, 2005 and 2004, the estimated undiscounted future cash flows for our proved oil and natural gas properties exceeded the net capitalized costs, and no impairment was required to be recognized. In the year ended December 31, 2003, the Moriah Group recorded $471,394 of impairment expense related to leasehold and other prospect costs for an exploratory dry hole.
      Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred.
      Property acquisition costs are capitalized when incurred.
Oil and Natural Gas Reserve Quantities
      Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. LaRoche Petroleum Consultants, Ltd., prepares a reserve and economic evaluation of all our properties on a lease, unit or well-by-well basis, depending on the availability of well-level production data.
      Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. We prepare our reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. The independent engineering firm described above adheres to

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the same guidelines when preparing their reserve reports. The accuracy of our reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.
      Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. For example, when the price of oil and natural gas increases, the economic life of our properties is extended, thus increasing proved reserve quantifies and making certain projects economically viable. Likewise, if oil and natural gas prices decrease, the properties economic life is reduced and certain proved projects may become uneconomic, reducing proved reserved quantifies. Oil and natural gas price volatility adds to the uncertainty of our reserve quantity estimates. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and natural gas liquids eventually recovered.
Revenue Recognition
      Sales of oil and natural gas are recognized when oil and natural gas has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. Oil and natural gas are priced based on the day it is transferred from our tanks to a pipeline or truck. Natural gas is transferred to a pipeline as it is produced and is priced monthly based on the price index specified in a contract. Virtually all of our contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a truck, gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the oil and natural gas fluctuates to remain competitive with other available oil and natural gas supplies. As a result, our revenues from the sale of oil and natural gas will suffer if market prices decline and benefit if they increase. We believe that the pricing provisions of our oil and natural gas contracts are customary in the industry.
      We currently use the “net-back” method of accounting for transportation arrangements of our natural gas sales. We sell natural gas at the wellhead and collect a price and recognize revenues based on the wellhead sales price since transportation costs downstream of the wellhead are incurred by our purchasers and customers and reflected in the wellhead price.
      Natural gas imbalances occur when we sell more or less than our entitled ownership percentage of total natural gas production. Any amount received in excess of our share is treated as a liability. If we receive less than our entitled share the underproduction is recorded as a receivable. We did not have any significant natural gas imbalance positions as of December 31, 2005, 2004 or 2003.
      We are paid a monthly operating fee for each well we operate for outside owners. The fee covers monthly operating and accounting costs, insurance, and other recurring costs. As the operating fee is a reimbursement of costs incurred on behalf of third parties, the fee has been netted against general and administrative expense.
Derivative Instruments and Hedging Activities
      We periodically use derivative financial instruments to achieve a more predictable cash flow from our oil and natural gas production by reducing our exposure to price fluctuations. Currently, these transactions are swaps whereby we exchange our floating price for our oil and natural gas for a fixed price with a qualified and creditworthy counterparty. Our existing oil and natural gas swaps are with members of our lending group which enables us to avoid margin calls for out-of -the money mark-to -market positions. Our swaps for oil are NYMEX WTI Cushing basis and our natural gas swaps are NYMEX Henry Hub basis. In the future, we may hedge our natural gas basis risk by entering into a Waha-NYMEX basis swap to result in a more effective hedge as most of our natural gas pricing is indexed to the Waha hub in West Texas or other indices closely correlated to Waha. We may also enter into interest rate swaps to mitigate our interest rate exposure. We account for these activities pursuant to FAS No. 133  — Accounting for Derivative Instruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair market value and included in the balance sheet as assets or liabilities.

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      The accounting for changes in the fair market value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation, which is established at the inception of a derivative instrument. FAS No. 133 requires that a company formally document, at the inception of a hedge, the hedging relationship and the company’s risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, the method that will be used to assess effectiveness and the method that will be used to measure hedge ineffectiveness of derivative instruments that receive hedge accounting treatment.
      For derivative instruments designated as cash flow hedges, changes in fair market value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is assessed at least quarterly based on total changes in the derivative instrument’s fair market value. Any ineffective portion of the derivative instrument’s change in fair market value is recognized immediately in earnings.
      The Moriah Group does not specifically designate derivative instruments as cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices. Therefore, the mark-to -market of these instruments is recorded in current earnings.
Acquisitions
      The establishment of the Moriah Group’s initial asset base since inception in 1992 has included multiple acquisitions of oil and natural gas properties. These acquisitions have been accounted for using the purchase method of accounting.
      Under the purchase method, the acquiring company adds to its balance sheet the estimated fair values of the acquired company’s assets and liabilities.
      There are various assumptions we make in determining the fair values of acquired assets and liabilities. The most significant assumptions, and the ones requiring the most judgment, involve the estimated fair values of the oil and natural gas properties acquired. To determine the fair values of these properties, we prepare estimates of oil and natural gas reserves. These estimates are based on work performed by our engineers and that of outside consultants. The fair value of reserves acquired in a business combination must be based on our estimates of future oil and natural gas prices and not the prices at the time of the acquisition. Our estimates of future prices are based on our own analysis of pricing trends. These estimates are based on current data obtained with regard to regional and worldwide supply and demand dynamics such as economic growth forecasts. They also are based on industry data regarding oil and natural gas storage inventories, drilling rig activity, changes in delivery capacity, trends in regional pricing differentials, surveys of industry and bank price forecasts and other fundamental analysis. Forecasts of future prices from independent third parties are noted when we make our pricing estimates.
      We estimate future prices to apply to the estimated reserve quantities acquired, and estimate future operating and development costs, to arrive at estimates of future net revenues. For estimated proved reserves, the future net revenues are then discounted using a rate determined appropriate at the time of the business combination based upon our cost of capital.
      We also apply these same general principles in arriving at the fair value of unevaluated properties acquired in a business combination. These unevaluated properties generally represent the value of probable and possible reserves. Because of their very nature, probable and possible reserve estimates are more imprecise than those of proved reserves. To compensate for the inherent risk of estimating and valuing probable and possible reserves, we apply a risk-weighting factor to probable and possible volumes to reduce the estimated reserve volumes. Additionally, we increase the discount factor, compared to proved reserves, to recognize the additional uncertainties related to determining the value of probable and possible reserves. We have not assessed nor have we requested that our independent engineers assess any probable or possible reserves contained on our properties. We can offer no assurance as to the existence of any probable or possible reserves on our properties.

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Consolidation of Variable Interest Entity
      FASB Interpretation (FIN) No. 46 (revised December 2003)  — Consolidation of Variable Interest Entities, addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. We have determined that MBN Properties LP is a variable interest entity since MBN Properties LP required additional subordinated financial support to commence its activities. The Moriah Group has consolidated MBN Properties LP as a variable interest entity under FASB FIN 46R because it is the primary beneficiary of MBN Properties LP under the expected losses test of paragraph 14 of FIN 46R. While MBN Management, LLC is a variable interest entity, it has been accounted for on the Moriah Group’s financial statements utilizing the equity method since no entity is the primary beneficiary. The Moriah Group’s non-controlling income of $538 for the year ended December 31, 2005 represents the loss of MBN Properties LP attributable to the other owners’ equity interests. There will be no non-controlling interest after this offering.
Recently Issued Accounting Pronouncements
      Emerging Issues Task Force (“EITF”) Issue  04-9 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS  19-1: Statement of Financial Accounting Standards (“FAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this determination cannot be made at the conclusion of drilling, FAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. In April 2005, the FASB issued FSP FAS 19-1, which was adopted effective January 1, 2005. This FSP amends FAS No. 19 to allow continued capitalization when (i) the well has found a sufficient quantity of reserves to justify proceeding with the project plan and (ii) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project which may include more than one exploratory well if the reserves are intended to be extracted in a single integrated operation. The FSP also requires increased disclosures. Adoption of this rule did not have a material impact on our combined earnings in 2005. If this FSP had been applied to 2004, it would not have had a material effect on our earnings for that year.
      FAS No. 153: In 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which was effective July 1, 2005. With certain exceptions, this requires exchanges of nonmonetary assets to be recorded at fair value. Previously, these transactions were generally recorded at book value. This pronouncement results in reporting in earnings, gains and losses on exchanges of nonmonetary assets. Adoption of this standard did not have a material impact on either our earnings or consolidated balance sheet in 2005.
      FAS No. 154: In 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FAS No. 3,” which is effective January 1, 2006. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application (restatement) to prior periods’ financial statements of changes in accounting principle. This Statement also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
      FAS Interpretation No. 47: In March 2005, the FASB issued FAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FAS Statement No. 143,” “Accounting for Asset Retirement Obligations”, which is effective no later than December 31, 2005. This pronouncement clarifies that the term “conditional asset retirement obligation” as used in FAS Statement 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. When

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sufficient information exists, uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability. This interpretation is not expected to have a material impact on either our earnings or consolidated balance sheet.
Quantitative and Qualitative Disclosure About Market Risk
      The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.
Commodity Price Risk
      Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Realized pricing is primarily driven by the spot market prices applicable to our natural gas production and the prevailing price for crude oil. Pricing for oil and natural gas has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control, such as the strength of the global economy.
      We periodically enter into and anticipate entering into hedging arrangements with respect to a portion of our projected oil and natural gas production through various transactions that hedge the future prices received. These transactions may include price swaps whereby we will receive a fixed price for our production and pay a variable market price to the contract counterparty. Additionally, we may enter into put options, whereby we pay a premium in exchange for the right to receive a fixed price at a future date. At the settlement date we receive the excess, if any, of the fixed floor over the floating rate. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage our exposure to oil and natural gas price fluctuations. We do not hold or issue derivative instruments for speculative trading purposes.
      As of December 31, 2005, the fair market value of the Moriah Group’s derivative positions, not including the liabilities of MBN Properties LP, was a liability of $1.9 million, which the Moriah Group owes to the counterparty. Additionally, the fair market value of MBN Properties LP’s oil and natural gas hedge position as of December 31, 2005, was a liability of $1.45 million, for which the Moriah Group is not liable. Legacy Reserves LP has assumed these hedge positions. The oil and natural gas swaps for 2006 and through December 31, 2010 are tabulated in the table presented above under “— Cash Flow from Operations — Legacy Reserves LP.”
      If oil prices decline by $1.00 per Bbl, then the PV-10 of our proved reserves as of December 31, 2005 would decline from $277.2 million to $272.1 million, or (1.8%). If natural gas prices decline by $0.10 per Mcf, then the PV-10 of our proved reserves as of December 31, 2005 would decline from $277.2 million to $276.0 million, or (0.4%).
Interest Rate Risks
      At December 31, 2005, the Moriah Group had debt outstanding of $52,473,000, which incurred interest at floating rates in accordance with its revolving credit facility and the subordinated notes payable. The average annual interest rate incurred on by the Moriah Group for year ended December 31, 2005 was 9.0%. A 1% increase in LIBOR on the Moriah Group’s outstanding debt as of December 31, 2005 would result in an estimated $524,730 increase in annual interest expense. The subordinated debt interest rate is computed as the Moriah Group’s interest rate to the senior lending group plus 4.0%. Following our private equity offering, all then existing debt was retired, and borrowings under our revolving credit facility bear interest at variable rates.
      On a pro forma basis, a 1% increase in LIBOR on Legacy’s pro forma debt of $67.3 million as of December 31, 2005 would result in an estimated $0.67 million increase in annual interest expense.

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BUSINESS
Overview
     Legacy Reserves LP
      We are an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and exploitation of oil and natural gas properties primarily located in the Permian Basin of West Texas and southeast New Mexico. We were formed in October 2005 to own and operate the oil and natural gas properties that we acquired from our Founding Investors and three charitable foundations in connection with the closing of our private equity offering on March 15, 2006. Members of our management team have owned and operated the majority of these assets since 1999. Our primary business objective is to generate stable cash flows allowing us to make cash distributions to our unitholders and to increase quarterly cash distributions per unit over time through a combination of acquisitions of new and exploitation of our existing oil and natural gas properties.
      Based on our reserve report as of December 31, 2005 and our historical oil and natural gas production data:
  •  we had proved reserves of approximately 18 MMBoe, of which approximately 69% were oil and 83% were classified as proved developed;
 
  •  our proved reserves had estimated future net revenues discounted at 10%, or a PV-10, of $277.2 million;
 
  •  our average daily net production was 3,090 Boe/d for the twelve months ended December 31, 2005, including the historical production attributable to the PITCO properties, of which approximately 64% was from properties we operate; and
 
  •  our proved reserves to production ratio was approximately 16 years.
      We have grown primarily through two activities: the acquisition of producing oil and natural gas properties and the exploitation (as opposed to exploration) of our properties.
      During the period of January 1, 2002 through December 31, 2005 we acquired approximately 7.9 MMBoe of proved reserves and added approximately 8.8 MMBoe of proved reserves through extensions and discoveries, revisions of prior estimates and improved recovery.
      Our reserves are located primarily in the Permian Basin, one of the largest and most prolific oil and natural gas producing basins in the United States. The Permian Basin extends over 100,000 square miles in West Texas and southeast New Mexico and has produced over 24 billion Bbls of oil since its discovery in 1921. The Permian Basin is characterized by oil and natural gas fields with long production histories, multiple producing formations, low rates of production decline and predictable low-risk reserves.
Acquisition Activities
      Our strategy is to make accretive acquisitions of producing properties. Accordingly, we have and will continue to focus on identifying, evaluating, executing, integrating and exploiting acquisitions of oil and natural gas properties in the Permian Basin, a large basin with fragmented ownership. During July 2005, there were more than 1,700 operators in the Permian Basin according to the Texas and New Mexico oil and natural gas regulatory commissions, and the top five operators accounted for less than 40% of the total oil production during that period. We believe that our track record and structure will allow us to favorably compete in the acquisition market.
      From January 1, 1999 through December 31, 2005, we invested approximately $114.2 million in 26 acquisitions. Based on internal reserve data prepared at the time of these acquisitions, we added a total of approximately 20.1 MMBoe of proved reserves at a reserve acquisition cost of $5.67 per Boe. These additions include our September 2005 acquisition of approximately 5.6 MMBoe of proved reserves, as evaluated by La Roche Petroleum Consultants, Ltd. as of September 30, 2005, from PITCO for $63.9 million

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in cash ($64.3 million, inclusive of asset retirement obligations), representing a reserve acquisition cost of $11.49 per Boe.
      We believe that the September acquisition of Permian Basin producing properties from PITCO has provided us with opportunities to apply our operational knowledge to increase production and reserves from a variety of known producing formations since many of the PITCO properties are near or in the same fields or formations as our other properties. We also believe that the PITCO acquisition positions us to capitalize on a substantial number of additional strategic and “tack-on” acquisitions in the Permian Basin. Tack-on acquisitions typically require little or no additional overhead to manage as they often increase our ownership in an existing field or in a property adjacent to our operations.
Exploitation Activities
      We have also grown reserves and production each year since 1999 through exploitation activities on our existing and acquired properties. Our exploitation activities include accessing additional productive formations in existing wellbores, formation stimulation, artificial lift equipment enhancement, infill drilling on closer well spacing, secondary (water injection) and tertiary (CO 2 injection) recovery projects, drilling for deeper formations and tight formation drilling and completions. From January 1, 2002 through December 31, 2005, we added approximately 8.8 MMBoe of proved reserves, through exploitation activities, excluding the PITCO properties which were acquired in September 2005. Over the same period our reserve replacement rate, or the ratio of added proved reserves to production, from exploitation activities, revisions to prior estimates and improved recovery was over 300%, excluding the PITCO properties. As of December 31, 2005, we have identified 96 proved undeveloped drilling locations, 12 recompletion projects and one tertiary recovery expansion project on our properties, approximately 85% of which we intend to execute over the next four years. We expect to make capital expenditures of approximately $8.25 million during 2006, including drilling 11 gross (6.7 net) development wells, executing nine recompletions and initiating one tertiary recovery expansion project. We currently have rigs operating or committed to drill 100% of our expected development wells for 2006.
Hedging Activities
      Our strategy includes hedging a majority of our oil and natural gas production over a three- to five-year period. We have hedged approximately 85% of our expected oil and natural gas production for 2006 from total proved reserves. We have also hedged approximately 65% of our expected oil and natural gas production from total proved reserves for 2007 through 2010. All of our hedges are in the form of fixed price swaps with average NYMEX prices of at least $61.00 per Bbl of oil and $8.00 per MMBtu of natural gas.
Business Strategy
      The key elements of our business strategy are to:
  •  Make accretive acquisitions of producing properties generally characterized by long-lived reserves with stable production and reserve exploitation potential. We seek to acquire long-lived reserves with moderate production decline rates and reserve exploitation potential. Our diverse property base across numerous fields provides opportunities for “tack-on” acquisitions, whereby we increase our ownership in fields in which we already have a working interest. We also acquire interests in new fields. Since 1999, we have completed 26 acquisitions for a total purchase price of approximately $114.2 million. We believe that our experience positions us to identify, evaluate, execute, integrate and exploit suitable acquisitions.
 
  •  Grow proved reserves and maximize cash flow and production through exploitation activities and operational efficiencies. We have a history of growing proved reserves and maximizing production through exploitation activities while focusing on operational efficiencies. As of December 31, 2005, we have identified 96 proved undeveloped drilling locations, twelve recompletion projects, and a tertiary recovery expansion project on our properties, approximately 85% of which we intend to

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  execute over the next four years. For 2006, we have budgeted approximately $8.25 million for exploitation projects on our properties.
 
  •  Focus on the Permian Basin. The long-lived, stable production profile of our Permian Basin assets is well suited to our business objective and should support our ability to generate stable cash flows. While we are currently focused on the Permian Basin, we will continue to assess opportunities in other areas providing long- lived reserves and may expand into those areas if attractive opportunities become available.
 
  •  Maintain financial flexibility. We intend to maintain substantial borrowing capacity under our revolving credit facility. We believe our internally generated cash flows and our borrowing capacity will provide us with the financial flexibility to pursue additional acquisitions of producing properties and to execute our exploitation activities.
 
  •  Reduce commodity price risk through hedging. We enter into hedging arrangements to reduce the impact of oil and natural gas price volatility on our cash flow from operations. Our strategy includes hedging a significant portion of our future production over a three to five year period. For the year ending December 31, 2006, we have swapped floating prices for fixed prices on 667,224 Bbls of oil and 1,730,925 MMBtu of natural gas, which represents approximately 85% of our total expected net oil and gas production of 1,125 MBoe. By removing the price volatility from a significant portion of our oil and natural gas production, we have mitigated, but not eliminated, the potential effects of changing oil and natural gas prices on our cash flow from operations for those periods. Please read “Management’s Discussion and Analysis and Financial Condition and Results of Operations — Cash Flow from Operations.”

Competitive Strengths
      We believe that we are well positioned to successfully execute our business strategies because of the following competitive strengths:
  •  Proven acquisition and exploitation track record. We have historically grown our proved reserves and production through acquisitions and exploitation activities. Over the period of January 1, 2002 through December 31, 2005, we invested approximately $87.1 million and added approximately 16.7 MMBoe of proved reserves for a reserve replacement cost of $5.19 per Boe. The 16.7 MMBoe of proved reserve additions are comprised of approximately 8.8 MMBoe of extensions and discoveries, revisions of prior estimates and improved recovery and approximately 7.9 MMBoe of property acquisitions. Additionally, we have increased our production from 1,887 Boe/d for the year ended December 31, 2002, to 3,090 Boe/d for the year ended December 31, 2005, which includes the historical production attributed to the PITCO properties.
 
  •  Predictable, long-lived reserve base. Our properties are primarily located in mature fields characterized by a long history of stable production and low to moderate rates of production decline. According to the Texas and New Mexico oil and natural gas regulatory commissions, the properties in which we own interests have cumulatively produced over 900 MMBoe, gross. Technological advances have improved oil and natural gas recovery factors in the Permian Basin, resulting in positive revisions of our reserves and thereby extending the lives of our fields.
 
  •  Diversified operations. Our properties and operations are broadly distributed across the Permian Basin, producing from over 40 different formations. As of December 31, 2005, we produced oil and natural gas from a total of 1,658 wells. Our largest field in terms of total proved reserves, which includes approximately 99 producing wells, represents less than 8% of our total PV-10. We believe that our broad technical and operational expertise enables us to identify a wide range of production and reserve growth opportunities when evaluating acquisitions with reserve exploitation potential.
 
  •  Experienced management team with a vested interest in our success. The members of our management team have an average of over 20 years of experience in the oil and natural gas industry, with the majority of that time focused on the Permian Basin. During that time, which included several

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  commodity price cycles, we made more than 20 acquisitions of producing oil and natural gas properties. We believe that our management’s experience in acquiring and developing oil and natural gas properties and its technical knowledge of the production characteristics of the formations and recovery methods in the Permian Basin will enable us to successfully identify, evaluate, execute, integrate and exploit acquisitions. Members of our management team, their families and their affiliated entities beneficially own a 65.2% limited partner interest in us. Please read “Security Ownership of Certain Beneficial Owners and Management.”

Description of Our Properties
      We own and operate producing oil and natural gas properties in 138 fields in the Permian Basin. On a combined basis, at December 31, 2005 we operated 506 gross productive wells and owned non-operated interests in 1,152 gross productive wells.
      The following table sets forth information about our proved oil and natural gas reserves as of December 31, 2005 giving effect to our acquisition of the oil and natural gas properties from the Founding Investors and the charitable foundations. The reserve data is based on our December 31, 2005 reserve report. The PV-10 amounts shown in the table are not intended to represent the current market value of our estimated oil and natural gas reserves.
                                           
    As of December 31, 2005
     
        PV-10
    Proved Reserves    
            % of
Field   MMBoe   R/P   % Oil   Amount   Total
                     
                ($ in millions)    
Denton
    1.55       16.5       83.6 %   $ 21.5       7.8 %
Lea
    1.48       18.2       71.7       21.3       7.7  
Farmer
    1.78       24.2       66.1       20.1       7.3  
Dove Creek/ Brooks/ Zan Zan
    0.98       13.6       21.7       16.7       6.0  
Langlie Mattix
    1.26       25.3       92.0       16.6       6.0  
Hobbs
    1.16       23.3       92.6       16.3       5.9  
Howard Glasscock/ Iatan/ Iatan East Howard
    1.17       14.6       99.2       15.9       5.7  
                               
 
Total — Top 7 fields
    9.38       18.7       76.1 %     128.4       46.4 %
All others
    8.56       13.7       60.4       148.8       53.6  
                               
 
Total
    17.94       15.9       68.6 %   $ 277.2       100.0 %
                               
Summary of Oil and Natural Gas Properties and Projects
      Our most significant fields are the Denton, Lea, Farmer, Dove Creek/ Brooks/ Zan Zan, Hobbs, Howard Glasscock/ Iatan/ Iatan East Howard, and Langlie Mattix fields. As of December 31, 2005, these seven fields accounted for approximately 52.3% of our total estimated proved reserves.
      Denton Field. The Denton field is an oil and natural gas field located in Lea County, New Mexico. This field was discovered in 1950 and through December 31, 2005, our properties in this field have gross cumulative production of 36.0 MMBbls of oil and 21.0 Bcf of natural gas. The Devonian Formation at depths of 11,000 to 12,700 feet is the primary reservoir in the Denton field. Additional production has been developed in the Wolfcamp Formation at depths of 8,900 to 9,600 feet. We operate six wells in the Denton field with a 86.0% average working interest and a 76.6% average net revenue interest. We also own another 11 wells with a 15.0% average non-operated working interest. As of December 31, 2005, our properties in the Denton field contained 1.5 MMBoe (84% oil) of net proved reserves with a PV-10 of $21.5 million. The estimated average net daily production from this field is 257 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for the field is 16.5 years.
      The Denton field has a natural water drive and most of the wells produce large amounts of water utilizing high volume lift submersible pumps. We have one proved developed non-producing, or PDNP,

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project identified in the Devonian formation of this field and three unclassified high volume lift candidates in the Wolfcamp formation of this field.
      Lea Field. The Lea field is an oil and natural gas field located in Lea County, New Mexico. This field was discovered in 1960 and through December 31, 2005, our properties in this field have gross cumulative production of 9.7 MMBbls of oil and 15.0 Bcf of natural gas. The Devonian Formation at depths of 14,200 to 14,600 feet is the primary reservoir in the Lea field. Additional production has been developed in the Morrow Formation at depths of 12,800 to 13,200 feet and the Bone Spring Formation at depths of 9,300 to 10,500 feet. We operate 14 wells in the Lea Field with a 68.7% average working interest and a 58.4% average net revenue interest. We also own another two wells with a 10.3% average non-operated working interest. As of December 31, 2005, our properties in the Lea field contained 1.5 MMBoe (72% oil) of net proved reserves with a PV-10 of $21.3 million. The estimated average net daily production from this field is 222 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for the Lea field is 18.2 years.
      We have nine proved undeveloped locations in the Bone Spring Formation which are all 40-acre infill wells. There is also significant production from the Delaware formation less than a mile northwest of the Lea field and we are currently evaluating development of the Delaware formation in the Lea field. The Delaware formation is not included in our reserve report.
      Farmer Field. The Farmer field is an oil and natural gas field located in Crockett and Reagan County, Texas. This field was discovered in 1953 and through December 31, 2005, our properties in this field have gross cumulative production of 4.9 MMBbls of oil and 10.2 Bcf of natural gas. The San Andres Formation at depths of 2,100 to 2,600 feet is the primary reservoir in the Farmer field. We operate 105 wells (99 producing, 6 injecting) in the Farmer field with a 100.0% average working interest and a 87.5% average net revenue interest. As of December 31, 2005, our properties in the Farmer field contained 1.8 MMBoe (66% oil) of net proved reserves with a PV-10 of $20.1 million. The estimated average net daily production from this field is 201 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life (R/ P) for the field is 24.2 years.
      The Farmer field has been developed using 20-acre spacing with the exception of a pilot 10-acre spacing area that includes 11 10-acre wells. We currently have 33 10-acre proved undeveloped, or PUD, locations in this field and an additional 84 unproved 10-acre locations.
      Dove Creek, Brooks and Zan Zan Fields. The Dove Creek, Brooks and Zan Zan fields adjoin one another and are located in Irion and Tom Green counties, Texas. These fields were discovered in 1965 and through December 2005, our properties in these fields have a combined gross cumulative production of oil of 3.8 MMBbls and natural gas of 42.9 Bcf. These fields produce from multiple horizons of primarily Pennsylvanian age Cisco and Canyon sand formations from 5,800 to 6,400 feet. We operate 73 active wells (72 producing, 1 injecting) in these fields with working interests ranging from 50.0% to 100% and net revenue interests ranging from 39.0% to 87.5%. As of December 31, 2005, our properties in the Dove Creek, Brooks and Zan Zan fields contained 0.98 MMBoe (22% oil) of net proved reserves with a PV-10 of $16.7 million. The estimated average net daily production from these fields is 199 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for these fields is 13.6 years.
      Langlie Mattix Field. The Langlie Mattix field is an oil and natural gas field located in Lea County, New Mexico. This field was discovered in the late 1930s and through December 31, 2005, our properties in this field have gross cumulative production of 17.5 MMBbls of oil and 8.7 Bcf of natural gas. The Queen Formation at depths of 3,400 to 3,800 feet is the primary reservoir in the Langlie Mattix field. We operate 99 wells (67 producing, 32 injecting) in the Langlie Mattix Penrose Sand Unit, a subdivision of the Langlie Mattix Field, with a 51.7% average working interest and a 45.0% average net revenue interest. All of our undeveloped locations in this field are in the Langlie Mattix Penrose Sand Unit with a 51.7% average working interest and a 45.0% average net revenue interest. As of December 31, 2005, our properties in the Langlie Mattix field contained 1.26 MMBoe (92% oil) of net proved reserves with a PV-10 of $16.6 million. The estimated average net daily production is 137 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for the field is 25.3 years.

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      The Langlie Mattix Penrose Sand Unit was drilled in the late 1930s and early 1940s on 40-acre spacing. Waterflooding commenced in 1958. There have been 14 20-acre infill wells drilled on the Unit; five drilled in 1983, three drilled in 1992, and six drilled in 2004. All three 20-acre infill programs were successful. We have 30 20-acre infill proved undeveloped locations and an additional 55 unproved 20-acre locations.
      Hobbs Field. The Hobbs field is an oil and natural gas field located in Lea County, New Mexico. The field was discovered in 1928 and through December 31, 2005, our properties in the Hobbs field have a combined gross cumulative production of 340.5 MMBbls of oil and 371.2 Bcf of natural gas. The Grayburg and San Andres formations at depths of 3,850 to 4,300 feet are the primary reservoirs in the Hobbs field. We have a non-operated working interest in two Occidental Permian Ltd. operated properties, the North Hobbs Unit and the South Hobbs Unit. Working interests are 1.3% and 1.1% respectively with net revenue interests of 1.1% and 0.9% respectively. There are a total of 430 active wells (262 producing, 168 injecting) on these two units and they contain 1.16 MMBoe (93% oil) of net proved reserves with a PV-10 of $16.3 million. The estimated average net daily production from the Hobbs field is 136 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for these fields is 23.3 years.
      The North Hobbs Unit is currently being CO 2 flooded with ongoing expansion of the enhanced oil recovery project. The South Hobbs Unit is currently being waterflooded and has potential for enhanced oil recovery using CO 2 injection, but has not been evaluated by our engineers or LaRoche Petroleum Consultants.
      Howard Glasscock, Iatan and Iatan East Howard Fields. The Howard Glasscock, Iatan and Iatan East Howard fields adjoin one another and are located in Howard and Mitchell counties, Texas. These fields were discovered in 1925 and through December 31, 2005, our properties in these fields have a gross cumulative production of 10.1 MMBbls of oil and 0.6 Bcf of natural gas. These fields produce from multiple formations of Permian age which primarily include the San Andres, Yates, Seven Rivers, Queen, Clearfork and Glorieta Formations from 1,000 to 3,700 feet as well as the Wolfcamp and Canyon Formations from 5,100 to 7,400 feet. We operate 137 wells (129 producing, 8 injecting) in these fields with working interests ranging from 75.0% to 100.0% and net revenue interests ranging from 62.1% to 87.5%. As of December 31, 2005, our properties in the Howard Glasscock, Iatan and Iatan East Howard fields contained 1.17 MMBoe (99% oil) of net proved reserves with a PV-10 of $15.9 million. The estimated average net daily production from these fields is 220 Boe/d for the first quarter of 2006 as projected in our reserve report. The estimated reserve life for these fields is 14.6 years.
Oil and Natural Gas Data
     Proved Reserves
      The following table presents our estimated net proved oil and natural gas reserves and the PV-10 amounts associated with our estimated proved reserves for the dates indicated based on our December 31, 2005 reserve report. The tabulated figures represent the reserves acquired by Legacy Reserves LP including the Moriah Group, MBN Properties LP, the Brothers Group, H2K Holdings, and the charitable foundations. A summary of the reserve reports prepared by LaRoche Petroleum Consultants, Ltd. is attached as Appendix C. The estimates of net proved reserves have not been filed with or included in reports to any federal authority or agency. The PV-10 amounts shown in the table are not intended to represent the current market value of our estimated oil and natural gas reserves.
                             
    Legacy Reserves LP Combined
     
    As of December 31,
     
    2003   2004   2005
             
Reserve Data:
                       
Estimated net proved reserves:
                       
 
Oil (MMBbls)
    8.5       10.3       12.3  
 
Natural gas (Bcf)
    28.3       27.8       33.8  
   
Total (MMBoe)
    13.2       15.0       17.9  

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    Legacy Reserves LP Combined
     
    As of December 31,
     
    2003   2004   2005
             
Proved developed (MMBoe)
    13.2       14.7       14.9  
Proved undeveloped (MMBoe)
    —       0.3       3.0  
Proved developed reserves as a percentage of total proved reserves
    100.0 %     98.0 %     83.0 %
PV-10 (in millions) (a)
  $ 115.4     $ 159.9     $ 277.2  
Oil and natural gas Prices (b):
                       
Oil — NYMEX WTI per Bbl
  $ 32.52     $ 43.45     $ 61.05  
Natural gas — NYMEX Henry Hub per MMBtu
  $ 6.19     $ 6.15     $ 11.25  
 
(a) PV-10 is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the period end date) without giving effect to non-property related expenses such as general administrative expenses, debt service and future income tax expenses or to depletion, depreciation and amortization and discounted using an annual discount rate of 10%. PV-10 does not give effect to derivative transactions. For a description of our derivative transactions, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cash Flow from Operating Activities.”
 
(b) Oil and natural gas prices as of each period end date were based on NYMEX prices per Bbl of oil and per MMBtu of natural gas at such date, with these representative prices adjusted by field to arrive at the appropriate net price.
      Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are reserves that are expected to be recovered from new wells drilled to known reservoirs on undrilled acreage for which the existence and recoverability of such reserves can be estimated with reasonable certainty, or from existing wells on which a relatively major expenditure is required to establish production.
      The data in the above table represents estimates only. Oil and natural gas reserve engineering is inherently a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil and natural gas that are ultimately recovered. Please read “Risk Factors — Our estimated reserves are based on many assumptions that may prove inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.”
      Future prices received for production and costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. The PV-10 amounts shown above should not be construed as the current market value of our estimated oil and natural gas reserves. The 10% discount factor used to calculate PV-10, which is required by Financial Accounting Standard Board pronouncements, is not necessarily the most appropriate discount rate. The present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate.
      From time to time, we engage LaRoche Petroleum Consultants, Ltd. to prepare a reserve and economic evaluation of properties that we are considering purchasing. Neither LaRoche Petroleum Consultants, Ltd. nor any of its employees has any interest in those properties and the compensation for these engagements is not contingent on their estimates of reserves and future net revenues for the subject properties. During 2005, we paid LaRoche Petroleum Consultants, Ltd. approximately $200,000 for such reserve and economic evaluations.

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Production and Price History
      The following table sets forth information regarding combined net production of oil and natural gas, and certain price and cost information for each of the periods indicated:
                                   
    Moriah Group Historical    
        Legacy Reserves LP
        Combined
    Year Ended December 31,    
        Year Ended
    2003   2004   2005   December 31, 2005
                 
Net Production:
                               
 
Oil (MBbls)
    279       286       354       748  
 
Natural gas (MMcf)
    848       783       1,027       2,282  
 
Total (MBoe)
    392       416       525       1,128  
 
Average daily (Boe/d)
    1,152       1,138       1,438       3,090  
Average Sales Prices (including hedges):
                               
 
Oil (per Bbl)
  $ 28.40     $ 36.24     $ 38.95 (a)   $ $38.42 (a)
 
Natural gas (per Mcf)
  $ 4.02     $ 5.04     $ 5.45     $ 6.06  
 
Combined (per Boe)
  $ 26.96     $ 34.36     $ 36.92     $ 37.73  
Average Sales Prices (excluding hedges):
                               
 
Oil (per Bbl)
  $ 28.38     $ 38.45     $ 51.50     $ 51.08  
 
Natural gas (per Mcf)
  $ 4.36     $ 5.04     $ 7.13     $ 6.76  
 
Combined (per Boe)
  $ 27.64     $ 35.88     $ 48.65     $ 47.53  
Average Unit Costs Per Boe:
                               
 
Oil and natural gas production expenses
  $ 8.32     $ 10.43     $ 12.14     $ 10.40  
 
Production taxes
  $ 1.57     $ 2.23     $ 3.12     $ 3.07  
 
General and administrative expenses
  $ 1.29     $ 1.76     $ 2.58     $ 2.29  
 
Depletion, depreciation, amortization and accretion
  $ 1.82     $ 2.12     $ 4.36     $ 3.03  
 
(a) Includes the effects of approximately $3.5 million of derivative premiums for the year ended December 31, 2005 to cancel and reset 2006 oil swaps from $51.31 to $59.38 per Bbl and approximately $0.8 million of premiums paid on July 22, 2005 for an option to enter into a $55.00 per Bbl oil swap related to the PITCO acquisition that was not exercised.
Productive Wells
      The following table sets forth information at December 31, 2005 relating to the productive wells in which we, on a combined basis, owned a working interest as of that date. Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. Gross wells are the total number of producing wells in which we own an interest, and net wells are the sum of our fractional working interests owned in gross wells.
                                   
    Legacy Reserves LP Combined
     
    Oil   Natural Gas
         
    Gross   Net   Gross   Net
                 
Operated
    459       383.7       47       41.2  
Non-operated
    1,075       57.2       77       11.8  
 
Total
    1,534       440.9       124       53.0  

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Developed and Undeveloped Acreage
      The following table sets forth information, on a combined basis, as of December 31, 2005 relating to our leasehold acreage.
                                 
    Legacy Reserves LP Combined
     
    Developed Acreage(a)   Undeveloped Acreage(b)
         
    Gross(c)   Net(d)   Gross(c)   Net(d)
                 
Total
    156,761       43,844       —       —  
 
(a) Developed acres are acres spaced or assigned to productive wells or wells capable of production.
 
(b) Undeveloped acres are acres which are not held by commercially producing wells, regardless of whether such acreage contains proved reserves. All of our proved undeveloped locations are located on acreage currently held by production.
 
(c) A gross acre is an acre in which we own a working interest. The number of gross acres is the total number of acres in which we own a working interest.
 
(d) A net acre is deemed to exist when the sum of the fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.
Drilling Activity
      The following table sets forth information, on a combined basis, with respect to wells completed by the Moriah Group, Brothers Group, H2K, and the charitable foundations, during the years ended December 31, 2002, 2003 and 2004. No information relating to the PITCO properties is included in these historical annual periods. The drilling activities associated with the aforementioned entities and the PITCO properties (for the period from September 14, 2005 through December 31, 2005) are shown for the year ended December 31, 2005. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of oil and natural gas, regardless of whether they produce a reasonable rate of return.
                               
    Legacy Reserves LP
    Combined
     
    Year Ended
    December 31,
     
    2003   2004   2005
             
Gross:
                       
 
Development
                       
   
Productive
    5       12       12  
   
Dry
    1       —       —  
                   
     
Total
    6       12       12  
 
Exploratory
                       
   
Productive
    —       2       —  
   
Dry
    1       1       1  
                   
     
Total
    1       3       1  

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    Legacy Reserves LP
    Combined
     
    Year Ended
    December 31,
     
    2003   2004   2005
             
Net:
                       
 
Development
                       
   
Productive
    1.0       3.0       1.6  
   
Dry
    0.3       —       —  
                   
     
Total
    1.3       3.0       1.6  
 
Exploratory
                       
   
Productive
    —       0.2       —  
   
Dry
    1.0       0.2       0.1  
                   
     
Total
    1.0       0.4       0.1  
Summary of Exploitation Projects
      We are currently pursuing an active exploitation strategy. For 2006, we have budgeted up to $8.25 million for development drilling, recompletions and other exploitation related projects to implement this strategy. We intend to drill 11 gross (6.7 net) development wells in 2006, ten of which will be operated by us, and execute nine recompletion projects, three of which will be operated by us, and one tertiary recovery project. All of these exploitation projects are located in the Permian Basin.
Operations
General
      We operate approximately 64% of our net daily production of oil and natural gas. We design and manage the development, recompletion or workover for all of the wells we operate and supervise operation and maintenance activities. We do not own drilling rigs or other oil field services equipment used for drilling or maintaining wells on properties we operate. Independent contractors engaged by us provide all the equipment and personnel associated with these activities. Our Founding Investors have historically employed, and we expect to employ in the future, drilling, production, and reservoir engineers, geologists and other specialists who have, and will, work to improve production rates, increase reserves, and lower the cost of operating our oil and natural gas properties. Our non-operated wells are managed by third-party operators who are typically independent oil and natural gas companies. We charge the non-operating partners a contractual administrative overhead charge for operating the wells.
Oil and Natural Gas Leases
      The typical oil and natural gas lease agreement covering our properties provides for the payment of royalties to the mineral owner for all oil and natural gas produced from any well drilled on the lease premises. In the Permian Basin this amount ranges from 12.5% to 25.0% resulting in a 87.5% to 75.0% net revenue interest to us. Most of our leases are held by production and do not require lease rental payments.
Marketing and Major Customers
      For the year ended December 31, 2005, sales of oil to ConocoPhillips, Navajo Crude Oil Marketing, a subsidiary of Holly Corporation, and Plains Marketing, LP, a subsidiary of Plains All American, L.P., accounted for approximately 11%, 16% and 16%, respectively, of our total oil and natural gas sales on a combined basis excluding the PITCO properties prior to September 15, 2005. Our oil sales prices are based on formula pricing and calculated using the appropriate buyer’s posted price, plus Platt’s P-Plus monthly average, plus the Midland-Cushing differential less a transportation fee.

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      For the year ended December 31, 2005, no single natural gas purchaser accounted for more than 10% of our oil and natural gas sales on a combined basis excluding the PITCO properties prior to September 15, 2005.
      If we were to lose any one of our oil or natural gas purchasers, the loss could temporarily delay production and sale of our oil and natural gas in that particular purchaser’s service area. If we were to lose a purchaser, we believe we could identify a substitute purchaser. However, if one or more of our larger purchasers ceased purchasing oil or natural gas altogether, the loss of such purchasers could have a detrimental effect on our production volumes in general and on our ability to find substitute purchasers for our production volumes.
Hedging Activity
      We enter into hedging transactions with unaffiliated third parties with respect to oil and natural gas prices to achieve more predictable cash flows and to reduce our exposure to short-term fluctuations in oil and natural gas prices. All of our hedges in place are NYMEX financial swaps, which do not require option premiums and have us swap floating prices for fixed prices for both oil and natural gas. We do not have any interest rate swaps in place. For a more detailed discussion of our hedging activities, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cash Flow from Operations” and “— Quantitative and Qualitative Disclosures About Market Risk.”
Competition
      We operate in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in which we operate. As a result, our competitors may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and natural gas industry.
      We are also affected by competition for drilling rigs, completion rigs and the availability of related equipment. In the past, the oil and natural gas industry has experienced shortages of drilling and completion rigs, equipment, pipe and personnel, which has delayed development drilling and other exploitation activities and has caused significant increases in the prices for this equipment and personnel. We are unable to predict when, or if, such shortages may occur or how they would affect our exploitation program.
Title to Properties
      Prior to completing an acquisition of producing oil and natural gas leases, we perform title reviews on significant leases and, depending on the materiality of properties, we may obtain a title opinion or review previously obtained title opinions. As a result, title opinions have been obtained on a significant portion of our properties.
      As is customary in the oil and natural gas industry, we initially conduct only a cursory review of the title to our properties on which we do not have proved reserves. Prior to the commencement of drilling operations on those properties, we conduct a thorough title examination and perform curative work with respect to significant defects. To the extent title opinions or other investigations reflect title defects on those properties, we are typically responsible for curing any title defects at our expense. We generally will not commence drilling operations on a property until we have cured any material title defects on such property.
      We believe that we have satisfactory title to all of our material assets. Although title to these properties is subject to encumbrances in some cases, such as customary interests generally retained in connection with the acquisition of real property, customary royalty interests and contract terms and restrictions, liens under

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operating agreements, liens related to environmental liabilities associated with historical operations, liens for current taxes and other burdens, easements, restrictions and minor encumbrances customary in the oil and natural gas industry, we believe that none of these liens, restrictions, easements, burdens and encumbrances will materially detract from the value of these properties or from our interest in these properties or will materially interfere with our use in the operation of our business. In addition, we believe that we have obtained sufficient rights-of -way grants and permits from public authorities and private parties for us to operate our business in all material respects as described in this prospectus.
Seasonal Nature of Business
      Generally, but not always, the demand for natural gas decreases during the summer months and increases during the winter months thereby effecting the price we receive for natural gas. Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation.
Environmental Matters and Regulation
      General. Our operations are subject to stringent and complex federal, state and local laws and regulations governing environmental protection as well as the discharge of materials into the environment. These laws and regulations may, among other things:
  •  require the acquisition of various permits before drilling commences;
 
  •  restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling and production activities;
 
  •  limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
 
  •  require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to close pits and plug abandoned wells.
      These laws, rules and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. The regulatory burden on the oil and natural gas industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, Congress and federal and state agencies frequently revise environmental laws and regulations, and any changes that result in more stringent and costly waste handling, disposal and cleanup requirements for the oil and natural gas industry could have a significant impact on our operating costs.
      The following is a summary of some of the existing laws, rules and regulations to which our business operations are subject.
      Waste Handling. The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the federal Environmental Protection Agency, or EPA the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of crude oil or natural gas are currently regulated under RCRA’s non-hazardous waste provisions. However, it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our results of operations and financial position.
      Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject

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to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, 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 currently own, lease, or operate numerous properties that have been used for oil and natural gas exploitation and production for many years. Although we believe that we have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes, or hydrocarbons may have been released on or under the properties owned or leased by us, or on or under other locations, including off-site locations, where such substances have been taken for disposal. In addition, some of our properties have been operated by third parties or by previous owners or operators whose treatment and disposal of hazardous substances, wastes, or hydrocarbons was not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property, or perform remedial plugging or pit closure operations to prevent future contamination.
      Water Discharges. The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.
      Air Emissions. The Federal Clean Air Act, and comparable state laws, regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and associated state laws and regulations.
      National Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.
      OSHA and Other Laws and Regulation. We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to -know regulations under Title III of CERCLA and similar state statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations. We believe that we are in compliance with these applicable requirements and with other OSHA and comparable requirements.
      The Kyoto Protocol to the United Nations Framework Convention on Climate Change became effective in February 2005. Under the Protocol, participating nations are required to implement programs to reduce emissions of certain gases, generally referred to as greenhouse gases, that are suspected of contributing to global warming. The United States is not currently a participant in the Protocol, and Congress has not actively considered recent proposed legislation directed at reducing greenhouse gas emissions. However, there has been support in various regions of the country for legislation that requires reductions in greenhouse gas

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emissions, and some states have already adopted legislation addressing greenhouse gas emissions from various sources, primarily power plants. The oil and natural gas industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and methane, and future restrictions on such emissions could impact our future operations. Our operations are not adversely impacted by the current state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
      We believe that we are in substantial compliance with all existing environmental laws and regulations applicable to our current operations and that our continued compliance with existing requirements will not have a material adverse impact on our financial condition and results of operations. For instance, we did not incur any material capital expenditures for remediation or pollution control activities for the year ended December 31, 2005. Additionally, as of the date of this prospectus, we are not aware of any environmental issues or claims that will require material capital expenditures during 2006. However, we cannot assure you that the passage of more stringent laws or regulations in the future will not have a negative impact on our financial position or results of operation.
Other Regulation of the Oil and Natural Gas Industry
      The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the oil and natural gas industry with similar types, quantities and locations of production.
      Legislation continues to be introduced in Congress and development of regulations continues in the Department of Homeland Security and other agencies concerning the security of industrial facilities, including oil and natural gas facilities. Our operations may be subject to such laws and regulations. Presently, it is not possible to accurately estimate the costs we could incur to comply with any such facility security laws or regulations, but such expenditures could be substantial.
      Drilling and Production. Our operations are subject to various types of regulation at federal, state and local levels. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. Most states, and some counties and municipalities, in which we operate also regulate one or more of the following:
  •  the location of wells;
 
  •  the method of drilling and casing wells;
 
  •  the surface use and restoration of properties upon which wells are drilled;
 
  •  the plugging and abandoning of wells; and
 
  •  notice to surface owners and other third parties.
      State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally

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imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.
      Natural gas regulation. The availability, terms and cost of transportation significantly affect sales of natural gas. The interstate transportation and sale for resale of natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters, primarily by the Federal Energy Regulatory Commission. Federal and state regulations govern the price and terms for access to natural gas pipeline transportation. The Federal Energy Regulatory Commission’s regulations for interstate natural gas transmission in some circumstances may also affect the intrastate transportation of natural gas.
      Although natural gas prices are currently unregulated, Congress historically has been active in the area of natural gas regulation. We cannot predict whether new legislation to regulate natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on the operations of the underlying properties. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices.
      State regulation. The various states regulate the drilling for, and the production, gathering and sale of, oil and natural gas, including imposing severance taxes and requirements for obtaining drilling permits. For example, Texas currently imposes a 4.6% severance tax on oil production and a 7.5% severance tax on natural gas production. States also regulate the method of developing new fields, the spacing and operation of wells and the prevention of waste of natural gas resources. States may regulate rates of production and may establish maximum daily production allowables from natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but there can be no assurance that they will not do so in the future. The effect of these regulations may be to limit the amounts of natural gas that may be produced from our wells, and to limit the number of wells or locations we can drill.
      The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us.
Employees
      We have 19 full-time employees, including six petroleum engineers, four accountants and one landman, none of whom are subject to collective bargaining agreements. We will also contract for the services of independent consultants involved in land, engineering, regulatory, accounting, financial and other disciplines as needed. Please read “Management — Reimbursement of Expenses of Our General Partner.” The Founding Investors have favorable relationships with their employees, and we believe that we will have a favorable relationship with our employees.
Offices
      We currently lease approximately 12,500 square feet of office space in Midland, Texas at 303 W. Wall Street, Suite 1600, where our principal offices are located, from TCTB Partners, a limited partnership of which Dale A. Brown, Cary D. Brown and Kyle A. McGraw are limited partners. Please read “Certain Relationships and Related Transactions — Transactions with Executive Officers, Directors and Principal Unitholders.” The lease for our Midland office expires in April 2008.
Legal Proceedings
      Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are subject.

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MANAGEMENT
Management of Legacy Reserves LP
      The directors and officers of Legacy Reserves GP, LLC, as our general partner, manage our operations and activities. Our general partner is not elected by our unitholders and will not be subject to re-election on a regular basis in the future. Other than through their ability to elect directors of our general partner under the circumstances as described below, unitholders will not be entitled to directly or indirectly participate in our management or operation.
      Our general partner owes a fiduciary duty to our unitholders. Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically nonrecourse to it. Our general partner therefore may cause us to incur indebtedness or other obligations that are nonrecourse to it.
      The limited liability agreement of our general partners provides for a seven member board of directors. Prior to an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, all of the directors of our general partner will be elected by its owners (currently our Founding Investors) and not by our unitholders, except in the following circumstances:
  •  if the owners of our general partner own less than 50% but at least 35% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect three of the seven directors;
 
  •  if the owners of our general partner own less than 35% but at least 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect five of the seven directors; and
 
  •  if the owners of our general partner own less than 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors.
      Following an initial public offering resulting in proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the Nasdaq Stock Market, our unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors of our general partner. Please read “The Partnership Agreement — Meetings; Voting.”
      At least two members of the board of directors of our general partner serve on a conflicts committee to review specific matters that the board believes may involve conflicts of interest. The conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The members of the conflicts committee may not be officers or employees of our general partner or directors, officers, or employees of its affiliates, and must meet the independence and experience standards established by any national securities exchange on which our securities may be listed and the Exchange Act and other federal securities laws. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners and not a breach by our general partner of any duties it may owe us or our unitholders. In addition, the board of directors of our general partner has an audit committee of at least three directors who meet the independence and experience standards established by any national securities exchange on which our securities may be listed and the Exchange Act. The audit committee will review our external financial reporting, recommend engagement of our independent auditors and review procedures for internal auditing and the adequacy of our internal accounting controls. The board of directors of our general partner also has a compensation committee, consisting of at least two independent members, with the limited function of administering our long-term incentive plan and any future compensation plans.
      Independent members of the board of directors of our general partner serve as the initial members of the conflicts, audit and compensation committees. We are not required to have a majority of independent directors on the board of directors of our general partner.

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Directors and Executive Officers of Our General Partner
      The following table shows information for the directors and executive officers of our general partner. Directors are elected for one-year terms.
             
Name   Age   Position with Legacy Reserves GP, LLC
         
Cary D. Brown
    39     Chief Executive Officer and Chairman of the Board
Steven H. Pruett
    44     President, Chief Financial Officer and Secretary
Kyle A. McGraw
    45     Executive Vice President — Business Development and Land and Director
Paul T. Horne
    44     Vice President — Operations
William M. Morris
    53     Vice President, Chief Accounting Officer and Controller
Dale A. Brown
    63     Director
G. Larry Lawrence
    55     Director
William D. Sullivan
    49     Director
S. Wil VanLoh, Jr. 
    35     Director
Kyle D. Vann
    58     Director
      Directors of our general partner hold office until the earlier of their death, resignation, removal or disqualification or until their successors have been elected and qualified. Officers of our general partner serve at the discretion of the board of directors. None of our executive officers and directors are related except for Dale A. Brown and Cary D. Brown, who are father and son.
      Cary D. Brown is Chairman of the board of directors of our general partner and Chief Executive Officer of our general partner and has served in such capacities since our founding in October 2005. Prior to October 2005, Mr. Brown co-founded two businesses, Moriah Resources, Inc. and Petroleum Strategies, Inc. Moriah Resources, Inc. was formed in 1992 to acquire oil and natural gas reserves. Petroleum Strategies, Inc. was formed in 1991 to serve as a qualified intermediary in connection with the execution of Section 1031 transactions for major oil companies, super-independents and private companies. Mr. Brown has served as Executive Vice President of Petroleum Strategies, Inc. since its inception in 1991. Mr. Brown served as an auditor for Grant Thornton in Midland, Texas from January 1990 to June 1991 and for Deloitte & Touche in Houston, Texas from June 1989 to December 1989. Mr. Brown is a certified public accountant. In 1995, Mr. Brown also founded and organized The Executive Oil Conference held in Midland, Texas, which draws over 300 oil and natural gas industry professionals each year. Mr. Brown has a Bachelors of Business Administration, with honors, from Abilene Christian University.
      Steven H. Pruett is President, Chief Financial Officer and Secretary of our general partner and has served as President and Chief Financial Officer since our founding in October 2005. From January 2005 until he joined our general partner, Mr. Pruett served as a Managing Director at Quantum Energy Partners, a private equity group focused in the energy industry. From August 2004 to December 2004, Mr. Pruett was the President of PSI Management LLC, where his focus was investing in oil and natural gas projects in the Permian Basin. From June 2002 to July 2004, Mr. Pruett was the President of Petroleum Place and its subsidiary, P2 Energy Solutions, an acquisition and divestment advisor and accounting and land software systems developer serving over 100 public oil and natural gas companies. From June 2001 to June 2002, Mr. Pruett was employed by First Permian as its President and Chief Executive Officer until its sale to Energen Corporation. From April 2000 to May 2001, Mr. Pruett served as a Vice President of Enron North America Corp., where he managed 12 active oil and natural gas joint ventures and serving as chairman of CGAS, an Appalachian oil and natural gas company. From April 1995 to March 2000, Mr. Pruett was President and Chief Executive Officer of First Reserve Oil & Gas Co., a Permian Basin and Oklahoma oil and natural gas property acquisition and exploitation company. Mr. Pruett has a Bachelor of Science in Petroleum Engineering, with high honors, from the University of Texas and a Masters of Business Administration from Harvard Business School where he was a Baker Scholar.

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      Kyle A. McGraw is a member of the board of directors of our general partner and also serves as the Executive Vice President — Business Development and Land of our general partner and has served in such capacities since our founding in October 2005. Mr. McGraw joined Brothers Production Company in 1983, and has served as its General Manager since 1991. During his 23 year tenure at Brothers Production Company, Mr. McGraw has served in numerous capacities including reservoir and production engineering, acquisition evaluation and land management. Mr. McGraw is a registered professional engineer (inactive status) in the state of Texas. Mr. McGraw has a Bachelor of Science in Petroleum Engineering from Texas Tech University.
      Paul T. Horne is Vice President — Operations of our general partner and has served in such capacity since our founding in October 2005. From January 2000 to the present, Mr. Horne has served as Operations Manager of Moriah Resources, Inc. From January 1985 to January 2000, Mr. Horne worked for Mobil E&P U.S. Inc. in a variety of petroleum engineering and operations management roles primarily in the Permian Basin. Mr. Horne has a Bachelor of Science in Petroleum Engineering, with honors, from Texas A&M University.
      William M. Morris is Vice President, Chief Accounting Officer and Controller of our general partner and has served in such capacity since our founding in October 2005. From January 2000 until he joined our general partner in October 2005, Mr. Morris served as Financial Reporting Manager of Titan Exploration Inc. (from January 2000 through May 2000) and continued in that position upon Titan Exploration Inc.’s merger with the Permian Basin Business Unit of Unocal to form Pure Resources, Inc. (from May 2000 to January 2003) and most recently as a Financial Manager for Pure Resources, Inc. (from February 2003 to September 2005). Mr. Morris is a certified public accountant. Mr. Morris has a Bachelor of Science in Applied Mathematics, with honors, from the School of Engineering and Applied Science of the University of Virginia and a Master of Business Administration from Colgate Darden Graduate School of Business Administration of the University of Virginia.
      Dale A. Brown is a member of the board of directors of our general partner and has served in such capacity since our founding in October 2005. Mr. Brown has been President of Moriah Resources, Inc. since its inception in 1992 and President of Petroleum Strategies, Inc. since he co-founded it in 1991 with his son, Cary D. Brown. Mr. Brown is a certified public accountant. Mr. Brown has a Bachelor of Science in Accounting from Pepperdine University.
      G. Larry Lawrence has been a member of our board of directors since May 1, 2006. From May 2004 through April 2006 Mr. Lawrence served as Controller of Pure Resources. From June 2000 through May 2004, Mr. Lawrence was a practice manager of the Parson Group, LLC, management consulting firm whose services included Sarbanes Oxley engagements with oil and natural gas industry clients. From 1973 through May 2000, Mr. Lawrence was employed by Atlantic Richfield Company (ARCO) where he most recently (from 1993 through 2000) served as Controller of ARCO Permian. Mr. Lawrence has a Bachelor of Arts in Accounting, with honors, from Dillard University.
      William D. (Bill) Sullivan was appointed to the board of directors of our general partner upon completion of our private equity offering on March 15, 2006. Since May 2004, Mr. Sullivan has served as a director of St. Mary Land & Exploration Company, a publicly traded exploration and production company. From May 2004 through its sale in August 2005, Mr. Sullivan served as a director of Gryphon Exploration Company, a privately held exploration and production company. Prior to joining the board of directors of St. Mary Land & Exploration Company and Gryphon Exploration Company, Mr. Sullivan was employed in various capacities by Anadarko Petroleum Corporation from 1981 to August 2003, most recently as Executive Vice President, Exploration and Production (from August 2001 through August 2003). From June 15, 2005 to August 5, 2005, Mr. Sullivan was president and CEO of Leor Energy L.P., a privately held exploration and production company. Mr. Sullivan has a Bachelor of Science in Mechanical Engineering, with high honors, from Texas A&M University.
      S. Wil VanLoh, Jr. is a member of the board of directors of our general partner and has served in such capacity since our founding in October 2005. Since 1997, Mr. VanLoh has been a Managing Partner of Quantum Energy Partners, a private equity fund specializing in the energy industry. Prior to co-founding

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Quantum Energy Partners in 1997, Mr. VanLoh co-founded Windrock Capital, Ltd., an energy investment banking firm specializing in raising private equity and providing merger, acquisition and divestiture advice for energy companies. Before co-founding Windrock Capital, Ltd. in 1994, Mr. VanLoh was an investment banker in Kidder, Peabody & Co.’s Natural Resources Group and also with NationsBank Investment Banking where he worked on corporate debt and equity financings, mergers and acquisitions, and other highly structured transactions for energy and energy-related companies. Mr. VanLoh currently serves on the boards of Chalker Energy Partners, LP, Denali Oil & Gas Partners, LP, Denali Oil & Gas Partners II, LP, EnergyQuest Resources, LP, Ensight III Energy Partners, LP, Meritage Energy Partners II, LLC, Northpoint Energy Ltd., Rockford Energy Partners II, LLC, Sabretooth Energy Corp., Tecton Energy, LLC, and Tri-C Oil & Gas, LP, all of which are private energy companies. Mr. VanLoh currently serves as a board member and treasurer of the Houston Producers Forum and a member of the IPAA Finance Committee. Mr. VanLoh has a Bachelor of Science in Finance from Texas Christian University.
      Kyle D. Vann was appointed to the board of directors of our general partner upon completion of our private equity offering on March 15, 2006. From 1979 through December 2004 Mr. Vann was employed by Koch Industries most recently serving as Chief Executive Officer of Entergy — Koch, LP, an energy trading and transportation company, from its inception in February 2001 through its sale at year end 2004. Mr. Vann continues to serve Entergy as a consultant and serves on the board of Texon, LP, a private petroleum transportation company. On May 8, 2006, Mr. Vann was appointed to the board of directors of Crosstex Energy, L.P., a publicly traded midstream master limited partnership. Mr. Vann has a Bachelor of Science in Chemical Engineering from the University of Kansas.
Reimbursement of Expenses of Our General Partner
      Our general partner will not receive any management fee or other compensation for its management of us. Our general partner and its affiliates will, however, be reimbursed for all expenses incurred on our behalf. The partnership agreement provides that our general partner will determine the expenses that are allocable to us. There is no limit on the amount of expenses for which our general partner and its affiliates may be reimbursed.
Executive Compensation
      Our general partner manages our operations and activities through its board of directors and executive officers. We will reimburse our general partner for direct and indirect general and administrative expenses incurred on our behalf, including the compensation of our general partner’s board of directors and executive officers.
Employment Agreements
      We have entered into employment agreements, having no fixed termination dates, with each of Messrs. Cary D. Brown, Steven H. Pruett, Kyle A. McGraw, Paul T. Horne and William M. Morris. The employment agreements became effective upon completion of our private equity offering. The respective employment agreements of Messrs. Brown, Pruett, McGraw, Horne and Morris provide for an annual base salary of $200,000, $175,000, $150,000, $150,000 and $125,000, respectively subject to an annual increase. The board of directors of our general partner approved an increase in Mr. Morris’ annual base salary to $150,000 effective as of May 1, 2006. Each of the employment agreements also provide for incentive compensation to be paid at the discretion of the board of directors of our general partner. Additionally, Mr. Morris’ employment agreement provides for a grant of 35,077 restricted units under our Long-Term Incentive Plan, on the date the employment agreement becomes effective. The restricted units shall vest one-third each year over three years after the effective date of the employment agreement. Mr. Morris’ restricted unit award is also subject to accelerated vesting under certain conditions.

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      In the event that we terminate the employment of any of Messrs. Brown, Pruett, McGraw, Horne or Morris, other than for “cause,” or if any of them terminates their employment for “good reason” prior to the occurrence of a change of control or more than one year following a change of control he will be entitled to:
  •  24 monthly payments equal to one-twelfth of his annual salary either (i) as then in effect, if the termination occurs in the first 12 months following the effective date of the employment agreement; or (ii) the highest base salary in effect at any time during the 36 months prior to the date of termination, if the termination occurs after the first 12 months following the effective date of the employment agreement, plus the average annual bonus of the two prior years (or applicable lesser period);
 
  •  a pro rata portion of any bonus for the fiscal year in which termination occurs; and
 
  •  the cost of COBRA continuation coverage during the applicable COBRA period.
      If within one year following a change of control we terminate the employment of any of Messrs. Brown, Pruett, McGraw, Horne or Morris, other than for “cause,” or if any of them terminates their employment for “good reason,” then in lieu of the above severance we will pay the same severance benefits as set forth above, except that the amount set forth in the first bullet above shall be equal to 36 monthly payments and will be paid in a lump sum, plus their average annual bonus of the two prior years (or applicable lesser period). In addition, Messrs. Brown and McGraw would have the right to exercise one demand registration right each. Please read “Registration Rights — Founders Registration Rights Agreement.”
      Generally the employment agreements prohibit each of Messrs. Brown, Pruett, McGraw, Horne and Morris from:
  •  competing with us during the term of his employment unless such competitive activity is approved in writing by a majority of the independent directors of our general partner’s board of directors;
 
  •  soliciting any of our employees or customers for two years following his termination;
 
  •  competing with us in any county in, or adjacent to, a county in which we own oil and natural gas interests or conduct operations on the termination date, or in which we have owned oil and natural gas interests or conducted operations at any time during the six months prior to the termination date, unless such competitive activity is approved in writing by a majority of the independent directors of our general partner’s board, for 90 days following his termination; and
 
  •  from engaging in or participating in any publicly traded limited partnership or limited liability company or privately held company contemplating an initial public offering as a limited partnership or a limited liability company that is in direct competition with us for one year following his termination.
      The non-compete provisions will not apply to the investments held by each of Messrs. Brown, Pruett, McGraw, Horne and Morris prior to the effective date of their employment agreements provided that the investments were identified in their respective agreement. In addition, the non-compete provisions will not apply if we terminate their employment within one year following a change of control.
Compensation of Directors
      Officers or employees of our general partner and its affiliates who also serve as directors of our general partner will not receive additional compensation. Each non-employee director and independent director has received a grant of 1,750 units effective upon appointment to the board of directors of our general partner and will receive a grant of 1,250 units on the anniversary date of such director’s appointment to the board. Each non-employee director and independent director will also be entitled to receive an annual retainer of $25,000 and up to $1,000 for each board of directors and committee meeting in excess of four per year. The chairman of the Audit Committee is paid an additional $10,000 per year and the chairmen of the Conflicts Committee and the Compensation Committee are each paid an additional $5,000 per year. In addition, each non-employee director and independent director will be reimbursed for out-of -pocket expenses in connection

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with attending meetings of the board of directors or committees. Each director will be indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law.
Long-Term Incentive Plan
      General. We adopted the Legacy Reserves LP Long-Term Incentive Plan for the employees, consultants and directors of us, our affiliates and our general partner. The awards under the long-term incentive plan will consist of unit grants, restricted units, phantom units, unit options and unit appreciation rights. The long-term incentive plan permits the grant of awards covering an aggregate of 2,000,000 units. As of May 8, 2006 grants of awards covering 113,866 units have been made. The plan is administered by the compensation committee of the board of directors of our general partner.
      Our general partner’s board of directors, or its compensation committee, in its discretion may terminate, suspend or discontinue the long-term incentive plan at any time with respect to any award that has not yet been granted. Our general partner’s board of directors, or its compensation committee, also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval as required by the exchange upon which the units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.
      Unit Grants. The long-term incentive plan permits the grant of units. A unit grant is a grant of units that vests immediately upon issuance.
      Restricted Units and Phantom Units. A restricted unit is a unit that is subject to forfeiture prior to the vesting of the award. A phantom unit is a notional unit that entitles the grantee to receive a unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the value of a unit. The compensation committee may make grants under the plan of restricted units and phantom units to employees, consultants and directors containing such terms, consistent with the plan, as the compensation committee shall determine. The compensation committee will determine the period over which restricted units and phantom units granted to employees, consultants and directors will vest. The committee may base vesting upon the achievement of specified financial objectives or on the grantee’s completion of a period of service. In addition, the restricted units and phantom units will vest upon a change of control of Legacy Reserves LP or our general partner, unless provided otherwise by the compensation committee in the award agreement.
      If a grantee’s employment, service relationship or membership on the board of directors terminates for any reason, the grantee’s restricted units and phantom units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise in the award agreement or waives (in whole or in part) any such forfeiture. Units to be delivered in connection with the grant of restricted units or upon the vesting of phantom units may be units acquired by us on the open market, or from any other person or we may issue new units, or any combination of the foregoing. Our general partner is entitled to reimbursement by us for the cost incurred in acquiring units. Thus, the cost of the restricted units and delivery of units upon the vesting of phantom units will be borne by us. If we issue new units in connection with the grant of restricted units or upon vesting of the phantom units, the total number of units outstanding will increase. The compensation committee, in its discretion, may provide for tandem distribution rights with respect to restricted units and grant tandem distribution equivalent rights with respect to phantom units that entitle the holder to receive cash equal to any cash distributions made on units prior to the vesting of a restricted or phantom unit.
      Unit Options and Unit Appreciation Rights. The long-term incentive plan permits the grant of options covering units and the grant of unit appreciation rights. A unit appreciation right is an award that, upon exercise, entitles the participant to receive the excess of the fair market value of a unit on the exercise date over the exercise price established for the unit appreciation right. Such excess may be paid in units, cash, or a combination thereof, as determined by the compensation committee in its discretion. The compensation committee will be able to make grants of unit options and unit appreciation rights under the plan to employees, consultants and directors containing such terms as the committee shall determine consistent with the plan. Unit options and unit appreciation rights may not have an exercise price that is less than the fair

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market value of the units on the date of grant. In general, unit options and unit appreciation rights granted will become exercisable over a period determined by the compensation committee. In addition, the unit options and unit appreciation rights will become exercisable upon a change in control of Legacy Reserves LP or our general partner, unless provided otherwise by the committee in the award agreement. The compensation committee, in its discretion may grant tandem distribution equivalent rights with respect to unit options and unit appreciation rights.
      Upon exercise of a unit option (or a unit appreciation right settled in units), we will acquire units on the open market or from any other person or we may issue new units, or any combination of the foregoing. If we issue new units upon exercise of the unit options (or a unit appreciation right settled in units), the total number of units outstanding will increase, and our general partner will pay us the proceeds it receives from an optionee upon exercise of a unit option. The availability of unit options and unit appreciation rights is intended to furnish additional compensation to employees, consultants and directors and to align their economic interests with those of unitholders.
401(k) Plan
      We maintain a 401(k) plan. The plan permits eligible employees to make voluntary, pre-tax contributions to the plan up to a specified percentage of compensation, subject to applicable tax limitations. We may make a discretionary matching contribution to the plan for each eligible employee equal to 4.0% of an employee’s annual compensation not in excess of $220,000 for 2006, subject to applicable tax limitations. Eligible employees who elect to participate in the plan are generally vested in any matching contribution after commencement of employment with the company. The plan is intended to be qualified under Section 401(a) of the Internal Revenue Code so that contributions to the plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the plan, and so that contributions, if any, will be deductible when made.

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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      The following table sets forth the beneficial ownership of our units held by:
  •  each unitholder who then will be a beneficial owner of 5% or more of our outstanding units;
 
  •  each of the directors of our general partner;
 
  •  each named executive officer of our general partner; and
 
  •  all directors and executive officers of our general partner as a group.
      The amounts and percentage of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial owner of securities as to which he has no economic interest.
      Except as indicated by footnote, to our knowledge the persons named in the table below have sole voting and investment power with respect to all units shown as beneficially owned by them, subject to community property laws where applicable. Mr. VanLoh’s address is 777 Walker Street, Suite 2530, Houston, Texas 77002, and the business address for the other beneficial owners listed below is 303 W. Wall Street, Suite 1600, Midland, Texas 79701.
                   
    Units to be Beneficially
    Owned After the Offering
     
Name of Beneficial Owner   Number   Percentage
         
 
Moriah Group(a)(b)
    7,289,999       39.8 %
 
Moriah Properties, Ltd.(a)
    6,747,718       36.8  
 
Brothers Group(a)(c)
    4,189,525       22.9  
 
Brothers Production Properties, Ltd.(a)
    3,381,780       18.5  
 
Brothers Production Company, Inc.(a)(d)
    3,561,661       19.4  
 
MBN Properties LP
    3,162,438       17.3  
 
Newstone Group(a)
    1,638,861       9.0  
Directors and Officers
               
 
Dale A. Brown(a)(e)(f)
    7,291,749       39.8  
 
Cary D. Brown(a)(g)
    6,747,718       36.8  
 
Kyle A. McGraw
    —       —  
 
S. Wil VanLoh, Jr.(a)(e)(h)
    877,630       4.8  
 
Kyle D. Vann(e)
    1,750       *  
 
William D. Sullivan(e)
    1,750       *  
 
G. Larry Lawrence(e)
    1,750       *  
 
Steven H. Pruett(a)(i)
    296,935       1.6  
 
Paul T. Horne(j)
    154,443       *  
 
William M. Morris(k)
    —       —  
 
All directors and executive officers as a group (10 persons)
    8,626,006       47.1  
 
 * Percentage of units beneficially owned does not exceed (1%).
(a) Assumes that the units held by MBN Properties LP will be distributed to the partners of MBN Properties LP, including Moriah Properties, Ltd., Brothers Production Properties, Ltd., Brothers Production Company, Inc. and the Newstone Group.
 
(b) Includes units held my Moriah Properties, Ltd. as well as 542,281 units held by DAB Resources, Ltd.

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(c) Includes units held by Brothers Production Properties, Ltd. and Brothers Production Company, Inc. as well as 35,976 units held by Brothers Operating Company, Inc. and 591,887 units held by J&W McGraw Properties, Ltd.
 
(d) Brothers Production Company, Inc., in its capacity as general partner of Brothers Production Properties, Ltd. is deemed to beneficially own the partnership interests in us held by Brothers Production Properties, Ltd. as well as 179,882 units it holds directly.
 
(e) Includes 1,750 units granted under the Legacy Reserves LP Long-Term Incentive Plan to each non-employee director.
 
(f) Mr. Dale A. Brown is deemed to beneficially own the partnership interests in us held by Moriah Properties, Ltd. as well as 542,281 units held by DAB Resources, Ltd. Mr. Dale A. Brown and Mr. Cary D. Brown share voting and investment power with respect to the partnership interests in us held by Moriah Properties, Ltd.
 
(g) Mr. Cary D. Brown is deemed to beneficially own the partnership interests in us held by Moriah Properties, Ltd. Mr. Dale A. Brown and Mr. Cary D. Brown share voting and investment power with respect to the partnership interests in us held by Moriah Properties, Ltd.
 
(h) Assumes that the units beneficially owned by the Newstone Group will be distributed to the members of the Newstone Group, including entities controlled by Mr. VanLoh and Mr. Pruett.
 
(i) Mr. Pruett is deemed to beneficially own the 296,935 units held by SHP Capital L.P.
 
(j) Mr. Horne is deemed to beneficially own the 154,443 units held by H2K Holdings, Ltd.
 
(k) Mr. Morris was granted 35,077 restricted units upon the closing of our private equity offering, subject to vesting. Please read “Management — Employment Agreements.”
      The following table sets forth the beneficial ownership of equity interests of Legacy Reserves GP, LLC by the directors and each named executive officer of our general partner:
         
Name of Beneficial Owner   Equity Interest
     
Dale A. Brown(a)(b)
    54.9 %
Cary D. Brown(b)(c)
    50.5  
Kyle A. McGraw
    —  
S. Wil VanLoh, Jr.(d)
    6.1  
Steven H. Pruett(d)
    1.5  
Kyle D. Vann
    —  
William D. Sullivan
    —  
G. Larry Lawrence
    —  
Paul T. Horne
    0.4  
William M. Morris
    —  
All directors and executive officers as a group (10 persons)
    62.9  
 
(a) Assumes that the equity interests held by MBN Properties LP will be distributed to the partners of MBN Properties LP, including Moriah Properties, Ltd., Brothers Production Properties, Ltd., Brothers Production Company, Inc. and the Newstone Group.
 
(b) Includes a 44.5% equity interest held by Moriah Properties, Ltd. and a 4.0% equity interest held by DAB Resources, Ltd.
 
(c) Includes a 44.5% equity interest held by Moriah Properties, Ltd.
 
(d) Assumes that the equity interests beneficially owned by the Newstone Group will be distributed to the members of the Newstone Group, including entities controlled by Mr. VanLoh and Mr. Pruett.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
      Our Founding Investors own an aggregate of 13,292,683 units, representing a 72.6% limited partner interest in us. In addition, our general partner owns a 0.1% general partner interest in us.
Distributions and Payments to Our General Partner and Its Affiliates
      The following table summarizes the distributions and payments made or to be made by us to our general partner and our Founding Investors in connection with our formation, ongoing operation and any liquidation of Legacy Reserves LP. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm’s-length negotiations.
Formation Stage
The consideration received by our general partner and our Founding Investors for the contribution of the assets and liabilities to us 17,640,067 units;
 
The consideration received by our Founding Investors for the redemption of units and in connection with our private equity offering approximately $2.0 million for reimbursement of offering expenses from the proceeds of this offering;
 
$65.3 million (an amount equal to the total amount of third party and subordinate debt owed by MBN Properties LP) from borrowings under our revolving credit facility as partial consideration for the assets being contributed; and
 
$69.9 million for the redemption of 4,400,000 units from the Moriah Group, Brothers Group and H2K Holdings, Ltd.
 
0.1% general partner interest.
Operational Stage
Distributions of available cash to our general partner and our Founding Investors We will generally make cash distributions 99.9% to the unitholders pro rata, including our Founding Investors, as the holders of an aggregate of 13,292,683 units, and 0.1% to our general partner.
 
Assuming we have sufficient available cash to pay the full estimated initial quarterly distribution on all of our outstanding units for four quarters, our general partner would receive an annual distribution of approximately $30,065 on its 0.1% general partner interest, and our Founding Investors would receive approximately $21.8 million on their units.
 
Payments to our general partner Our general partner will be entitled to reimbursement for all expenses it incurs on our behalf. The partnership agreement provides that our general partner will determine the expenses that are allocable to us in good faith. Please read “The Partnership Agreement — Reimbursement of Expenses.”

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Withdrawal or removal of our general partner If our general partner withdraws or is removed, its general partner interest will either be sold to the new general partner for cash or converted into units, for an amount equal to the fair market value of that interest. Please read “The Partnership Agreement — Withdrawal or Removal of the General Partner.”
Liquidation Stage
Liquidation Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their respective capital account balances. Please read “How We Make Cash Distributions.”
Agreements Governing the Transactions
      We and other partners have entered into the various documents and agreements that effected the private equity offering transactions, including the vesting of assets in, and the assumption of liabilities by, us and our subsidiaries, and the application of the proceeds of the private equity offering. These agreements, including the Omnibus Agreement described below, were not the result of arm’s-length negotiations, and they, or any of the transactions that they provide for, may not have been effected on terms at least as favorable to the parties to these agreements as they could have been obtained from unaffiliated third parties. All of the transaction expenses incurred in connection with these transactions, including the expenses associated with transferring assets into our subsidiaries, were paid from the proceeds of the private equity offering.
Omnibus Agreement
      On March 15, 2006, we entered into an agreement with our Founding Investors and certain of their affiliates. The agreement, which we refer to as the Omnibus Agreement, set forth the overall agreement of the parties with respect to the formation transactions among the parties and included:
  •  the contribution of assets by the Founding Investors and the units to be issued in exchange therefor pursuant to a Contribution, Conveyance and Assumption Agreement;
 
  •  the granting of registration rights to the Founding Investors pursuant to the Founders Registration Rights Agreement described below; and
 
  •  certain other matters.
Founders Registration Rights Agreement
      The Founding Investors and their permitted transferees are entitled to registration rights pursuant to the Founders Registration Rights Agreement. The Founders Registration Rights Agreement gives the beneficiaries thereof certain “demand” and “piggyback” registration rights pursuant to which they will be entitled to cause us to use our commercially reasonable best efforts to register all or a portion of their units and participate in our registration of securities under the Securities Act. Please read “Registration Rights — Founders Registration Rights Agreement.”
Transactions with Executive Officers, Directors and Principal Unitholders
Formation Transactions
      Simultaneously with the completion of the private equity offering, each of the Founding Investors contributed oil and natural gas properties and related assets to us as contemplated by the Omnibus Agreement, and we purchased oil and natural gas properties from MBN Properties LP and the charitable foundations. In consideration for the oil and natural gas properties and related assets, we paid cash in the aggregate amount of approximately $73.0 million and issued an aggregate of 17,640,067 unregistered units.

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      The following table sets forth for each of the Founding Investors and the three charitable foundations the cash and units received pursuant to the formation transactions:
                   
    Cash   Units
         
    (in millions)    
Moriah Group:
               
 
Moriah Properties, Ltd. 
  $ —       7,334,070  
 
DAB Resources, Ltd. 
    —       859,703  
Brothers Group:
               
 
Brothers Production Properties, Ltd
    —       4,968,945  
 
Brothers Production Company, Inc. 
    —       264,305  
 
Brothers Operating Company, Inc. 
    —       52,861  
 
J&W McGraw Properties, Ltd. 
    —       914,246  
MBN Properties LP
    65.30       3,162,438  
H2K Holdings, Ltd. 
    —       83,499  
Charities Support Foundation, Inc. 
    0.38       —  
Moriah Foundation, Inc. 
    3.65       —  
Cary Brown Family Foundation, Inc. 
    3.65       —  
      In September 2005, MBN Properties LP acquired the PITCO properties for $63.9 million cash ($64.3 million including asset retirement obligations) net of post-closing adjustments. Mr. Cary D. Brown, the Chief Executive Officer and Chairman of the Board of our general partner, Mr. Pruett, the President, Chief Financial Officer and Secretary of our general partner, Mr. Horne, the Vice President-Operations of our general partner, Mr. Dale A. Brown, a member of the board of directors of our general partner, and Mr. VanLoh, a member of the board of our general partner, all indirectly own membership interests in MBN Properties LP.
Petroleum Strategies, Inc.
      Neither Moriah Properties, Ltd. nor its general partner, Moriah Resources, Inc., have any employees. All operational personnel performing services with respect to their properties and business were employees of Petroleum Strategies, Inc., a Qualified Intermediary for like kind exchanges owned by Mr. Dale A. Brown and Mr. Cary D. Brown. The personnel and general administrative services were provided to Moriah Properties, Ltd. under an overhead allocation agreement. During 2005, Moriah Properties, Ltd. and Moriah Resources, Inc., paid $838,899 to Petroleum Strategies, Inc. pursuant to this agreement as reimbursement for salaries and other general and administrative expenses. We have no future obligations for personal and general and administrative services to Petroleum Strategies.
Office Leases
      TCTB Partners, a limited partnership of which Dale A. Brown, Cary D. Brown and Kyle A. McGraw are limited partners, owns the office building in which the principal offices of the Moriah Group, Brothers Group and Petroleum Strategies are located.
      During 2005, the Brothers Group and Moriah Group paid rentals of $46,836 and $35,220, respectively, to TCTB Partners. We assumed the existing leases for our office space. The annual rental initially payable to TCTB Partners is $82,056, without respect to property taxes and insurance. We also subleased a portion of our space to Petroleum Strategies at the same rate per square foot that we are charged by TCTB Partners.

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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
Conflicts of Interest
      Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its affiliates (including our Founding Investors), on the one hand, and our partnership and our limited partners, on the other hand. The directors and officers of our general partner have fiduciary duties to manage our general partner in a manner beneficial to its owners. At the same time, our general partner has a fiduciary duty to manage our partnership in a manner beneficial to us and our unitholders.
      Whenever a conflict arises between our general partner or its affiliates, on the one hand, and us or any other partner, on the other hand, our general partner will resolve that conflict. Our partnership agreement contains provisions that modify and limit our general partner’s fiduciary duties to the unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions taken that, without those limitations, might constitute breaches of fiduciary duty.
      Our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if the resolution of the conflict is:
  •  approved by the conflicts committee, although our general partner is not obligated to seek such approval;
 
  •  approved by the vote of a majority of the outstanding units, excluding any units owned by our general partner or any of its affiliates;
 
  •  on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
 
  •  fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
      Our general partner may, but is not required to, seek the approval of such resolution from the conflicts committee of the board of directors of our general partner. If our general partner does not seek approval from the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the conflicts committee may consider any factors it determines in good faith to consider when resolving a conflict. When our partnership agreement requires that someone act in good faith, it requires that person to believe he is acting in the best interests of the partnership. Please read “Management — Management of Legacy Reserves LP” for information about the conflicts committee of the board of directors of our general partner.
      Conflicts of interest could arise in the situations described below, among others.
Certain of our general partner’s affiliates may engage in competition with us.
      Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than those incidental to its ownership of interests in us. However, affiliates of our general partner, other than our executive officers and their affiliates, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. In addition, under our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to the general partner and its affiliates, other than our executive officers and their affiliates. As a result, neither the general partner nor any of its affiliates other than our executive officers and their affiliates, will have any obligation to present business opportunities to us.

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Our general partner is allowed to take into account the interests of parties other than us, such as its owners and their affiliates, in resolving conflicts of interest.
      Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, its voting rights with respect to the units it owns, its registration rights and its determination whether or not to consent to any merger or consolidation of the partnership.
Our general partner has limited its liability and reduced its fiduciary duties, and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty.
      In addition to the provisions described above, our partnership agreement contains provisions that restrict the remedies available to our unitholders for actions that might otherwise constitute breaches of fiduciary duty. For example, our partnership agreement:
  •  provides that the general partner shall not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed that the decision was in the best interests of our partnership;
 
  •  generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us, as determined by the board of directors of our general partner in good faith, and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and
 
  •  provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non — appealable judgment entered by a court of competent jurisdiction determining that our general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct.
Actions taken by our general partner may affect the amount of cash that is distributed to our unitholders.
      The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:
  •  the amount and timing of asset purchases and sales;
 
  •  cash expenditures;
 
  •  borrowings;
 
  •  the issuance of additional units; and
 
  •  the creation, reduction or increase of reserves in any quarter.

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Our general partner determines which costs incurred by it are reimbursable by us.
      We will reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering support services to us. The partnership agreement provides that our general partner will determine the expenses that are allocable to us in good faith.
Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.
      Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner does not intend to charge us a management fee. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither our partnership agreement nor any of the other agreements, contracts, and arrangements between us, on the one hand, and our general partner and its affiliates, on the other hand, are or will be the result of arm’s — length negotiations.
      Our general partner will determine, in good faith, the terms of any of these transactions entered into after the sale of the units offered in this offering.
      Our general partner and its affiliates will have no obligation to permit us to use any facilities or assets of our general partner and its affiliates, except as may be provided in contracts entered into specifically dealing with that use. There is no obligation of our general partner and its affiliates to enter into any contracts of this kind.
Our general partner intends to limit its liability regarding our obligations.
      Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets, and not against our general partner or its assets. The partnership agreement provides that any action taken by our general partner to limit its liability or our liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability.
Unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.
      Any agreements between us on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.
Our general partner may exercise its right to call and purchase units if it and its affiliates own more than 80% of the units.
      If at any time our general partner and its affiliates own more than 80% of our units, our general partner may exercise its right to call and purchase units as provided in the partnership agreement or assign this right to one of its affiliates or to us. Our general partner is not bound by fiduciary duty restrictions in determining whether to exercise this right. As a result, a unitholder may have his units purchased from him at an undesirable time or price. Our general partner and its affiliates own approximately 72.7% of our outstanding units. Please read “The Partnership Agreement — Limited Call Right.”
Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
      The attorneys, independent accountants and others who have performed services for us regarding this offering have been retained by our general partner, its affiliates and us and may continue to be retained by our general partner, its affiliates and us after the offering. Attorneys, independent accountants and others who will perform services for us are selected by our general partner or the conflicts committee and may perform

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services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of units in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.
Except in limited circumstances our general partner has the power and authority to conduct our business without unitholder approval.
      Under our partnership agreement, our general partner has full power and authority to do all things, other than those items that require unitholder approval or with respect to which our general partner has sought conflicts committee approval, on such terms as it determines to be necessary or appropriate to conduct our business including, but not limited to, the following:
  •  the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible into securities of the partnership, and the incurring of any other obligations;
 
  •  the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over our business or assets;
 
  •  the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of our assets or the merger or other combination of us with or into another person;
 
  •  the negotiation, execution and performance of any contracts, conveyances or other instruments;
 
  •  the distribution of partnership cash;
 
  •  the selection and dismissal of employees and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;
 
  •  the maintenance of insurance for our benefit and the benefit of our partners;
 
  •  the formation of, or acquisition of an interest in, and the contribution of property and the making of loans to, any further limited or general partnerships, joint ventures, corporations, limited liability companies or other relationships;
 
  •  the control of any matters affecting our rights and obligations, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expense and the settlement of claims and litigation;
 
  •  the indemnification of any person against liabilities and contingencies to the extent permitted by law;
 
  •  the purchase, sale or other acquisition or disposition of our securities, or the issuance of additional options, rights, warrants and appreciation rights relating to our securities; and
 
  •  the entering into of agreements with any of its affiliates to render services to us or to itself in the discharge of its duties as our general partner.
      Our partnership agreement provides that our general partner must act in “good faith” when making decisions on our behalf, and our partnership agreement further provides that in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in our best interests. Please read “The Partnership Agreement — Voting Rights” for information regarding matters that require unitholder approval.
Fiduciary Duties
      Our general partner is accountable to us and our unitholders as a fiduciary. Fiduciary duties owed to unitholders by our general partner are prescribed by law and the partnership agreement. The Delaware Revised Uniform Limited Partnership Act, which we refer to in this prospectus as the Delaware Act, provides

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that Delaware limited partnerships may, in their partnership agreements, modify, restrict or expand the fiduciary duties otherwise owed by a general partner to limited partners and the partnership.
      Our partnership agreement contains various provisions modifying and restricting the fiduciary duties that might otherwise be owed by our general partner. We have adopted these restrictions to allow our general partner or its affiliates to engage in transactions with us that would otherwise be prohibited by state-law fiduciary duty standards and to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. We believe this is appropriate and necessary because our general partner’s board of directors have fiduciary duties to manage our general partner in a manner beneficial to its owners, as well as to you. Without these modifications, the general partner’s ability to make decisions involving conflicts of interest would be restricted. The modifications to the fiduciary standards enable the general partner to take into consideration all parties involved in the proposed action, so long as the resolution is fair and reasonable to us. These modifications also enable our general partner to attract and retain experienced and capable directors. These modifications are detrimental to the unitholders because they restrict the remedies available to unitholders for actions that, without those limitations, might constitute breaches of fiduciary duty, as described below, and permit our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interest. The following is a summary of the material restrictions of the fiduciary duties owed by our general partner to the limited partners:
State - law fiduciary duty standards Fiduciary duties are generally considered to include an obligation to act in good faith and with due care and loyalty. The duty of care, in the absence of a provision in a partnership agreement providing otherwise, would generally require a general partner to act for the partnership in the same manner as a prudent person would act on his own behalf. The duty of loyalty, in the absence of a provision in a partnership agreement providing otherwise, would generally prohibit a general partner of a Delaware limited partnership from taking any action or engaging in any transaction where a conflict of interest is present.
 
Partnership agreement modified standards Our partnership agreement contains provisions pursuant to which limited partners waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that when our general partner is acting in its capacity as our general partner, as opposed to in its individual capacity, it must act in “good faith” and will not be subject to any other standard under applicable law. In addition, when our general partner is acting in its individual capacity, as opposed to its capacity as our general partner, it may act without any fiduciary obligation to us or the unitholders whatsoever. These standards reduce the obligations to which our general partner would otherwise be held.
 
Our partnership agreement generally provides that affiliated transactions and resolutions of conflicts of interest not involving a vote of unitholders and that are not approved by the conflicts committee of the board of directors of our general partner must be:
 
• on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
 
• “fair and reasonable” to us, taking into account the totality of the relationships between the parties involved (including other

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transactions that may be particularly favorable or advantageous to us).
 
If our general partner does not seek approval from the conflicts committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the bullet points above, then it will be presumed that, in making its decision, the board of directors, which may include board members affected by the conflict of interest, acted in good faith and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. These standards reduce the obligations to which our general partner would otherwise be held.
 
In addition to the other more specific provisions limiting the obligations of our general partner, our partnership agreement further provides that our general partner, its affiliates and their officers and directors will not be liable for monetary damages to us, our limited partners or assignees for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that our general partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct.
 
Rights and remedies of unitholders The Delaware Act generally provides that a limited partner may institute legal action on behalf of the partnership to recover damages from a third party where a general partner has refused to institute the action or where an effort to cause a general partner to do so is not likely to succeed. These actions include actions against a general partner for breach of its fiduciary duties or of the partnership agreement. In addition, the statutory or case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the limited partners.

      By purchasing our units, each unitholder automatically agrees to be bound by the provisions in the partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited partner or assignee to sign a partnership agreement does not render the partnership agreement unenforceable against that person.
      We must indemnify our general partner and its officers, directors, managers and certain other specified persons, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other persons. We must provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct. We must also provide this indemnification for criminal proceedings unless our general partner or these other persons acted with knowledge that their conduct was unlawful. Thus, our general partner could be indemnified for its negligent acts if it meets the requirements set forth above. To the extent these provisions purport to include indemnification for liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and, therefore, unenforceable. Please read “The Partnership Agreement — Indemnification.”

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DESCRIPTION OF THE UNITS
The Units
      The units represent partnership interests in us. The holders of units are entitled to participate in distributions and exercise the rights or privileges available to limited partners under our partnership agreement. For a description of the relative rights and preferences of holders of units in and to distributions, please read this section and “Cash Distribution Policy and Restrictions on Distributions.” For a description of the rights and privileges of limited partners under our partnership agreement, including voting rights, please read “The Partnership Agreement.”
Transfer Agent and Registrar
Duties
      Computershare Trust Company, N.A. serves as registrar and transfer agent for the units. We pay all fees charged by the transfer agent for transfers of units, except the following fees that will be paid by unitholders:
  •  surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;
 
  •  special charges for services requested by a holder of a unit; and
 
  •  other similar fees or charges.
      There will be no charge to holders for disbursements of our cash distributions. We will indemnify the transfer agent against all claims and losses that may arise out of all actions of the transfer agent or its agents or subcontractors for their activities in that capacity, except for any liability due to any gross negligence or willful misconduct of the transfer agent or subcontractors.
Resignation or Renewal
      The transfer agent may at any time resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and has accepted the appointment within 30 days after notice of the resignation or removal, our general partner is authorized to act as the transfer agent and registrar until a successor is appointed.
Transfer of Units
      By transfer of units in accordance with our partnership agreement, each transferee of units shall be admitted as a limited partner with respect to the units transferred when such transfer and admission is reflected on our books and records. Additionally, each transferee of units:
  •  becomes the record holder of the units;
 
  •  represents that the transferee has the capacity, power and authority to enter into the partnership agreement;
 
  •  automatically agrees to be bound by the terms and conditions of, and is deemed to have executed our partnership agreement; and
 
  •  gives the consents, approvals and waivers contained in our partnership agreement, such as the approval of all transactions and agreements we are entering into in connection with our formation and this offering.
      A transferee will become a substituted limited partner of our partnership for the transferred units automatically upon the recording of the transfer on our books and records. Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly.

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      We may, at our discretion, treat the nominee holder of a unit as the absolute owner. In that case, the beneficial holder’s rights are limited to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.
      Units are securities and are transferable according to the laws governing transfer of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a limited partner in our partnership for the transferred units.
      Until a unit has been transferred on our books, we and the transfer agent, notwithstanding any notice to the contrary, may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.
Non-Citizen Assignees; Redemption
      For a discussion of our general partner’s ability to redeem the units held by persons other than U.S. citizens, please read “The Partnership Agreement — Non-Citizen Assignees; Redemption.”

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THE PARTNERSHIP AGREEMENT
      The following is a summary of the material provisions of our partnership agreement. Our partnership agreement is included in this prospectus as Appendix A.
      We summarize the following provisions of our partnership agreement elsewhere in this prospectus:
  •  with regard to distributions of available cash, please read “Cash Distribution Policy and Restrictions on Distributions” and “How We Make Cash Distributions”;
 
  •  with regard to the fiduciary duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties”;
 
  •  with regard to the transfer of units, please read “Description of the Units — Transfer of Units”; and
 
  •  with regard to allocations of taxable income and taxable loss, please read “Material Tax Consequences.”
Organization and Duration
      We were organized in October 2005 and will have a perpetual existence.
Purpose
      Our purpose under the partnership agreement is to engage in any business activities that are approved by our general partner. Our general partner, however, may not cause us to engage in any business activities that it determines would cause us to be treated as a corporation for federal income tax purposes. Our general partner is authorized in general to perform all acts it determines to be necessary or appropriate to carry out our purposes and to conduct our business.
Power of Attorney
      Each limited partner, and each person who acquires a unit from a unitholder, by accepting the unit, automatically grants to our general partner and, if appointed, a liquidator, a power of attorney, among other things, to execute and file documents required for our qualification, continuance or dissolution. The power of attorney also grants our general partner the authority to amend, and to grant consents and waivers on behalf of the limited partners under, our partnership agreement. Please read “— Amendment of the Partnership Agreement” below.
Capital Contributions
      Unitholders are not obligated to make additional capital contributions, except as described below under “— Limited Liability.”
Voting Rights
      The following is a summary of the unitholder vote required for the matters specified below. Matters requiring the approval of a “unit majority” require the approval of a majority of the units.
      In voting their units, our general partner and its affiliates will have no fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners.
Issuance of additional units No approval right.
 
Amendment of the partnership agreement Certain amendments may be made by our general partner without the approval of our unitholders. Other amendments generally require the approval of a unit majority. Please read “— Amendment of the Partnership Agreement.”

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Merger of our partnership or the sale of all or substantially all of our assets Unit majority in certain circumstances. Please read “— Merger, Sale or Other Disposition of Assets.”
 
Amendment of the limited partnership agreement of our operating partnership and other action taken by us as the sole member of its general partner Unit majority if such amendment or other action would adversely affect our limited partners in any material respect. Please read “— Amendment of the Partnership Agreement — Action Relating to the Operating Partnership.”
 
Dissolution of our partnership Unit majority. Please read “— Termination and Dissolution.”
 
Continuation of our partnership upon dissolution Unit majority. Please read “— Termination and Dissolution.”
 
Withdrawal of our general partner Under most circumstances, the approval of a unit majority, excluding units held by our general partner and its affiliates, is required for the withdrawal of our general partner prior to March 31, 2016 in a manner that would cause a dissolution of our partnership. Please read “— Withdrawal or Removal of our General Partner.”
 
Removal of the general partner Not less than 66 2 / 3 % of our outstanding units, including units held by our general partner and its affiliates. Please read “— Withdrawal or Removal of the General Partner.”
 
Transfer of the general partner
interest 		Our general partner may transfer all, but not less than all, of its general partner interest in us without a vote of our unitholders to an affiliate or another person in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets, to such person. The approval of a majority of the units, excluding units held by the general partner and its affiliates, is required in other circumstances for a transfer of the general partner interest to a third party prior to March 31, 2016. Please read “— Transfer of General Partner Interest.”
 
Transfer of ownership interests in our general partner No approval required at any time. Please read “— Transfer of Ownership Interests in the General Partner.
Limited Liability
Participation in the Control of Our Partnership
      Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Act and that he otherwise acts in conformity with the provisions of the partnership agreement, his liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to us for his units plus his share of any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right, by the limited partners as a group:
  •  to remove or replace the general partner;
 
  •  to approve some amendments to the partnership agreement; or
 
  •  to take other action under the partnership agreement;

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constituted “participation in the control” of our business for the purposes of the Delaware Act, then the limited partners could be held personally liable for our obligations under the laws of Delaware, to the same extent as the general partner. This liability would extend to persons who transact business with us who reasonably believe that the limited partner is a general partner. Neither the partnership agreement nor the Delaware Act specifically provides for legal recourse against the general partner if a limited partner were to lose limited liability through any fault of the general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.
Unlawful Partnership Distribution
      Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited partner of a limited partnership is liable for the obligations of the transferring limited partner to make contributions to the partnership, except that such person is not obligated for liabilities unknown to him at the time he became a limited partner and that could not be ascertained from the partnership agreement.
Failure to Comply with the Limited Liability Provisions of Jurisdictions in Which We Do Business
      Our subsidiaries may be deemed to conduct business in Mississippi, New Mexico, Oklahoma and Texas. Our subsidiaries may conduct business in other states in the future. Maintenance of our limited liability as a limited partner of our operating partnership may require compliance with legal requirements in the jurisdictions in which the operating partnership conducts business, including qualifying our subsidiaries to do business there.
      Limitations on the liability of limited partners for the obligations of a limited partner have not been clearly established in many jurisdictions. If, by virtue of our limited partner interest in the operating partnership or otherwise, it were determined that we were conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace the general partner, to approve some amendments to the partnership agreement, or to take other action under the partnership agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent as the general partner under the circumstances. We will operate in a manner that the general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.
Issuance of Additional Securities
      Our partnership agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders.
      It is possible that we will fund acquisitions through the issuance of additional units or other partnership securities. Holders of any additional units we issue will be entitled to share equally with the then-existing holders of units in our distributions of available cash. In addition, the issuance of additional units or other partnership securities may dilute the value of the interests of the then-existing unitholders in our net assets.

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      In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership securities that, as determined by our general partner, may have special voting rights to which the units are not entitled. In addition, our partnership agreement does not prohibit the issuance by our subsidiaries of equity securities that may effectively rank senior to the units.
      Upon issuance of additional partnership securities, our general partner will be entitled, but not required, to make additional capital contributions to the extent necessary to maintain its 0.1% general partner interest in us. Our general partner’s 0.1% interest in us will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 0.1% general partner interest. Moreover, our general partner will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase units or other partnership securities whenever, and on the same terms that, we issue those securities to persons other than our general partner and its affiliates, to the extent necessary to maintain the percentage interest of the general partner and its affiliates, including such interest represented by units that existed immediately prior to each issuance. Unitholders will not have preemptive rights to acquire additional units or other partnership securities.
Amendment of the Partnership Agreement
General
      Amendments to our partnership agreement may be proposed only by or with the consent of our general partner. Our general partner, however, will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners. In order to adopt a proposed amendment, other than the amendments discussed below, our general partner must seek written approval of the holders of the number of units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a unit majority.
Prohibited Amendments
      No amendment may be made that would:
  •  enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected; or
 
  •  enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by us to our general partner or any of its affiliates without the consent of our general partner, which consent may be given or withheld at its option.
      The provision of our partnership agreement preventing the amendments having the effects described in any of the clauses above can only be amended upon the approval of the holders of at least 90% of the outstanding units voting together at a single class (including units owned by our general partner and its affiliates). Upon completion of the offering, affiliates of our general partner will own approximately 72.7% of our outstanding units.
No Unitholder Approval
      Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner or assignee to reflect:
  •  change in our name, the location of our principal place of business, our registered agent or our registered office;
 
  •  the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement;

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  •  a change that our general partner determines to be necessary or appropriate to qualify or continue our qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that neither we nor the operating partnership nor any of its subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;
 
  •  an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees from in any manner being subjected to the provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, or ERISA, whether or not substantially similar to plan asset regulations currently applied or proposed;
 
  •  an amendment that our general partner determines to be necessary or appropriate for the authorization of additional partnership securities or rights to acquire partnership securities;
 
  •  any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone;
 
  •  an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our partnership agreement;
 
  •  any amendment that our general partner determines to be necessary or appropriate for the formation by us of, or our investment in, any corporation, partnership or other entity, as otherwise permitted by our partnership agreement;
 
  •  a change in our fiscal year or taxable year and related changes;
 
  •  certain mergers or conveyances as set forth in our partnership agreement; or
 
  •  any other amendments substantially similar to any of the matters described in the clauses above.
      In addition, our general partner may make amendments to our partnership agreement without the approval of any limited partner or transferee in connection with a merger or consolidation approved in connection with our partnership agreement, or if our general partner determines that those amendments:
  •  do not adversely affect the limited partners (or any particular class of limited partners) in any material respect;
 
  •  are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;
 
  •  are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are or will be listed for trading;
 
  •  are necessary or appropriate for any action taken by our general partner relating to splits or combinations of units under the provisions of our partnership agreement; or
 
  •  are required to effect the intent expressed in this prospectus or the intent of the provisions of our partnership agreement or are otherwise contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval
      Our general partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners or result in our being treated as an entity for federal income tax purposes in connection with any of the amendments described under “— No Unitholder Approval.” No other amendments to our partnership agreement will become effective without the approval of holders of at least 90% of the outstanding units voting as a single class unless we first obtain an opinion of

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counsel to the effect that the amendment will not affect the limited liability under applicable law of any of our limited partners.
      In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced.
Action Relating to the Operating Partnership and its General Partner
      Without the approval of the holders of units representing a unit majority, our general partner is prohibited from consenting on our behalf, as the sole limited partner of the operating partnership, and the sole member of its general partner, to any amendment to the limited partnership agreement or limited liability company agreement of either such entities or taking any action on our behalf permitted to be taken by a limited partner of the operating partnership or a member of its general partner, in each case, that would adversely effect our limited partners (or any particular class of limited partners) in any material respect.
Merger, Sale or Other Disposition of Assets
      A merger or consolidation of us requires the prior consent of our general partner. Our general partner, however, will have no duty or obligation to consent to any merger or consolidation and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interest of us or the limited partners. In addition, the partnership agreement generally prohibits our general partner without the prior approval of the holders of a unit majority, from causing us, among other things, to sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all or substantially all of the assets of our subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without that approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without that approval. Finally, our general partner may consummate any merger without the prior approval of our unitholders if we are the surviving entity in the transaction, the transaction would not result in an amendment to our partnership agreement that could not otherwise be adopted solely by our general partner, each of our units will be an identical unit of our partnership following the transaction, and the units to be issued do not exceed 20% of our outstanding units immediately prior to the transaction.
      If the conditions specified in the partnership agreement are satisfied, our general partner may convert us or any of our subsidiaries into a new limited liability entity or merge us or any of our subsidiaries into, or convey all of our assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity. The unitholders are not entitled to dissenters’ rights of appraisal under the partnership agreement or applicable Delaware law in the event of a conversion, merger or consolidation, a sale of substantially all of our assets or any other transaction or event.
Termination and Dissolution
      We will continue as a limited partnership until terminated under our partnership agreement. We will dissolve upon:
  •  the election of our general partner to dissolve us, if approved by the holders of units representing a unit majority;
 
  •  there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law;
 
  •  the entry of a decree of judicial dissolution of our partnership; or

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  •  the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner other than by reason of a transfer of its general partner interest in accordance with our partnership agreement or withdrawal or removal following approval and admission of a successor.
      Upon a dissolution under the last bullet point above, the holders of a unit majority may also elect, within specific time limitations, to continue our business on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of units representing a unit majority, subject to our receipt of an opinion of counsel to the effect that:
  •  the action would not result in the loss of limited liability of any limited partner; and
 
  •  none of us, our operating partnership or any of our other subsidiaries, would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.
Liquidation and Distribution of Proceeds
      Upon our dissolution, unless we are reconstituted and continued as a new limited partnership, the liquidator authorized to wind up our affairs will, acting with all of the powers of our general partner that are necessary or appropriate to liquidate our assets and apply the proceeds of the liquidation as provided in “How We Make Cash Distributions — Distributions of Cash upon Liquidation.” The liquidator may defer liquidation or distribution of our assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to our partners.
Withdrawal or Removal of the General Partner
      Except as described below, our general partner has agreed not to withdraw voluntarily as our general partner prior to March 31, 2016 without obtaining the approval of the holders of at least a majority of the outstanding units, excluding units held by the general partner and its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after March 31, 2016, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of our partnership agreement. Notwithstanding the information above, our general partner may withdraw without unitholder approval upon 90 days’ notice to the limited partners if at least 50% of the outstanding units are held or controlled by one person and its affiliates other than the general partner and its affiliates. In addition, the partnership agreement permits our general partner in some instances to sell or otherwise transfer all of its general partner interest in us without the approval of the unitholders. Please read “— Transfer of General Partner Interest.”
      Upon withdrawal of our general partner under any circumstances, other than as a result of a transfer by our general partner of all or a part of its general partner interest in us, the holders of a unit majority may select a successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within a specified period after that withdrawal, the holders of a unit majority agree in writing to continue our business and to appoint a successor general partner. Please read “— Termination and Dissolution.”
      Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 66 2 / 3 % of the outstanding units, voting together as a single class, including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding units. The ownership of more than 33 1 / 3 % of the outstanding units by our general partner and its affiliates would give them the practical ability to prevent our general partner’s removal. Affiliates of our general partner own 72.7% of the total of our outstanding units.
      Our partnership agreement also provides that if our general partner is removed as our general partner under circumstances where cause does not exist or our general partner withdraws where that withdrawal does not violate our partnership agreement, our general partner will have the right to convert its general partner

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interest into units or to receive cash in exchange for such interest based on the fair market value of its interest at that time.
      In the event of removal of such a general partner under circumstances where cause exists or withdrawal of a general partner where that withdrawal violates our partnership agreement, a successor general partner will have the option to purchase the general partner interest for a cash payment equal to the fair market value of such interest. Under all other circumstances where a general partner withdraws or is removed by the limited partners, the departing general partner will have the option to require the successor general partner to purchase the general partner interest of the departing general partner for fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. Or, if the departing general partner and the successor general partner cannot agree upon an expert, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.
      If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partner interest will automatically convert into units equal to the fair market value of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.
      In addition, we will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general partner or its affiliates for our benefit.
Transfer of General Partner Interest
      Except for transfer by our general partner of all, but not less than all, of its general partner interest in us to:
  •  an affiliate of our general partner (other than an individual); or
 
  •  another entity as part of the merger or consolidation of our general partner with or into another entity or the transfer by our general partner of all or substantially all of its assets to another entity,
our general partner may not transfer all or any part of its general partner interest in our partnership to another person prior to March 31, 2016 without the approval of the holders of at least a majority of the outstanding units, excluding units held by our general partner and its affiliates. As a condition of this transfer, the transferee must assume, among other things, the rights and duties of our general partner, agree to be bound by the provisions of our partnership agreement, and furnish an opinion of counsel regarding limited liability and tax matters.
      Our general partner and its affiliates may at any time transfer units to one or more persons without unitholder approval.
Transfer of Ownership Interests in the General Partner
      At any time, the members of our general partner may sell or transfer all or part of their membership interest in our general partner to an affiliate or third party without the approval of our unitholders.
Change of Management Provisions
      Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove our general partner or otherwise change our management. If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the units from our general partner or its affiliates and any transferees of

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that person or group approved by our general partner or to any person or group who acquires the units with the prior approval of the board of directors of our general partner.
Limited Call Right
      If at any time our general partner and its affiliates own more than 85% of the then-issued and outstanding limited partner interests of any class, our general partner will have the right, which it may assign in whole or in part to any of its affiliates or to us, to acquire all, but not less than all, of the remaining partnership securities of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at least 10 but not more than 60 days’ notice. The purchase price in the event of this purchase is the greater of:
  •  the highest cash price paid by either of our general partner or any of its affiliates for any partnership securities of the class purchased within the 90 days preceding the date on which our general partner first mails notice of its election to purchase those limited partner interests; and
 
  •  the current market price as of the date three days before the date the notice is mailed.
      As a result of our general partner’s right to purchase outstanding partnership securities, a holder of partnership securities may have his partnership securities purchased at an undesirable time or price. Our partnership agreement provides that the resolution of any conflict of interest that is fair and reasonable will not be a breach of the partnership agreement. Our general partner may, but is not obligated to, submit the conflict of interest represented by the exercise of the limited call right to the conflicts committee for approval or seek a fairness opinion from an investment banker. If our general partner exercises its limited call right, it will make a determination at the time, based on the facts and circumstances, and upon the advice of counsel, as to the appropriate method of determining the fairness and reasonableness of the transaction. Our general partner is not obligated to obtain a fairness opinion regarding the value of the units to be repurchased by it upon exercise of the limited call right.
      There is no restriction in our partnership agreement that prevents our general partner from issuing additional units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take this private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934.
      The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his units in the market. Please read “Material U.S. Federal Income Tax Consequences — Disposition of Units.”
Meetings; Voting
      Except as described below regarding a person or group owning 20% or more of any class of units then outstanding, unitholders or transferees who are record holders of units on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited. Units that are owned by an assignee who is a record holder, but who has not yet been admitted as a limited partner, will be voted by our general partner at the written direction of the record holder. Absent direction of this kind, the units will not be voted, except that, in the case of units held by our general partner on behalf of non-citizen assignees, our general partner will distribute the votes on those units in the same ratios as the votes of limited partners on other units are cast.
      Our general partner does not anticipate that any meeting of unitholders will be called until after the closing of an initial public offering of our units, if any, occurs or until our Founding Investors own less than 50% of our outstanding units. It is anticipated that such a meeting would be called for the express purpose of electing the members of the board of directors of our general partner. The limited liability agreement of our general partner provides for a seven member board of directors. Prior to the closing of an initial public offering, defined in our partnership agreement as a public offering of our units generating gross proceeds of not less than $20 million that results in our units being traded on a national securities exchange or the

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Nasdaq Stock Market, all of the directors of our general partner will be elected by its owners (currently our Founding Investors) and not by our unitholders, except in the following circumstances:
  •  if the owners of our general partner own less than 50% but at least 35% of our units, the unitholders, including the general partner and its affiliates, will be entitled to elect three of the seven directors;
 
  •  if the owners of our general partner own less than 35% but at least 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect five of the seven directors; and
 
  •  if the owners of our general partner own less than 20% of our units the unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors.
      Following an initial public offering of our units, our unitholders, including the general partner and its affiliates, will be entitled to elect all of the directors of our general partner.
      Additionally, any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20% of the outstanding units of the class for which a meeting is proposed. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called represented in person or by proxy will constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.
      Each record holder of a unit has a vote according to his percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read “— Issuance of Additional Securities.” However, if at any time any person or group, other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.
      Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of units under our partnership agreement will be delivered to the record holder by us or by the transfer agent.
Status as Limited Partner
      By transfer of units in accordance with our partnership agreement, each transferee of units shall be admitted as a limited partner with respect to the units transferred when such transfer and admission is reflected in our books and records. Except as described under “— Limited Liability,” the units will be fully paid, and unitholders will not be required to make additional contributions.
Non-Citizen Assignees; Redemption
      If we are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, our general partner may redeem the units held by the limited partner at their current market price. In order to avoid any cancellation or forfeiture, our general partner may require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible

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citizen, our general partner may elect to treat the limited partner as a non-citizen assignee. A non-citizen assignee is entitled to an interest equivalent to that of a limited partner for the right to share in allocations and distributions from us, including liquidating distributions. A non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in kind upon our liquidation.
Indemnification
      Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:
  •  our general partner;
 
  •  any departing general partner;
 
  •  any person who is or was an affiliate of a general partner or any departing general partner;
 
  •  any person who is or was a director, officer, member, partner, fiduciary or trustee of any entity set forth in the preceding three bullet points;
 
  •  any person who is or was serving as director, officer, member, partner, fiduciary or trustee of another person at the request of our general partner or any departing general partner; and
 
  •  any person designated by our general partner.
      Any indemnification under these provisions will only be out of our assets. Unless it otherwise agrees, our general partner will not be personally liable for, or have any obligation to contribute or loan funds or assets to us to enable us to effectuate, indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our partnership agreement.
Reimbursement of Expenses
      Our partnership agreement requires us to reimburse our general partner for all direct and indirect expenses it incurs or payments it makes on our behalf and all other expenses allocable to us or otherwise incurred by our general partner in connection with operating our business. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. The general partner is entitled to determine in good faith the expenses that are allocable to us.
Books and Reports
      Our general partner is required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and financial reporting purposes, our fiscal year is the calendar year.
      We will furnish or make available to record holders of units, within 120 days after the close of each fiscal year, an annual report containing audited financial statements and a report on those financial statements by our independent public accountants. Except for our fourth quarter, we will also furnish summary financial information within 90 days after the close of each quarter.
      We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless of whether he supplies us with information.

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Right to Inspect Our Books and Records
      Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable demand and at his own expense, have furnished to him:
  •  a current list of the name and last known address of each partner;
 
  •  a copy of our tax returns;
 
  •  information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each partner and the date on which each partner became a partner;
 
  •  copies of our partnership agreement, our certificate of limited partnership, related amendments and powers of attorney under which they have been executed;
 
  •  information regarding the status of our business and financial condition; and
 
  •  any other information regarding our affairs as is just and reasonable.
      Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which our general partner believes in good faith is not in our best interests or that we are required by law or by agreements with third parties to keep confidential.

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REGISTRATION RIGHTS
Shelf Registration Statement
      We entered into a registration rights agreement in connection with the private equity offering. In the registration rights agreement we agreed, at our expense, to use our reasonable best efforts to file with the SEC (which occurs pursuant to the filing of the shelf registration statement of which this prospectus is a part) no later than May 15, 2006 a shelf registration statement for FBR and certain of its affiliates and a registration statement for the other purchasers registering for resale the units sold in this offering plus any additional units issued in respect thereof whether by unit dividend, unit split or otherwise.
      If the shelf registration statements have not become effective within 180 days of their filing, until they are effective, we will pay to the beneficiaries of the registration rights agreement affected by the failure a penalty equivalent to a 0.5% increase in the yield implied from the offering price and our initial quarterly distribution on an annualized basis. Based on an offering price of $17.00 per unit and an initial quarterly distribution of $1.64 per unit on an annualized basis, this penalty will be $0.02125 per unit per quarter, or $0.085 per unit on an annualized basis. The requirement that the shelf registration statements be effective within 180 days of their filing may be delayed by up to 60 days upon a determination of the independent members of our general partner’s board of directors that such delay is required due to a delay in obtaining required financial statements for any acquisition that we make. We have filed the registration statement of which this prospectus is a part to satisfy certain of our obligations under the registration rights agreement.
      We will use our commercially reasonable efforts to cause the shelf registration statements to become effective under the Securities Act within 180 days of their filing and to continuously maintain the effectiveness of the shelf registration statements under the Securities Act until the first to occur of:
  •  the sale pursuant to a registration statement of all of the units covered by the shelf registration statement;
 
  •  the sale, transfer or other disposition pursuant to Rule 144 under the Securities Act of all of the units covered by the shelf registration statement;
 
  •  such time as all of the units sold in this offering and covered by a shelf registration statement and not held by affiliates of us are, in the opinion of our counsel, eligible for sale pursuant to Rule 144 without volume or manner of sale restrictions (or any successor or analogous rule) under the Securities Act;
 
  •  the units have been sold to us or any of our subsidiaries; or
 
  •  the second anniversary of the initial effective date of the shelf registration statements.
Blackout Periods
      We are permitted, under limited circumstances, to suspend the use, from time to time, of the prospectuses that are part of the shelf registration statements (and therefore suspend sales under the registration statements) for certain periods, referred to as “blackout periods,” if, among other things, any of the following occurs:
        (i) the representative of the underwriters of an underwritten offering of units by us has advised us that the sale of units under the shelf registration statements would have a material adverse effect on the offering;
 
        (ii) a majority of the members of the board of directors of our general partner, in good faith, determines that:
  •  the offer or sale of any units would materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, merger, tender offer, business combination, corporate reorganization, consolidation or other significant transaction involving us (a “proposed transaction”);

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  •  after receiving the advice of counsel, that the sale of the units covered by the shelf registration statements would require disclosure of non-public material information not otherwise required to be disclosed under applicable law; or
 
  •  either (1) we have a bona fide business purpose for preserving the confidentiality of a proposed transaction, (2) disclosure of such proposed transaction would have a material adverse effect on us or our ability to consummate the proposed transaction or (3) a proposed transaction renders us unable to comply with SEC requirements; or
        (iii) a majority of the members of the board of directors of our general partner, in good faith, determines that we are required by law, rule or regulation to supplement the shelf registration statements or file post-effective amendments to the shelf registration statements in order to incorporate information into the shelf registration statements, including for the purpose of:
  •  including in the shelf registration statements any prospectus required under Section 10(a)(3) of the Securities Act;
 
  •  reflecting in the prospectuses included in the shelf registration statements any facts or events arising after the effective date of the shelf registration statements (or the most recent post-effective amendments) that, individually or in the aggregate, represent a fundamental change in the information set forth in the prospectuses; or
 
  •  including in the prospectuses included in the shelf registration statements any material information with respect to the plan of distribution not disclosed in the shelf registration statements or any material change to such information.
      The cumulative blackout periods in any twelve-month period commencing on March 15, 2006 may not exceed an aggregate of 90 days and furthermore may not exceed 60 days in any 90-day period, except as a result of a review of any post-effective amendment by the SEC prior to declaring any post- effective amendment to a registration statement effective provided we have used all commercially reasonable efforts to cause such post-effective amendment to be declared effective.
      In addition to this limited ability to suspend use of the shelf registration statements, until we are eligible to incorporate by reference into the registration statements our periodic and current reports, we will be required to amend or supplement the shelf registration statements to include our quarterly and annual financial information and other developments material to us. Therefore, sales under the shelf registration statements will be suspended until the amendment or supplement, as the case may be, is filed and effective.
Initial Public Offering
      In connection with an underwritten initial public offering, the beneficiaries of the registration rights agreement will be entitled to “piggyback” registration rights and will be eligible, subject to any exclusion or limitation of selling unitholder units in such initial public offering by the managing underwriter, to include their units in the registration statement relating to such initial public offering on a pro rata basis with the Founding Investors, as described below. Upon an underwritten initial public offering by us, the beneficiaries of the registration rights agreement, whether or not they sell units in the initial public offering, will not be able to sell any units not included in our initial public offering for a period of up to 75 days following the effective date of the registration statement filed in connection with our initial public offering.
Founders Registration Rights Agreement
      The Founders Registration Rights Agreement gives the Founding Investors and their permitted transferees certain “demand” registration rights pursuant to which they will be entitled to cause us to register under the Securities Act all or a portion of their units. The Founding Investors and their permitted transferees are entitled to exercise up to three demand registration rights with respect to registrations on SEC Form  S-1, provided that the number of units that the Founding Investors and their permitted transferees propose to include in each such registration is at least ten percent of the total number of units they hold following the

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completion of this offering. The Founding Investors and their permitted transferees also have an unlimited number of demand registration rights with respect to registrations on SEC Form  S-3, provided that the gross proceeds to the selling unitholders in each such registration is expected to be at least $1 million. We will not be required to effect more than three registrations on Form  S-3 pursuant to the foregoing in any calendar year. If the employment of either Cary D. Brown or Kyle A. McGraw is terminated without cause (as defined in their respective employment agreements), the terminated officer will be entitled to one “demand” registration right allowing them to register the resale of their units.
      In addition, the Founders Registration Rights Agreement provides that if we at any time intend to file on our behalf or on behalf of any of our other unitholders a registration statement in connection with a public offering of any of our securities on a form and in a manner that would permit the registration for offer and sale of our units held by the any of the Founding Investors or their permitted transferees, such groups will be able to exercise “piggyback” registration rights pursuant to which they will be entitled to participate in public offerings of our units. The Founding Investors and their permitted transferees also have piggyback registration rights with respect to any registration statement we file on behalf of any of our other unitholders in connection with a public offering of our units on a form and in a manner that would permit the registration for offer and sale of our units. However, the Founding Investors are not entitled to participate in the shelf registration statements that we file to register the resale of the units pursuant to the registration rights agreement. The piggyback registration rights will be subject to:
  •  compliance with the registration rights agreement;
 
  •  cutback rights on the part of the underwriters; and
 
  •  other conditions and limitations that may be imposed by the underwriters.
      In the event underwriters exercise their cutback rights with respect to an offering, units to be sold in the offering by us will be excluded from the registration only after all units sold in such offering as to which piggyback registration rights have been exercised have been excluded. In other words, units to be sold by us in such an offering will have a higher priority for inclusion in the offering than units which piggyback registration rights have been exercised. Furthermore, in the event the underwriters exercise their cutback rights with respect to an offering, the units held by the beneficiaries of the registration rights agreement, the Founding Investors and their respective permitted transferees will be excluded from the registration on a pro rata basis.
Other Matters
      A holder that sells our units pursuant to a shelf registration statement or as a selling unitholder in an underwritten public offering will be required to be named as a selling unitholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement that are applicable to such holder (including certain indemnification rights and contribution obligations). In addition, each holder of our units will be required to deliver information to be used in connection with the shelf registration statement or related prospectus related to their units in order to have such holder’s units included in the shelf registration statement.
      Each holder will be deemed to have agreed that, upon receipt of notice of the occurrence of any event that makes a statement in the prospectus which is part of the shelf registration statement relating to their units untrue in any material respect or which requires the making of any changes in such prospectus in order to make the statements therein not misleading, or of certain other events specified in the registration rights agreement, such holder will suspend the sale of our units pursuant to such prospectus until we have amended or supplemented such prospectus to correct such misstatement or omission and we have given notice that the sale of the units may be resumed.
      We have agreed to use our commercially reasonable efforts to satisfy the criteria for listing and list or include (if we meet the criteria for listing on such exchange or market) our units on the New York Stock Exchange, American Stock Exchange or The Nasdaq National Market (as soon as practicable, including

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seeking to cure in our listing or inclusion application any deficiencies cited by the exchange or market), and thereafter maintain the listing on such exchange or market.
      We will bear certain expenses incident to our registration obligations upon exercise of these registration rights, including the payment of federal securities law and state blue sky registration fees, except that we will not bear any underwriting discounts or commissions or transfer taxes relating to resale of units by selling unitholders. We have agreed to indemnify each selling unitholder for certain violations of federal or state securities laws in connection with any registration statement in which such selling unitholder sells its units pursuant to these registration rights. Each selling unitholder has in turn agreed to indemnify us for federal or state securities law violations that occur in reliance upon written information it provides to us for use in the registration statement.
      We will also provide each holder of registrable units a copy of the prospectus that is a part of the registration statement relating to their units, notify such holder when such registration statement has become effective, and take certain other actions as are required to permit resales.
      The preceding summary of certain provisions of the registration rights agreement and the Founders Registration Rights Agreement is not intended to be complete, and is subject to, and qualified in its entirety by reference to, all of the provisions of the registration rights agreement and the Founders Registration Rights Agreement.

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MATERIAL TAX CONSEQUENCES
      This section is a discussion of the material United States Federal Income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States and, unless otherwise noted in the following discussion, is the opinion of Andrews Kurth LLP, counsel to us, insofar as it relates to matters of United States federal income tax law and legal conclusions with respect to these matters. This section is based on current provisions of the Internal Revenue Code, existing and proposed regulations and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “us” or “we” are references to Legacy Reserves LP and our operating subsidiaries.
      This section does not address all federal income tax matters that affect us or the unitholders. Furthermore, this section focuses on unitholders who are individual citizens or residents of the United States and has only limited application to corporations, estates, trusts, non-resident aliens or other unitholders subject to specialized tax treatment, such as tax-exempt institutions, foreign persons, individual retirement accounts (IRAs), employee benefit plans, real estate investment trusts (REITs) or mutual funds. Accordingly, we urge each prospective unitholder to consult, and depend on, his own tax advisor in analyzing the federal, state, local and foreign tax consequences particular to him of the ownership or disposition of our units.
      No ruling has been or will be requested from the IRS regarding any matter that affects us or prospective unitholders. Instead, we will rely on opinions and advice of Andrews Kurth LLP. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made in this discussion may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for our units and the prices at which our units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to our unitholders and thus will be borne directly by our unitholders. Furthermore, the tax treatment of us, or of an investment in us, may be significantly modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.
      For the reasons described below, Andrews Kurth LLP has not rendered an opinion with respect to the following specific federal income tax issues:
  (1)  the treatment of a unitholder whose units are loaned to a short seller to cover a short sale of units (please read “— Tax Consequences of Unit Ownership — Treatment of Short Sales”);
 
  (2)  whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury regulations (please read “— Disposition of Units — Allocations Between Transferors and Transferees”);
 
  (3)  whether percentage depletion will be available to a unitholder or the extent of the percentage depletion deduction available to any unitholder (please read “— Tax Treatment of Operations — Depletion Deductions”);
 
  (4)  whether the deduction related to United States production activities will be available to a unitholder or the extent of such deduction to any unitholder (please read “— Tax Treatment of Operations — Deduction for United States Production Activities”); and
 
  (5)  whether our method for depreciating Section 743 adjustments is sustainable in certain cases (please read “— Tax Consequences of Unit Ownership — Section 754 Election” and “— Uniformity of Units”).
Partnership Status
      A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, even if no cash distributions are made to him. Distributions by a

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partnership to a partner are generally not taxable to the partner unless the amount of cash distributed to him is in excess of his adjusted basis in his partnership interest.
      Section 7704 of the Internal Revenue Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to in this discussion as the “Qualifying Income Exception,” exists with respect to publicly traded partnerships 90% or more of the gross income of which for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the exploration, development, mining or production, processing, transportation and marketing of natural resources, including oil, natural gas, and products thereof. Other types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than 3% of our current income does not constitute qualifying income; however, this estimate could change from time to time. Based on and subject to this estimate, the factual representations made by us, and a review of the applicable legal authorities, Andrews Kurth LLP is of the opinion that more than 90% of our current gross income constitutes qualifying income. The portion of our income that is qualifying income can change from time to time.
      No ruling has been or will be sought from the IRS, and the IRS has made no determination as to our status or the status of our operating subsidiaries for federal income tax purposes or whether our operations generate “qualifying income” under Section 7704 of the Internal Revenue Code. Instead, we will rely on the opinion of Andrews Kurth LLP. Andrews Kurth LLP is of the opinion, based upon the Internal Revenue Code, its regulations, published revenue rulings, court decisions and the representations described below, that we will be classified as a partnership, and each of our operating subsidiaries (other than the entity employing our employees) will be disregarded as an entity separate from us, for federal income tax purposes.
      In rendering its opinion, Andrews Kurth LLP has relied on factual representations made by us. The representations made by us upon which Andrews Kurth LLP has relied include:
  (a)  Neither we, nor any of our partnership or limited liability company subsidiaries, have elected nor will we elect to be treated as a corporation; and
  (b)  For each taxable year, more than 90% of our gross income will be income that Andrews Kurth LLP has opined or will opine is “qualifying income” within the meaning of Section 7704(d) of the Internal Revenue Code.
      If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery, we will be treated as if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in return for stock in that corporation and then distributed that stock to the unitholders in liquidation of their interests in us. This deemed contribution and liquidation would be tax-free to unitholders and us so long as we, at that time, do not have liabilities in excess of the tax basis of our assets. Thereafter, we would be treated as a corporation for federal income tax purposes.
      If we were taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to the unitholders, and our net income would be taxed to us at corporate rates. In addition, any distribution made to a unitholder would be treated as taxable dividend income to the extent of our current or accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital to the extent of the unitholder’s tax basis in his units, or taxable capital gain, after the unitholder’s tax basis in his units is reduced to zero. Accordingly, taxation as a corporation would result in a material reduction in a unitholder’s cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.
      The remainder of this section is based on Andrews Kurth LLP’s opinion that we will be classified as a partnership for federal income tax purposes.

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Unitholder Status
      Unitholders who become partners of Legacy Reserves LP will be treated as partners of Legacy Reserves LP for federal income tax purposes. Also, assignees who have executed and delivered transfer applications, and are awaiting admission as members, and unitholders whose units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their units will be treated as partners of Legacy Reserves LP for federal income tax purposes.
      Because there is no direct authority addressing the federal tax treatment of assignees of units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, the opinion of Andrews Kurth LLP does not extend to these persons. Furthermore, a purchaser or other transferee of units who does not execute and deliver a transfer application may not receive some federal income tax information or reports furnished to record holders of units unless the units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those units.
      A beneficial owner of units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read “— Tax Consequences of Unit Ownership — Treatment of Short Sales.”
      Items of our income, gain, loss, or deduction are not reportable by a unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore be fully taxable as ordinary income. These unitholders are urged to consult their own tax advisors with respect to their status as partners in us for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-Through of Taxable Income
      We will not pay any federal income tax. Instead, each unitholder will be required to report on his income tax return his share of our income, gains, losses and deductions without regard to whether corresponding cash distributions are received by him. Consequently, we may allocate income to a unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his share of our income, gain, loss and deduction for our taxable year or years ending with or within his taxable year. Our taxable year ends on December 31.
Treatment of Distributions
      Distributions made by us to a unitholder generally will not be taxable to him for federal income tax purposes to the extent of his tax basis in his units immediately before the distribution. Cash distributions made by us to a unitholder in an amount in excess of his tax basis in his units generally will be considered to be gain from the sale or exchange of those units, taxable in accordance with the rules described under “— Disposition of Units” below. To the extent that cash distributions made by us cause a unitholder’s “at risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted in previous years. Please read “— Limitations on Deductibility of Losses.”
      Any reduction in a unitholder’s share of our liabilities for which no partner bears the economic risk of loss, known as “non-recourse liabilities,” will be treated as a distribution of cash to that unitholder. A decrease in a unitholder’s percentage interest in us because of our issuance of additional units will decrease his share of our nonrecourse liabilities and thus will result in a corresponding deemed distribution of cash, which may constitute a non-pro rata distribution. A non-pro rata distribution of money or property may result in ordinary income to a unitholder, regardless of his tax basis in his units, if the distribution reduces the unitholder’s share of our “unrealized receivables,” including recapture of intangible drilling costs, depletion and depreciation recapture, and/or substantially appreciated “inventory items,” both as defined in Section 751 of the Internal Revenue Code, and collectively, “Section 751 Assets.” To that extent, he will be treated as having received his proportionate share of the Section 751 Assets and having exchanged those assets with us in return for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will

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generally result in the unitholder’s realization of ordinary income. That income will equal the excess of (i) the non-pro rata portion of that distribution over (ii) the unitholder’s tax basis for the share of Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions
      We estimate that a purchaser of our units in this offering who holds those units from the date of closing of this offering through the record date for distributions for the period ending December 31, 2008, will be allocated an amount of federal taxable income for that period that will be less than 10% of the cash distributed to the unitholder with respect to that period. We anticipate that thereafter, the ratio of taxable income allocable to cash distributions to the unitholders will increase. These estimates are based upon the assumption that gross income from operations will approximate the amount necessary to make expected distributions on all units and other assumptions with respect to capital expenditures, cash flow and anticipated cash distributions. These estimates and assumptions are subject to, among other things, numerous business, economic, regulatory, competitive and political uncertainties beyond our control. Further, the estimates are based on current tax law and tax reporting positions that we intend to adopt and with which the IRS could disagree. Accordingly, these estimates may not prove to be correct. The actual percentage of distributions that will constitute taxable income could be higher or lower, and any differences could be material and could materially affect the value of the units.
Basis of Units
      A unitholder’s initial tax basis for his units will be the amount he paid for the units plus his share of our nonrecourse liabilities. That basis will be increased by his share of our income and by any increases in his share of our nonrecourse liabilities. That basis generally will be decreased, but not below zero, by distributions to him from us, by his share of our losses, by depletion deductions taken by him to the extent such deductions do not exceed his proportionate share of the adjusted tax basis of the underlying producing properties, by any decreases in his share of our nonrecourse liabilities and by his share of our expenditures that are not deductible in computing taxable income and are not required to be capitalized. A unitholder’s share of our nonrecourse liabilities will generally be based on his share of our profits. Please read “— Disposition of Units — Recognition of Gain or Loss.”
Limitations on Deductibility of Losses
      The deduction by a unitholder of his share of our losses will be limited to his tax basis in his units and, in the case of an individual unitholder or a corporate unitholder, if more than 50% of the value of its stock is owned directly or indirectly by or for five or fewer individuals or some tax-exempt organizations, to the amount for which the unitholder is considered to be “at risk” with respect to our activities, if that amount is less than his tax basis. A unitholder must recapture losses deducted in previous years to the extent that distributions cause his at-risk amount to be less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result of these limitations will carry forward and will be allowable as a deduction in a later year to the extent that his tax basis or at-risk amount, whichever is the limiting factor, is subsequently increased. Upon the taxable disposition of a unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at-risk limitation but may not be offset by losses suspended by the basis limitation. Any excess loss above that gain previously suspended by the at risk or basis limitations is no longer utilizable.
      In general, a unitholder will be at risk to the extent of his tax basis in his units, excluding any portion of that basis attributable to his share of our nonrecourse liabilities, reduced by any amount of money he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in us, is related to the unitholder or can look only to the units for repayment. A unitholder’s at-risk amount will increase or decrease as the tax basis of the unitholder’s units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of our nonrecourse liabilities. Moreover, a unitholder’s at risk amount will decrease by the amount of the unitholder’s depletion deductions and will increase to the

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extent of the amount by which the unitholder’s percentage depletion deductions with respect to our property exceed the unitholder’s share of the basis of that property.
      The at risk limitation applies on an activity-by-activity basis, and in the case of oil and natural gas properties, each property is treated as a separate activity. Thus, a taxpayer’s interest in each oil or natural gas property is generally required to be treated separately so that a loss from any one property would be limited to the at risk amount for that property and not the at risk amount for all the taxpayer’s oil and natural gas properties. It is uncertain how this rule is implemented in the case of multiple oil and natural gas properties owned by a single entity treated as a partnership for federal income tax purposes. However, for taxable years ending on or before the date on which further guidance is published, the IRS will permit aggregation of oil or natural gas properties we own in computing a unitholder’s at risk limitation with respect to us. If a unitholder must compute his at risk amount separately with respect to each oil or natural gas property we own, he may not be allowed to utilize his share of losses or deductions attributable to a particular property even though he has a positive at risk amount with respect to his units as a whole.
      The passive loss limitation generally provides that individuals, estates, trusts and some closely held corporations and personal service corporations are permitted to deduct losses from passive activities, which are generally defined as corporate or partnership activities in which the taxpayer does not materially participate, only to the extent of the taxpayer’s income from those passive activities. The passive loss limitation is applied separately with respect to each publicly traded partnership. Consequently, any losses we generate will only be available to offset our passive income generated in the future and will not be available to offset income from other passive activities or investments, including our investments or investments in other publicly traded partnerships, or a unitholder’s salary or active business income. If we dispose of only part of our interest in a property, unitholders will be able to offset only their suspended passive activity losses attributable to that property against the gain on the disposition. Any remaining suspected passive activity losses will remain suspended. Notwithstanding whether a oil and natural gas property is a separate activity, passive losses that are not deductible because they exceed a unitholder’s share of income we generate may be deducted in full when he disposes of his entire investment in us in a fully taxable transaction with an unrelated party. The passive activity loss rules are applied after other applicable limitations on deductions, including the at-risk rules and the basis limitation.
      A unitholder’s share of our net income may be offset by any of our suspended passive losses, but it may not be offset by any other current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships.
Limitation on Interest Deductions
      The deductibility of a non-corporate taxpayer’s “investment interest expense” is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:
  •  interest on indebtedness properly allocable to property held for investment;
 
  •  our interest expense attributable to portfolio income; and
 
  •  the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.
      The computation of a unitholder’s investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit.
      Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment. The IRS has indicated that net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders. In addition, the unitholder’s share of our portfolio income will be treated as investment income.

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Entity-Level Collections
      If we are required or elect under applicable law to pay any federal, state or local income tax on behalf of any unitholder or any former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of cash to the unitholder on whose behalf the payment was made. If the payment is made on behalf of a unitholder whose identity cannot be determined, we are authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend our limited liability company agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under our limited liability company agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of a unitholder in which event the unitholder would be required to file a claim in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction
      In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among the unitholders in accordance with their percentage interests in us. If we have a net loss for an entire year, the loss will be allocated to our unitholders according to their percentage interests in us to the extent of their positive capital account balances.
      Specified items of our income, gain, loss and deduction will be allocated under Section 704(c) of the Internal Revenue Code to account for the difference between the tax basis and fair market value of our assets at the time of this offering, which assets are referred to in this discussion as “Contributed Property.” These allocations are required to eliminate the difference between a partner’s “book” capital account, credited with the fair market value of Contributed Property, and the “tax” capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “book-tax disparity.” The effect of these allocations to a unitholder who purchases units in this offering will be essentially the same as if the tax basis of our assets were equal to their fair market value at the time of the offering. In the event we issue additional units or engage in certain other transactions in the future, Section 704(c) allocations will be made to all holders of partnership interests, including purchasers of units in this offering, to account for the difference between the “book” basis for purposes of maintaining capital accounts and the fair market value of all property held by us at the time of the future transaction. In addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by other unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and manner sufficient to eliminate the negative balance as quickly as possible.
      An allocation of items of our income, gain, loss or deduction, other than an allocation required by Section 704(c), will generally be given effect for federal income tax purposes in determining a unitholder’s share of an item of income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a unitholder’s share of an item will be determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances, including:
  •  his relative contributions to us;
 
  •  the interests of all the unitholders in profits and losses;
 
  •  the interest of all the unitholders in cash flow; and
 
  •  the rights of all the unitholders to distributions of capital upon liquidation.
      Andrews Kurth LLP is of the opinion that, with the exception of the issues described in “— Tax Consequences of Unit Ownership — Section 754 Election,” “— Uniformity of Units” and “— Disposition of Units — Allocations Between Transferors and Transferees,” allocations under our partnership agreement

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will be given effect for federal income tax purposes in determining a unitholder’s share of an item of income, gain, loss or deduction.
Treatment of Short Sales
      A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be a partner for tax purposes with respect to those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period:
  •  none of our income, gain, loss or deduction with respect to those units would be reportable by the unitholder;
 
  •  any cash distributions received by the unitholder with respect to those units would be fully taxable; and
 
  •  all of these distributions would appear to be ordinary income.
      Andrews Kurth LLP has not rendered an opinion regarding the treatment of a unitholder whose units are loaned to a short seller. Therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition are urged to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units. The IRS has announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please also read “— Disposition of Units — Recognition of Gain or Loss.”
Alternative Minimum Tax
      Each unitholder will be required to take into account his distributive share of any items of our income, gain, loss or deduction for purposes of the alternative minimum tax. The current minimum tax rate for non-corporate taxpayers is 26% on the first $175,000 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. Prospective unitholders are urged to consult their tax advisors with respect to the impact of an investment in our units on their liability for the alternative minimum tax.
Tax Rates
      In general, the highest effective federal income tax rate for individuals currently is 35% and the maximum federal income tax rate for net capital gains of an individual currently is 15% if the asset disposed of was held for more than 12 months at the time of disposition.
Section 754 Election
      We will make the election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS. That election will generally permit us to adjust a unit purchaser’s tax basis in our assets (“inside basis”) under Section 743(b) of the Internal Revenue Code to reflect his purchase price. The Section 743(b) adjustment does not apply to a person who purchases units directly from us, and it belongs only to the purchaser and not to other unitholders. Please also read, however, “— Allocation of Income, Gain, Loss and Deduction” above. For purposes of this discussion, a unitholder’s inside basis in our assets has two components: (1) his share of our tax basis in our assets (“common basis”) and (2) his Section 743(b) adjustment to that basis.
      Treasury regulations under Section 743 of the Internal Revenue Code require, if the remedial allocation method is adopted (which we will adopt), a portion of the Section 743(b) adjustment attributable to recovery property to be depreciated over the remaining cost recovery period for the Section 704(c) built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code rather than cost recovery deductions under Section 168 is generally required to be depreciated using either the straight-line method or the 150%

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declining balance method. Under our limited liability company agreement, we are authorized to take a position to preserve the uniformity of units even if that position is not consistent with these Treasury regulations. Please read “— Tax Treatment of Operations — Uniformity of Units.”
      Although Andrews Kurth LLP is unable to opine on the validity of this approach because there is no clear authority on this issue, we intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized book-tax disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of the property, or treat that portion as non-amortizable to the extent attributable to property the common basis of which is not amortizable. This method is consistent with the regulations under Section 743 but is arguably inconsistent with Treasury regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. To the extent a Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized book-tax disparity, we will apply the rules described in the Treasury regulations and legislative history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read “— Tax Treatment of Operations — Uniformity of Units.”
      A Section 754 election is advantageous if the transferee’s tax basis in his units is higher than the units’ share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depletion and depreciation deductions and his share of any gain on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferee’s tax basis in his units is lower than those units’ share of the aggregate tax basis of our assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is required regardless of whether a Section 754 election is made in the case of a transfer of an interest in us if we have a substantial built-in loss immediately after the transfer, or if we distribute property and have a substantial basis reduction. Generally a built-in loss or a basis reduction is substantial if it exceeds $250,000.
      The calculations involved in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment we allocated to our tangible assets to goodwill instead. Goodwill, an intangible asset, is generally either nonamortizable or amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations we make will not be successfully challenged by the IRS or that the resulting deductions will not be reduced or disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754 election. If permission is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year
      We will use the year ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each unitholder will be required to include in income his share of our income, gain, loss and deduction for our taxable year ending within or with his taxable year. In addition, a unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of his units following the close of our taxable year but before the close of his taxable year must include his share of our income, gain, loss and deduction in income for his taxable year, with the result that he will be required to

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include in income for his taxable year his share of more than twelve months of our income, gain, loss and deduction. Please read “— Disposition of Units — Allocations Between Transferors and Transferees.”
Depletion Deductions
      Subject to the limitations on deductibility of losses discussed above, unitholders will be entitled to deductions for the greater of either cost depletion or (if otherwise allowable) percentage depletion with respect to our oil and natural gas interests. Although the Internal Revenue Code requires each unitholder to compute his own depletion allowance and maintain records of his share of the adjusted tax basis of the underlying property for depletion and other purposes, we intend to furnish each of our unitholders with information relating to this computation for federal income tax purposes.
      Percentage depletion is generally available with respect to unitholders who qualify under the independent producer exemption contained in Section 613A(c) of the Internal Revenue Code. For this purpose, an independent producer is a person not directly or indirectly involved in the retail sale of oil, natural gas, or derivative products or the operation of a major refinery. Percentage depletion is calculated as an amount generally equal to 15% (and, in the case of marginal production, potentially a higher percentage) of the unitholder’s gross income from the depletable property for the taxable year. The percentage depletion deduction with respect to any property is limited to 100% of the taxable income of the unitholder from the property for each taxable year, computed without the depletion allowance. A unitholder that qualifies as an independent producer may deduct percentage depletion only to the extent the unitholder’s daily production of domestic crude oil, or the natural gas equivalent, does not exceed 1,000 Bbls. This depletable amount may be allocated between oil and natural gas production, with six Mcf of domestic natural gas production regarded as equivalent to one Bbl of crude oil. The 1,000 Bbl limitation must be allocated among the independent producer and controlled or related persons and family members in proportion to the respective production by such persons during the period in question.
      In addition to the foregoing limitations, the percentage depletion deduction otherwise available is limited to 65% of a unitholder’s total taxable income from all sources for the year, computed without the depletion allowance, net operating loss carrybacks, or capital loss carrybacks. Any percentage depletion deduction disallowed because of the 65% limitation may be deducted in the following taxable year if the percentage depletion deduction for such year plus the deduction carryover does not exceed 65% of the unitholder’s total taxable income for that year. The carryover period resulting from the 65% net income limitation is indefinite.
      Unitholders that do not qualify under the independent producer exemption are generally restricted to depletion deductions based on cost depletion. Cost depletion deductions are calculated by (i) dividing the unitholder’s share of the adjusted tax basis in the underlying mineral property by the number of mineral units (Bbls of oil and thousand cubic feet, or Mcf, of natural gas) remaining as of the beginning of the taxable year and (ii) multiplying the result by the number of mineral units sold within the taxable year. The total amount of deductions based on cost depletion cannot exceed the unitholder’s share of the total adjusted tax basis in the property.
      All or a portion of any gain recognized by a unitholder as a result of either the disposition by us of some or all of our oil and natural gas interests or the disposition by the unitholder of some or all of his units may be taxed as ordinary income to the extent of recapture of depletion deductions, except for percentage depletion deductions in excess of the basis of the property. The amount of the recapture is generally limited to the amount of gain recognized on the disposition.
      The foregoing discussion of depletion deductions does not purport to be a complete analysis of the complex legislation and Treasury regulations relating to the availability and calculation of depletion deductions by the unitholders. Further, because depletion is required to be computed separately by each unitholder and not by our partnership, no assurance can be given, and counsel is unable to express any opinion, with respect to the availability or extent of percentage depletion deductions to the unitholders for any taxable year. We encourage each prospective unitholder to consult his tax advisor to determine whether percentage depletion would be available to him.

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Deductions for Intangible Drilling and Development Costs
      We will elect to currently deduct intangible drilling and development costs (IDCs). IDCs generally include our expenses for wages, fuel, repairs, hauling, supplies and other items that are incidental to, and necessary for, the drilling and preparation of wells for the production of oil, natural gas, or geothermal energy. The option to currently deduct IDCs applies only to those items that do not have a salvage value.
      Although we will elect to currently deduct IDCs, each unitholder will have the option of either currently deducting IDCs or capitalizing all or part of the IDCs and amortizing them on a straight-line basis over a 60-month period, beginning with the taxable month in which the expenditure is made. If a unitholder makes the election to amortize the IDCs over a 60-month period, no IDC preference amount will result for alternative minimum tax purposes.
      Integrated oil companies must capitalize 30% of all their IDCs (other than IDCs paid or incurred with respect to oil and natural gas wells located outside of the United States) and amortize these IDCs over 60 months beginning in the month in which those costs are paid or incurred. If the taxpayer ceases to be an integrated oil company, it must continue to amortize those costs as long as it continues to own the property to which the IDCs relate. An “integrated oil company” is a taxpayer that has economic interests in crude oil deposits and also carries on substantial retailing or refining operations. An oil or natural gas producer is deemed to be a substantial retailer or refiner if it is subject to the rules disqualifying retailers and refiners from taking percentage depletion. In order to qualify as an “independent producer” that is not subject to these IDC deduction limits, a unitholder, either directly or indirectly through certain related parties, may not be involved in the refining of more than 75,000 Bbls of oil (or the equivalent amount of natural gas) on average for any day during the taxable year or in the retail marketing of oil and natural gas products exceeding $5 million per year in the aggregate.
      IDCs previously deducted that are allocable to property (directly or through ownership of an interest in a partnership) and that would have been included in the adjusted basis of the property had the IDC deduction not been taken are recaptured to the extent of any gain realized upon the disposition of the property or upon the disposition by a unitholder of interests in us. Recapture is generally determined at the unitholder level. Where only a portion of the recapture property is sold, any IDCs related to the entire property are recaptured to the extent of the gain realized on the portion of the property sold. In the case of a disposition of an undivided interest in a property, a proportionate amount of the IDCs with respect to the property is treated as allocable to the transferred undivided interest to the extent of any unrealized gain. Please read “— Disposition of Units — Recognition of Gain or Loss.”
Deduction for United States Production Activities
      Subject to the limitations on the deductibility of losses discussed above and the limitation discussed below, unitholders will be entitled to a deduction, herein referred to as the Section 199 deduction, equal to a specified percentage of our qualified production activities income that is allocated to such unitholder. The percentages are 3% for qualified production activities income generated in the year 2006; 6% for the years 2007, 2008, and 2009; and 9% thereafter.
      Qualified production activities income is generally equal to gross receipts from domestic production activities reduced by cost of goods sold allocable to those receipts, other expenses directly associated with those receipts, and a share of other deductions, expenses and losses that are not directly allocable to those receipts or another class of income. The products produced must be manufactured, produced, grown or extracted in whole or in significant part by the taxpayer in the United States.
      For a partnership, the Section 199 deduction is determined at the partner level. To determine his Section 199 deduction, each unitholder will aggregate his share of the qualified production activities income allocated to him from us with the unitholder’s qualified production activities income from other sources. Each unitholder must take into account his distributive share of the expenses allocated to him from our qualified production activities regardless of whether we otherwise have taxable income. However, our expenses that otherwise would be taken into account for purposes of computing the Section 199 deduction are only taken

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into account if and to the extent the unitholder’s share of losses and deductions from all of our activities is not disallowed by the basis rules, the at-risk rules or the passive activity loss rules. Please read “— Tax Consequences of Unit Ownership — Limitations on Deductibility of Losses.”
      The amount of a unitholder’s Section 199 deduction for each year is limited to 50% of the IRS Form W-2 wages paid by the unitholder during the calendar year. Each unitholder is treated as having been allocated IRS Form W-2 wages from us equal to the lesser of either (i) the unitholder’s allocable share of our wages, or (ii) two times the applicable Section 199 deduction percentage of our qualified production activities income allocated to the unitholder plus any expenses incurred directly by the unitholder that are allocated to our qualified production activities for that taxable year. It is not anticipated that we or our subsidiaries will pay material wages that will be allocated to our unitholders.
      This discussion of the Section 199 deduction does not purport to be a complete analysis of the complex legislation and Treasury authority relating to the calculation of domestic production gross receipts, qualified production activities income, or IRS Form W-2 Wages, or how such items are allocated by us to unitholders. Further, because the Section 199 deduction is required to be computed separately by each unitholder, no assurance can be given, and counsel is unable to express any opinion, as to the availability or extent of the Section 199 deduction to the unitholders. Each prospective unitholder is encouraged to consult his tax advisor to determine whether the Section 199 deduction would be available to him.
      Lease Acquisition Costs. The cost of acquiring oil and natural gas leaseholder or similar property interests is a capital expenditure that must be recovered through depletion deductions if the lease is productive. If a lease is proved worthless and abandoned, the cost of acquisition less any depletion claimed may be deducted as an ordinary loss in the year the lease becomes worthless. Please read “Tax Treatment of Operations — Depletion Deductions.”
      Geophysical Costs. The cost of geophysical exploration must be capitalized as a lease acquisition cost if a property is (or may be) acquired or retained on the basis of data from such exploration. Otherwise, such costs generally may be deducted as ordinary expenses.
      Operating and Administrative Costs. Amounts paid for operating a producing well are deductible as ordinary business expenses, as are administrative costs to the extent they constitute ordinary and necessary business expenses which are reasonable in amount.
Tax Basis, Depreciation and Amortization
      The tax basis of our assets, such as casing, tubing, tanks, pumping units and other similar property, will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to (i) this offering will be borne by our existing unitholders, and (ii) any other offering will be borne by our unitholders as of that time. Please read “— Tax Consequences of Unit Ownership — Allocation of Income, Gain, Loss and Deduction.”
      To the extent allowable, we may elect to use the depreciation and cost recovery methods that will result in the largest deductions being taken in the early years after assets are placed in service. Property we subsequently acquire or construct may be depreciated using accelerated methods permitted by the Internal Revenue Code.
      If we dispose of depreciable property by sale, foreclosure, or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own will likely be required to recapture some or all of those deductions as ordinary income upon a sale of his interest in us. Please read “— Tax Consequences of Unit Ownership — Allocation of Income, Gain, Loss and Deduction” and “— Disposition of Units — Recognition of Gain or Loss.”

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      The costs incurred in selling our units (called “syndication expenses”) must be capitalized and cannot be deducted currently, ratably or upon our termination. There are uncertainties regarding the classification of costs as organization expenses, which we may be able to amortize, and as syndication expenses, which we may not amortize. The underwriting discounts and commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our Properties
      The federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values and the tax bases of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deduction previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.
Disposition of Units
Recognition of Gain or Loss
      Gain or loss will be recognized on a sale of units equal to the difference between the unitholder’s amount realized and the unitholder’s tax basis for the units sold. A unitholder’s amount realized will equal the sum of the cash or the fair market value of other property he receives plus his share of our nonrecourse liabilities. Because the amount realized includes a unitholder’s share of our nonrecourse liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.
      Prior distributions from us in excess of cumulative net taxable income for a unit that decreased a unitholder’s tax basis in that unit will, in effect, become taxable income if the unit is sold at a price greater than the unitholder’s tax basis in that unit, even if the price received is less than his original cost.
      Except as noted below, gain or loss recognized by a unitholder, other than a “dealer” in units, on the sale or exchange of a unit held for more than one year will generally be taxable as capital gain or loss. A portion of this gain or loss, which may be substantial, however, will be separately computed and taxed as ordinary income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to “unrealized receivables” or “inventory items” that we own. The term “unrealized receivables” includes potential recapture items, including depreciation, depletion, and IDC recapture. Ordinary income attributable to unrealized receivables and inventory items may exceed net taxable gain realized on the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and a capital loss upon a sale of units. Net capital loss may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gain in the case of corporations.
      The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an “equitable apportionment” method. Treasury regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify units transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling, a unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but, according to the regulations, may designate specific units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of units transferred must consistently use that identification method for all subsequent sales or exchanges of units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged to consult his tax advisor as to the possible consequences of this ruling and those Treasury regulations.

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      Specific provisions of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:
  •  a short sale;
 
  •  an offsetting notional principal contract; or
 
  •  a futures or forward contract with respect to the partnership interest or substantially identical property.
      Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer who enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees
      In general, our taxable income or loss will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the unitholders in proportion to the number of units owned by each of them as of the first business day of the month (or once traded on an exchange, as of the opening of the applicable exchange on the first business day of the month) (the “Allocation Date”). However, gain or loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.
      Although simplifying conventions are contemplated by the Code and most publicly traded partnerships use similar simplifying convention, the use of this method may not be permitted under existing Treasury regulations. Accordingly, Andrews Kurth LLP is unable to opine on the validity of this method of allocating income and deductions between unitholders. If this method is not allowed under the Treasury regulations, or only applies to transfers of less than all of the unitholder’s interest, our taxable income or losses might be reallocated among the unitholders. We are authorized to revise our method of allocation between unitholders, as well as among unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury regulations.
      A unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter but will not be entitled to receive that cash distribution.
Notification Requirements
      A unitholder who sells any of his units, other than through a broker, generally is required to notify us in writing of that sale within 30 days after the sale (or, if earlier, January 15 of the year following the sale). A person who purchases units is required to notify us in writing of that purchase within 30 days after the purchase, unless a broker or nominee will satisfy such requirement. We are required to notify the IRS of any such transfers of units and to furnish specified information to the transferor and transferee. Failure to notify us of a transfer of units may lead to the imposition of substantial penalties.
Constructive Termination
      We will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve — month period. A constructive termination results in the closing of our taxable year for all unitholders. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may result in more than

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12 months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination occurring on a date other than December 31 will result in us filing two tax returns (and unitholders receiving two Schedule K-1s) for one fiscal year and the cost of the preparation of these returns will be borne by all unitholders. We would be required to make new tax elections after a termination, including a new election under Section 754 of the Internal Revenue Code, and a termination would result in a deferral of our deductions for depreciation. A termination could also result in penalties if we were unable to determine that the termination had occurred. Moreover, a termination might either accelerate the application of, or subject us to, any tax legislation enacted before the termination.
Uniformity of Units
      Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation Section  1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on the value of the units. Please read “— Tax Consequences of Unit Ownership — Section 754 Election.”
      We intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized book-tax disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of that property, or treat that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent with the regulations under Section 743 of the Internal Revenue Code, even though that position may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6). This method is consistent with the Treasury regulations applicable to property depreciable under the accelerated cost recovery system or the modified accelerated cost recovery system, which we expect will apply to substantially all, if not all, of our depreciable property. We also intend to use this method with respect to property that we own, if any, depreciable under Section 167 of the Internal Revenue Code. We do not expect Section 167 to apply to a material portion, if any, of our assets. Please read “— Tax Consequences of Unit Ownership — Section 754 Election.” To the extent that the Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized book-tax disparity, we will apply the rules described in the Treasury regulations and legislative history. If we determine that this position cannot reasonably be taken, we may adopt a depreciation and amortization position under which all purchasers acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to a common basis or Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our property. If we adopt this position, it may result in lower annual deductions than would otherwise be allowable to some unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions are otherwise allowable. We will not adopt this position if we determine that the loss of depreciation and amortization deductions will have a material adverse effect on the unitholders. If we choose not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax characteristics of any units that would not have a material adverse effect on the unitholders. Our counsel, Andrews Kurth LLP, is unable to opine on the validity of any of these positions. The IRS may challenge any method of depreciating the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might be affected, and the gain from the sale of units might be increased without the benefit of additional deductions. Please read “— Disposition of Units — Recognition of Gain or Loss.”
Tax-Exempt Organizations and Other Investors
      Ownership of units by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations, other foreign persons and regulated investment companies raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them.
      Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated

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business taxable income. Virtually all of our income allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to them.
      Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the United States because of the ownership of units. As a consequence they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain. Under rules applicable to publicly traded partnerships, we will withhold tax, at the highest effective applicable rate, from cash distributions made quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8 BEN or applicable substitute form in order to obtain credit for these withholding taxes. A change in applicable law may require us to change these procedures.
      In addition, because a foreign corporation that owns units will be treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain, as adjusted for changes in the foreign corporation’s “U.S. net equity,” that is effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.
      Under a ruling issued by the IRS, a foreign unitholder who sells or otherwise disposes of a unit will be subject to federal income tax on gain realized on the sale or disposition of that unit to the extent the gain is effectively connected with a United States trade or business of the foreign unitholder. Apart from the ruling, a foreign unitholder will not be taxed or subject to withholding upon the sale or disposition of a unit if he has owned less than 5% in value of the units during the five-year period ending on the date of the disposition and if the units are regularly traded on an established securities market at the time of the sale or disposition.
      A regulated investment company or “mutual fund” must derive at least 90% of its gross income from permitted sources, including income from qualified publicly traded partnerships. If our units are not traded on an established securities market or readily tradeable on a secondary market (or substantial equivalent thereof), our income will not be from a permitted source.
Administrative Matters
Information Returns and Audit Procedures
      We intend to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes his share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been mentioned earlier, to determine each unitholder’s share of income, gain, loss and deduction.
      We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, Treasury regulations or administrative interpretations of the IRS. Neither we nor counsel can assure prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the units.
      The IRS may audit our federal income tax information returns. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior year’s tax liability and possibly may result in an audit of his own return. Any audit of a unitholder’s return could result in adjustments not related to our returns as well as those related to our returns.
      Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate

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proceedings with the partners. The Internal Revenue Code requires that one partner be designated as the “Tax Matters Partner” for these purposes. The partnership agreement appoints our general partner as our Tax Matters Partner.
      The Tax Matters Partner will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate.
      A unitholder must file a statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting
      Persons who hold an interest in us as a nominee for another person are required to furnish to us:
        (a) the name, address and taxpayer identification number of the beneficial owner and the nominee;
 
        (b) a statement regarding whether the beneficial owner is:
        (1) a person that is not a United States person,
 
        (2) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing, or
 
        (3) a tax-exempt entity;
        (c) the amount and description of units held, acquired or transferred for the beneficial owner; and
 
        (d) specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.
      Brokers and financial institutions are required to furnish additional information, including whether they are United States persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.
Accuracy-related Penalties
      An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.
      A substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year

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or $5,000. The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:
        (1) for which there is, or was, “substantial authority,” or
 
        (2) as to which there is a reasonable basis and the relevant facts of that position are disclosed on the return.
      We believe we will not be classified as a tax shelter. If any item of income, gain, loss or deduction included in the distributive shares of unitholders could result in that kind of an “understatement” of income for which no “substantial authority” exists, we would be required to disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make adequate disclosure on their returns to avoid liability for this penalty. More stringent rules would apply to an understatement of tax resulting from ownership of units if we were classified as a “tax shelter.” For individuals, a substantial valuation misstatement exists if the value of any property, or the adjusted basis of any property, claimed on a tax return is 200% or more of the amount determined to be the correct amount of the valuation or adjusted basis. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for a corporation other than an S Corporation or a personal holding company). If the valuation claimed on a return is 400% or more than the correct valuation, the penalty imposed increases to 40%.
Reportable Transactions
      If we were to engage in a “reportable transaction,” we (and possibly you and others) would be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of transaction publicly identified by the IRS as a “listed transaction” or that it produces certain kinds of losses in excess of $2 million. Our participation in a reportable transaction could increase the likelihood that our federal income tax information return (and possibly your tax return) is audited by the IRS. Please read “— Information Returns and Audit Procedures” above.
      Moreover, if we were to participate in a listed transaction or a reportable transaction (other than a listed transaction) with a significant purpose to avoid or evade tax, you could be subject to the following provisions of the American Jobs Creation Act of 2004:
  •  accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at “— Accuracy-related Penalties,”
 
  •  for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability, and
 
  •  in the case of a listed transaction, an extended statute of limitations.
      We do not expect to engage in any reportable transactions.
State, Local and Other Tax Considerations
      In addition to federal income taxes, you will be subject to other taxes, including state and local income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which we do business or own property or in which you are a resident. We currently do business and own property in Texas, New Mexico, Oklahoma and Mississippi. We may also own property or do business in other states in the future. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on his investment in us. You may not be required to file a return and pay taxes in some states because your income from that state falls below the filing and payment requirement. You will be required, however, to file state income tax returns and to pay state income taxes in many of the states in which we may do business or own property, and you may be subject to penalties for failure to comply with those requirements. In some states, tax losses may not produce a tax benefit in the year incurred and also may not be available to offset income in subsequent taxable years.

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Some of the states may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the state. Withholding, the amount of which may be greater or less than a particular unitholder’s income tax liability to the state, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld may be treated as if distributed to unitholders for purposes of determining the amounts distributed by us. Please read “— Tax Consequences of Unit Ownership  — Entity-Level Collections.” Based on current law and our estimate of our future operations, we anticipate that any amounts required to be withheld will not be material.
      It is the responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent states and localities, of his investment in us. Andrews Kurth LLP has not rendered an opinion on the state local, or foreign tax consequences of an investment in us. We strongly recommend that each prospective unitholder consult, and depend on, his own tax counsel or other advisor with regard to those matters. It is the responsibility of each unitholder to file all tax returns, that may be required of him.

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INVESTMENT IN LEGACY RESERVES LP BY EMPLOYEE BENEFIT PLANS
      An investment in us by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and restrictions imposed by Section 4975 of the Internal Revenue Code. For these purposes, the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be given to:
  •  whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
 
  •  whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(l)(C) of ERISA; and
 
  •  whether the investment will result in recognition of unrelated business taxable income by the plan and, if so, the potential after-tax investment return.
      The person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in us is authorized by the appropriate governing instrument and is a proper investment for the plan.
      Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibits employee benefit plans, and IRAs that are not considered part of an employee benefit plan, from engaging in specified transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Internal Revenue Code with respect to the plan.
      In addition to considering whether the purchase of units is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that our general partner also would be a fiduciary of the plan and our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as the prohibited transaction rules of the Internal Revenue Code.
      The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s assets would not be considered to be “plan assets” if, among other things:
  •  the equity interests acquired by employee benefit plans are publicly offered securities — i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal securities laws;
 
  •  the entity is an “operating company,” — i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority owned subsidiary or subsidiaries and certain other requirements are met; or
 
  •  there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest, disregarding some interests held by our general partner, its affiliates, and some other persons, is held by the employee benefit plans referred to above, IRAs and other employee benefit plans not subject to ERISA, including governmental plans.
      We should qualify as an “operating company” because our business includes the acquisition and exploitation of oil and natural gas properties and therefore our underlying assets should not be considered “plan assets” under these regulations.
      Plan fiduciaries contemplating a purchase of our units should consult with their own counsel regarding the consequences under ERISA and the Internal Revenue Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.

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SELLING UNITHOLDERS
      This prospectus covers units sold in our recent private equity offering. Some of the units sold in the private equity offering were sold directly to “accredited investors” as defined by Rule 501(a) under the Securities Act pursuant to an exemption from registration provided in Regulation D, Rule 506 under Section 4(2) of the Securities Act. In addition, we sold units to Friedman, Billings, Ramsey & Co., Inc. (“FBR”), who acted as initial purchaser and sole placement agent in the offering. FBR sold a portion of the units it purchased from us in transactions exempt from the registration requirements of the Securities Act to persons that it reasonably believed were “qualified institutional buyers,” as defined by Rule 144A under the Securities Act. The selling unitholders who purchased units from us or FBR in the private equity offering and their permitted transferees may from time to time offer and sell under this prospectus any or all of the units listed opposite each of their names below.
      The following table sets forth information about the number of units owned by each selling unitholder that may be offered from time to time under this prospectus. Certain selling unitholders may be deemed to be “underwriters” as defined in the Securities Act. Any profits realized by the selling unitholder may be deemed to be underwriting commissions.
      The table below has been prepared based upon the information furnished to us by the selling unitholders as of March 15, 2006. The selling unitholders identified below may have sold, transferred or otherwise disposed of some or all of their units since the date on which the information in the following table is presented in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling unitholders may change from time to time and, if necessary, we will supplement this prospectus accordingly. We cannot give an estimate as to the amount of units that will be held by the selling unitholders upon termination of this offering because the selling unitholders may offer some or all of their units under the offering contemplated by this prospectus. Each selling unitholder is registering pursuant to the registration statement, of which this prospectus is a part, 100% of the units currently held by such selling unitholder. Therefore, if each such selling unitholder sells all of the units it is offering, such selling unitholder will no longer own any of our units. The total amount of units that may be sold hereunder will not exceed the number of shares offered hereby. Please read “Plan of Distribution.”
      If units are to be sold by transferees of the selling unitholders under this prospectus, we must file a post-effective amendment to the registration statement that includes this prospectus or a prospectus supplement, amending the list of selling unitholders to include the transferee as a selling unitholder. Upon being notified by a selling unitholder that it intends to use an agent or principal to sell their shares, a post-effective amendment to the registration statement that includes this prospectus will be filed, naming the agent or principal as an underwriter and disclosing the compensation arrangement. All selling unitholders are subject to Rule 105 of Regulation M and are precluded from engaging in any short selling activities prior to effectiveness and for as long as they are participants in the offering.
      Except as noted below, to our knowledge, none of the selling unitholders has, or has had within the past three years, any position, office or other material relationship with us or any of our predecessors or affiliates, other than their ownership of units described below.
                 
    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
A & R Agreement of Trust for Joan M. Welsh — DTD 08/31/1990 — Joan M. Welsh TTEE(1)
    1,570       *  
A-Able Transmission — Corporate Investment Account(1)
    240       *  
Alexandra P. Tumbleston — Personal Portfolio(1)
    2,290       *  
Alexis A. Shehata — Personal Portfolio(1)
    830       *  
Andrea L. Kilian Trust — DTD 9/25/97 — Andrea L. Kilian TTEE(1)
    810       *  
Anita L. Rankin Revocable Trust — U/ A DTD 4/28/1995 — Anita L. Rankin, TTEE(1)
    870       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Ann C. Karter — Personal Portfolio(1)
    110       *  
Ann K. Miller — Personal Portfolio(1)
    670       *  
Anne Marie Romer — Personal Portfolio(1)
    1,040       *  
Anthony L. Kremer Revocable Living Trust — U/ A DTD 1/27/1998 — Anthony L. Kremer TTEE(1)
    1,770       *  
Aurelia Palcher — TOD John E. Palcher(1)
    10,310       *  
Baker-Hazel Funeral Home — Corporate Investment Fund(1)
    250       *  
Barbara A. Muth — Revocable Living Trust U/ A DTD 10/31/96 — Barbara A. Muth, TTEE(1)
    1,560       *  
Barbara McCarty — Personal Portfolio(1)
    470       *  
Billy A. West — Personal Trust(1)
    3,140       *  
BLT Enterprises, LLLP — Partnership(1)
    780       *  
Brian L. McMurray — Personal Portfolio(1)
    1,220       *  
Capital Ventures International(2)
    117,650       *  
Carl. W. Goeckel — Personal Portfolio II(1)
    690       *  
Carmine and Wendy Guerro Living Trust — U/ A DTD 7/31/2000 — C Guerro and W Guerro, TTEES(1)
    1,610       *  
Carol D. Shellabarger Green — Revocable Trust DTD 4/21/00 — Carol Downing Green TTEE(1)
    1,990       *  
Carrie Marie DeMange Living Trust — U/ A DTD 7/9/2004 — M. DeMange & T. DeMange, TTEES(1)
    490       *  
Charles L. & Miriam L. Bechtel — Joint Personal Portfolio(1)
    230       *  
Charles T. Kunesh Irrevocable Trust — DTD 6/28/95 — Mary M. Kunesh, TTEE(1)
    830       *  
Charles V. Simms Trust — U/ A DTD 12/28/1994 — Charles V. Simms, TTEE(1)
    1,230       *  
Chris H. & Linda M. Kapolas — Joint Personal Portfolio(1)
    880       *  
Cindy Ernst — Personal Portfolio(1)
    430       *  
Craig & Mary Jo Sanford — Joint Personal Portfolio(1)
    550       *  
CTBB Family Limited Partnership(1)
    1,280       *  
Daniel W. Crotty Trust — Dated November 3, 1995 — Daniel W. Crotty, TTEE(1)
    1,730       *  
David L. Roer — Personal Portfolio(1)
    1,520       *  
David M. Gray — Revocable Trust DTD 07-19-96 — David M. Gray, TTEE(1)
    1,990       *  
David R. & Renee M. Ernst — Joint Personal Portfolio(1)
    780       *  
David R. Kremer Revocable Living Trust — DTD 5/7/1996 — David R. Kremer & Ruth E. Kremer, TTEES(1)
    980       *  
David Ross — Revocable Living Trust U/ A DTD 11/04/00 — David Ross TTEE(1)
    350       *  
David Slyman Jr. — Personal Portfolio(1)
    1,290       *  
Dolores H. Russ Trust — DTD 4/20/2000 — Dolores H. Russ, TTEE(1)
    8,620       *  
Don A. & Linda B. Maccubbin — Revocable Trust DTD 05/04/93 — Don A. & Linda B. Maccubbin, TTEES(1)
    2,390       *  
Donald G. Tekamp Revocable Trust — DTD 8/16/2000 — Donald G. Tekamp TTEE(1)
    1,430       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Donald Gorman — Personal Portfolio(1)
    1,070       *  
Dorothy W. Savage-Kemp — TOD(1)
    740       *  
Douglas & Melissa Marchal — Joint Personal Portfolio(1)
    2,540       *  
Dr. Donald H. Nguyen & Lynn A. Buffington — JTWROS(1)
    340       *  
Dr. Michael T. Kunesh — Revocable Trust(1)
    1,810       *  
EBS Microcap Partners, L.P. — Limited Partnership(1)
    810       *  
EBS Partners, LP — Limited Partnership — Primary Account(1)
    790       *  
Eileen M. Jackson — TOD(1)
    990       *  
Elaine S. Berman Trust — DTD 6/30/95 — Elaine S. Berman TTEE(1)
    1,610       *  
Elizabeth Ann Simms Trust — U/ A DTD 12/28/1994 — Elizabeth Ann Simms, TTEE(1)
    1,270       *  
FBO Marjorie G. Kasch — U/ A/ D 3/21/80 — Thomas A. Holton TTEE(1)
    980       *  
Felice M. Kantor #1 — Personal Trust U/ A DTD 06/23/93 — Felice M. Kantor TTEE(1)
    690       *  
Forney M. Hoke III — Personal Portfolio(1)
    920       *  
Found-Mor LLC —(1)
    300       *  
George H. Welsh — Revocable Living Trust DTD 8/1/90 — Trust B — Joan M. Welsh, Co-TTEE(1)
    150       *  
George Hicks — Personal Portfolio(1)
    870       *  
Gerald E. & Deanne W. Joseph — Joint Personal Portfolio(1)
    480       *  
Gerald J. Allen — Personal Portfolio(1)
    500       *  
Giacomo Life Insurance — Trust DTD 4/28/01 — Jane Hughes TTEE(1)
    1,280       *  
Grace G. Miller — Personal Portfolio(1)
    2,170       *  
Gregory A. & Bibi A. Reber — Joint Personal Portfolio(1)
    4,620       *  
Gregory Hull — Personal Portfolio(1)
    2,080       *  
Gwendolyn D. Harmon — Revocable Living Trust(1)
    240       *  
H. Joseph & Rosemary Wood — Joint Personal Portfolio(1)
    170       *  
Harold & Congress Hazel Trust — U/ A DTD 04/21/1991 — Congress Ann Hazel, TTEE(1)
    710       *  
Harold A. & Lois M. Ferguson — Joint Personal Portfolio(1)
    710       *  
Hazel B. Kidd — Personal Portfolio(1)
    350       *  
Helen G. Moody — Revocable Living Trust DTD 01/17/02 — Helen G. Moody TTEE(1)
    230       *  
Howard Smith — Personal Portfolio(1)
    870       *  
Iroquois Master Fund Ltd.
    14,705       *  
Jack E. & Sandra McMaken — Joint Personal Portfolio(1)
    730       *  
Jack R. Scherer Liv Trust — DTD 4/3/97 — Jack R. & Lana B. Scherer TTEES(1)
    150       *  
Jacqueline Slyman — Personal Portfolio(1)
    700       *  
James R. Goldstein — Personal Portfolio(1)
    520       *  
Janet R. Seiler Trust — DTD 5/18/2005 — Janet R. Seiler, TTEE(1)
    960       *  
Janice S. Harmon Revocable Trust — Dtd 2/2/05 — Janice S. Harmon TTEE(1)
    770       *  
Jean C. Marten — Personal Portfolio(1)
    1,670       *  
Jeannine E. Phlipot — Personal Portfolio(1)
    1,160       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Jeffrey M. Grieco — Revocable Living Trust DTD 7/19/2001 — Jeffrey M. Grieco, TTEE(1)
    750       *  
Jennifer M. DeMange Rev. Living Trust — U/ A DTD 12/15/2001 — M. DeMange & T. DeMange, TTEES(1)
    450       *  
Jerald & Francine Siegel(1)
    500       *  
Jerome E. Muth — Revocable Living Trust U/ A DTD 10/31/96 — Jerome E. Muth, TTEE(1)
    580       *  
Joan M O’Neil — Personal Portfolio(1)
    10,850       *  
John & Lisa O’Neil — Joint Personal Portfolio(1)
    400       *  
John A. Barron — Personal Portfolio(1)
    200       *  
John A. Barron — Personal Portfolio(1)
    700       *  
John B. Maynard — Personal Portfolio(1)
    3,960       *  
John Barron, Jr. — Personal Portfolio(1)
    2,290       *  
John C. & Sarah L. Kunesh — JTWROS(1)
    37,010       *  
John E. Meyer — Personal Portfolio(1)
    1,890       *  
John J. Miller — Personal Portfolio(1)
    370       *  
John T. & Julia M. Paas — JTWROS(1)
    39,830       *  
Jon R. Yenor & Caroline L. Brecker — Joint Tenants(1)
    1,000       *  
Jonell L. Gharst — Revocable Living Trust U/ A DTD 3/18/97 — William I. Gharst TTEE(1)
    690       *  
Joseph D. Maloney — Personal Portfolio(1)
    400       *  
Joyce Ann Porter — Revocable Living Trust dtd 12/1/00 — Joyce Ann Porter, TTEE(1)
    3,290       *  
Kandythe J. Miller — Personal Portfolio(1)
    1,040       *  
Karen A. Beach Trust — DTD 5/25/02 — Karen A. Beach, TTEE(1)
    6,350       *  
Karen S. Crotty Trust DTD 06/13/1995 Karen S. Crotty, TTEE(1)
    9,070       *  
Kathleen J. Lienesch Family Trust — DTD 2/2/00 — Kathleen J. Lienesch TTEE(1)
    260       *  
Kathryn A. Leeper — Revocable Living Trust DTD 06-29-95 — Kathryn A. Leeper, TTEE(1)
    720       *  
Kenneth E. & Doreen G. Klaus — Joint Personal Portfolio(1)
    250       *  
Kevin M. Crotty Revocable Living Trust DTD 06/13/1995 Kevin M. Crotty, TTEE(1)
    3,190       *  
Larry J. & Marilyn E. Lehman — JTWROS(1)
    1,020       *  
Lawrence J. Harmon Trust A — DTD 1/29/2001 — G Harmon & T Harmon & H Wall TTEES(1)
    950       *  
Lawrence K. Jackson — TOD(1)
    950       *  
Lawrence S. Connor — Personal Portfolio(1)
    140       *  
Leo K. & Katherine H. Wingate — Joint Personal Portfolio(1)
    360       *  
Lester J. & Suzan A. Charnock — JTWROS(1)
    1,470       *  
Linda M. Meister — Personal Portfolio(1)
    1,280       *  
Marcia M. O’Rourke — Personal Portfolio(1)
    220       *  
Margaret S. Adam Revocable TRUST — DTD 4/10/02 — Margaret S. Adam, TTEE(1)
    1,810       *  
Mark Orlandini — Personal Portfolio(1)
    410       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Martha S. Senkiw — Revocable Living Trust DTD 11/02/98 — Martha S. Senkiw, TTEE(1)
    1,130       *  
Marvin E. Nevins — Personal Portfolio(1)
    2,740       *  
Mary Ellen Kremer Living Trust — U/ A DTD 01/27/1998 — Mary Ellen Kremer TTEE(1)
    4,190       *  
Mary J. DeMange Rev. Living Trust — U/ A DTD 12/30/1992 — M. DeMange & T. DeMange, TTEES(1)
    980       *  
Mary Lou R. Baggott — Personal Portfolio(1)
    230       *  
Maureen K. Aukerman — Personal Portfolio(1)
    1,110       *  
Melodee Ruffo — Personal Portfolio(1)
    860       *  
Michael & Andrea Dakin — Personal Portfolio(1)
    220       *  
Michael & Marilyn E. Lipson — JTWROS(1)
    430       *  
Michael A. Houser & H. Stephen Wargo — JTWROS(1)
    790       *  
Michael G. & Dara L. Bradshaw — Joint Personal Portfolio(1)
    8,240       *  
Michael G. Lunsford — Personal Portfolio(1)
    680       *  
Michael J. Mathile — Revocable Living Trust DTD 10/03/96(1)
    6,090       *  
Michael J. Suttman — Personal Portfolio(1)
    810       *  
Michael J. Wenzler — Personal Portfolio(1)
    600       *  
Michael K. Stout Revocable Liv Trust — Dtd 12/27/94 — Michael K. & Carol A. Stout(1)
    1,450       *  
Milo Noble — Personal Portfolio(1)
    430       *  
Monte R. Black — Personal Portfolio(1)
    5,530       *  
Neal L. & Kandythe J. Miller — Joint Personal Portfolio(1)
    2,210       *  
Neil W. & Jeanne K. Hazel — Joint Personal Portfolio(1)
    1,090       *  
Neil W. Hazel — Personal Trust(1)
    510       *  
Nosrat M. Hillman — Personal Portfolio(1)
    480       *  
Pam Graeser — Personal Portfolio(1)
    32,400       *  
Pamela S. Carroll — Personal Portfolio(1)
    820       *  
Patricia Meyer Dorn — Personal Portfolio(1)
    960       *  
Patrick A. Mickley & Amy Jo Mickley — Joint Personal Portfolio(1)
    790       *  
Patrick L. & Jackie L. McGohan — Joint Personal Portfolio(1)
    13,260       *  
Paul & Joan Strausbaugh — Personal Portfolio(1)
    5,770       *  
Paul R. & Dina E. Crnkovich — Joint Personal Portfolio(1)
    720       *  
Paul S. & Cynthia J. Guthrie — Joint Personal Portfolio(1)
    560       *  
Peck Family Investments, Ltd.(1)
    3,950       *  
Peck Investments, LLC — Terry S. & Allan L. Peck, Managers(1)
    340       *  
Peter & Noreen McInnes — Joint Personal Portfolio(1)
    840       *  
Peter D. Senkiw — Revocable Living Trust DTD 11/02/98 — Peter D. Senkiw, TTEE(1)
    2,590       *  
Philip H. Wagner — Revocable Trust U/ A DTD 11/1/00 — Philip H. Wagner TTEE(1)
    1,410       *  
Philip H. Wagner Trust by — Eloise P. Wagner FBO Peter S. Wagner — Dtd 12/6/93 Philip H. Wagner TTEE(1)
    1,340       *  
Pleiades Investment Partners-R LP
    54,223       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Potomac Capital International Ltd.
    46,788       *  
Potomac Capital Partners LP
    75,459       *  
R&D Investment Partnership, LLP — Limited Liability Partnership(1)
    13,920       *  
Randy H. & Pamela F. Yoakum — Joint Personal Portfolio(1)
    650       *  
RAWA Ltd. — Limited Partnership(1)
    860       *  
Raymond W. Lane — Personal Portfolio(1)
    3,320       *  
Richard D. Smith — Personal Portfolio(1)
    200       *  
Richard E. Holmes — Revocable Living Trust DTD 08/25/94 — Richard E. Holmes, TTEE — Sharon Longo & Marianne Nestor, Durable POA(1)
    230       *  
Robert F. Mays Trust — DTD 12/7/95 — Robert F. Mays TTEE(1)
    1,030       *  
Robert H. Meixner, Jr. — Personal Portfolio(1)
    220       *  
Robert L. Kilian — Trust U/ A DTD 9/25/97 — Robert L. Kilian TTEE(1)
    640       *  
Robert N. Sturwold — Personal Portfolio(1)
    400       *  
Robert S. Crotty Trust DTD 02/25/1996 Robert S. Crotty, TTEE(1)
    2,460       *  
Robert W. Lowry — Personal Portfolio(1)
    210       *  
Roland and Fanny Anderson — JTWROS(1)
    27,910       *  
Ronald E. & Sharon S. Yoakum — Joint Personal Portfolio(1)
    260       *  
Ronald Lee Devore MD & Duneen Lynn Devore — JTWROS(1)
    950       *  
Ruth D. Scharf Trust — DTD 12/6/1995 — Ruth D. Scharf, TTEE(1)
    270       *  
Ruth E. Kremer Revocable Living Trust — DTD 5/7/96 — David R. Kremer & Ruth E. Kremer, TTEES(1)
    3,750       *  
Samuel W. Lumby — Personal Portfolio(1)
    240       *  
Sandra E. Nischwitz — Personal Portfolio(1)
    1,220       *  
Scott M. DeMange Rev. Living Trust — U/ A DTD 12/15/2001 — M. DeMange & T. DeMange, TTEES(1)
    570       *  
Sean R. Convery — Personal Portfolio(1)
    790       *  
Stanley H. & Cynthia J. Rainey — Joint Personal Portfolio(1)
    230       *  
Stephen & Cynthia Hopf — Joint Personal Portfolio(1)
    1,270       *  
Steven & Victoria Conover — Joint Personal Portfolio(1)
    850       *  
Steven A. Miller — Revocable Living Trust U/ A June 5, 1998 — Steven A. Miller, C.E. Liesner TTEES(1)
    280       *  
Steven E. & Mary J. Ross — Joint Personal Portfolio(1)
    550       *  
Susan J. Gagnon — Revocable Living Trust UA 8/30/95 — Susan J. Gagnon TTEE(1)
    750       *  
Tanya P. Hrinyo Pavlina — Revocable Trust DTD 11/21/95 — Tanya P. Hrinyo Pavlina TTEE(1)
    260       *  
The Anderson Family — Revocable Trust, DTD 09/23/02 — J. Kendall & Tamera L. Anderson, TTEES(1)
    260       *  
The Charles T. Walsh Trust — DTD 12/6/2000 — Charles T. Walsh TTEE(1)
    380       *  
The Christine F. Lindeman-Thomas — Revocable Living Trust DTD 08/22/91 — Christine F. Lindeman-Thomas, TTEE Gregory J. Thomas, POA(1)
    430       *  
The Louis J. Thomas — Irrevocable Trust DTD 08/22/91 — Gregory J. Thomas, TTEE(1)
    750       *  
Thomas A. & Nancy A. Miller — Joint Personal Portfolio(1)
    270       *  

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    Number of   Percentage of
    Units That May   Units
Selling Unitholder   Be Sold   Outstanding
         
Thomas J. & Susan J. Maio — Joint Personal Portfolio(1)
    330       *  
Thomas L. & Mary Leslie Falvey — Joint Personal Portfolio(1)
    7,760       *  
Thomas M. DeMange Rev. Living Trust — U/ A DTD 12/30/1992 — T. DeMange & M. DeMange, TTEES(1)
    990       *  
Thomas V. & Charlotte E. Moon Family Trust — Joint Personal Trust(1)
    3,680       *  
Timothy J. Beach Trust — DTD 4/22/02 — Timothy J. Beach, TTEE(1)
    350       *  
TNM Investments LTD — Partnership(1)
    90       *  
Toby G. Weber Revocable Management Trust — DTD 6/13/2002 — Toby Guy Weber TTEE(1)
    660       *  
Tonya S. Harmon — Revocable Living Trust(1)
    470       *  
Upnorth Investments, Ltd. — Trust(1)
    440       *  
Virginia & Edward O’Neil JTWROS(1)
    990       *  
Vivian D. Bichsel Revocable Living Trust — DTD 11/18/93 — Vivian D. Bichsel, TTEE(1)
    310       *  
Wilbur L. & Evilina A. Brown — JTWROS — All Cap Value(1)
    1,030       *  
Wilbur L. & Evilina A. Brown — JTWROS — Small Cap Value(1)
    600       *  
William J. Turner Revocable Living Trust — DTD 05/20/98 Schwab Account — William J. Turner, TTEE(1)
    580       *  
William M. & Carla D. Thornton — Joint Personal Portfolio(1)
    310       *  
Yvonne A. Grieco — Revocable Living Trust DTD 7/19/01 — Yvonne A. Grieco, TTEE(1)
    360       *  
 
  *  Percentage of units beneficially owned does not exceed (1%).
(1)  Paul Crichton is the Director of Trading of EBS Asset Management, which is the Investment Advisor for this selling unitholder. By virtue of his position with EBS Asset Management, Mr. Crichton is deemed to hold investment power and voting control over the units held by this unitholder.
 
(2)  Heights Capital Management, Inc. is the authorized agent of Capital Ventures International.

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PLAN OF DISTRIBUTION
      We are registering the units covered by this prospectus to permit selling unitholders to conduct public secondary trading of these units from time to time after the date of this prospectus. Under the registration rights agreement we entered into with selling unitholders, we agreed to, among other things, bear all expenses, other than brokers’ or underwriters’ discounts and commissions, in connection with the registration and sale of the units covered by this prospectus. We will not receive any of the proceeds of the sale of the units offered by this prospectus. The aggregate proceeds to the selling unitholders from the sale of the units will be the purchase price of the units less any discounts and commissions. A selling unitholder reserves the right to accept and, together with their agents, to reject, any proposed purchases of units to be made directly or through agents.
      The units offered by this prospectus may be sold from time to time to purchasers:
  •  directly by the selling unitholders and their successors, which includes their donees, pledgees or transferees or their successors-in -interest, or
 
  •  through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, commissions or agent’s commissions from the selling unitholders or the purchasers of the units. These discounts, concessions or commissions may be in excess of those customary in the types of transactions involved.
      Upon being notified by a selling unitholder that any material arrangement has been entered into with an underwriter, broker, dealer or agent regarding the sale of the units covered by this prospectus, a revised prospectus or prospectus supplement, if required, will be distributed which will set forth the aggregate amount and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commissions and other items constituting compensation from the selling unitholders, and any discounts, commissions or concessions allowed or reallowed or paid to dealers. The prospectus supplement and, if necessary, a post-effective amendment to the registration statement of which this prospectus forms a part, will be filed with the SEC to reflect the disclosure of additional information with respect to the distribution of the units.
      The selling unitholders and any underwriters, broker-dealers or agents who participate in the sale or distribution of the units may be deemed to be “underwriters” within the meaning of the Securities Act. The selling unitholders identified as registered broker-dealers in the selling unitholders table above (under “Selling Unitholders”) are deemed to be underwriters with respect to securities sold by them pursuant to this prospectus. As a result, any profits on the sale of the units by such selling unitholders and any discounts, commissions or agent’s commissions or concessions received by any such broker-dealer or agents may be deemed to be underwriting discounts and commissions under the Securities Act. Selling unitholders who are deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to prospectus delivery requirements of the Securities Act. Underwriters are subject to certain statutory liabilities, including, but not limited to, Sections 11, 12 and 17 of the Securities Act.
      The units may be sold in one or more transactions at:
  •  fixed prices;
 
  •  prevailing market prices at the time of sale;
 
  •  prices related to such prevailing market prices;
 
  •  varying prices determined at the time of sale; or
 
  •  negotiated prices.
      These sales may be effected in one or more transactions:
  •  on any national securities exchange or quotation on which the units may be listed or quoted at the time of the sale;

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  •  in the over-the -counter market;
 
  •  in transactions other than on such exchanges or services or in the over-the -counter market;
 
  •  through the writing of options (including the issuance by the selling unitholders of derivative securities), whether the options or such other derivative securities are listed on an options exchange or otherwise;
 
  •  through the settlement of short sales; or
 
  •  through any combination of the foregoing.
      These transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as an agent on both sides of the trade.
      In connection with the sales of the units, the selling unitholders may enter into hedging transactions with broker-dealers or other financial institutions which in turn may:
  •  engage in short sales of the units in the course of hedging their positions;
 
  •  sell the units short and deliver the units to close out short positions;
 
  •  loan or pledge the units to broker-dealers or other financial institutions that in turn may sell the units;
 
  •  enter into option or other transactions with broker-dealers or other financial institutions that require the delivery to the broker-dealer or other financial institution of the units, which the broker-dealer or other financial institution may resell under the prospectus; or
 
  •  enter into transactions in which a broker-dealer makes purchases as a principal for resale for its own account or through other types of transactions.
      To our knowledge, there are currently no plans, arrangements or understandings between any selling unitholders and any underwriter, broker-dealer or agent regarding the sale of the units by the selling unitholders. The maximum amount of compensation to be received by any participating NASD member will not exceed 8% of the total proceeds of the offering.
      We can give no assurances as to the development of liquidity or any trading market for the units.
      There can be no assurance that any selling unitholder will sell any or all of the units under this prospectus. Further, we cannot assure you that any such selling unitholder will not transfer, devise or gift the units by other means not described in this prospectus. In addition, any units covered by this prospectus that qualifies for sale under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than under this prospectus. The units covered by this prospectus may also be sold to non-U.S.  persons outside the U.S. in accordance with Regulation S under the Securities Act rather than under this prospectus. The units may be sold in some states only through registered or licensed brokers or dealers. In addition, in some states the units may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification is available and complied with.
      The selling unitholders and any other person participating in the sale of the units will be subject to the Exchange Act. The Exchange Act rules include, without limitation, Regulation M, which may limit the timing of purchases and sales of any of the units by the selling unitholders and any other such person. In addition, Regulation M may restrict the ability of any person engaged in the distribution of the units to engage in market-making activities with respect to the particular units being distributed. This may affect the marketability of the units and the ability of any person or entity to engage in market-making activities with respect to the units.
      We have agreed to indemnify the selling unitholders against certain liabilities, including liabilities under the Securities Act.
      We have agreed to pay substantially all of the expenses incidental to the registration, offering and sale of the units to the public, including the payment of federal securities law and state blue sky registration fees,

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except that we will not bear any underwriting discounts or commissions or transfer taxes relating to the sale of the units.
VALIDITY OF THE UNITS
      The validity of the units will be passed upon for us by Andrews Kurth LLP, Houston, Texas.
EXPERTS
      The financial statements of Legacy Reserves LP, Legacy Reserves GP, LLC, Moriah Group, Brothers Group and PITCO Properties, included in this prospectus, have been audited by BDO Seidman, LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their reports appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting.
      The financial statements of the selected interests of Paul T. Horne and the Charities Support Foundation Inc. and Affiliates, included in this prospectus, have been audited by Johnson Miller & Co., CPA’s, an independent registered public accounting firm, to the extent and for the periods set forth in their reports appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting.
      Information included in this prospectus regarding our estimated quantities of oil and natural gas reserves was prepared by LaRoche Petroleum Consultants, Ltd., independent petroleum engineers, geologists and geophysicists, as stated in their reserve report with respect thereto. The reserve report of LaRoche Petroleum Consultants, Ltd. for our reserves as of December 31, 2005 is attached hereto as Appendix C, in reliance upon the authority of said firm as experts with respect to the matters covered by their report and the giving of their report.
WHERE YOU CAN FIND MORE INFORMATION
      We have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form  S-1 regarding the units. This prospectus does not contain all of the information found in the registration statement. For further information regarding us and the units offered by this prospectus, you may desire to review the full registration statement, including its exhibits and schedules, filed under the Securities Act. This registration statement of which this prospectus forms a part, including its exhibits and schedules, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of the material may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site on the Internet at http://www.sec.gov. Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC’s website.
      We intend to furnish our unitholders annual reports containing our audited financial statements and furnish or make available quarterly reports containing our unaudited interim financial information for the first three fiscal quarters of each of our fiscal years.

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INDEX TO FINANCIAL INFORMATION
         
  LEGACY RESERVES LP
    F-2  
    F-12  
    F-13  
    F-14  
 
  LEGACY RESERVES GP, LLC
    F-15  
    F-16  
    F-17  
 
  MORIAH GROUP
    F-18  
    F-19  
    F-20  
    F-21  
    F-22  
    F-23  
 
  BROTHERS GROUP
    F-42  
    F-43  
    F-44  
    F-45  
    F-46  
    F-47  
 
  H2K HOLDINGS LTD. (FORMERLY KNOWN AS PAUL T. HORNE)
    F-64  
    F-65  
    F-66  
    F-67  
    F-68  
    F-69  
 
  CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
    F-80  
    F-81  
    F-82  
    F-83  
    F-84  
    F-85  
 
  PITCO PROPERTIES
    F-93  
    F-94  
    F-95  

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Table of Contents

LEGACY RESERVES LP
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
      The following unaudited pro forma consolidated balance sheet as of December 31, 2005 and statement of operations for the year ended December 31, 2005 are derived from the Moriah Group historical combined financial statements, the historical combined financial statements of the Brothers Group and Selected Interests of Charities Support Foundation Inc. and Affiliates (“Foundations”), the historical financial statements of the oil and natural gas operations of Paul T. Horne (“PTH”), which have been transferred to H2K Holdings Ltd. (“H2K”) effective January 1, 2006, and the historical statement of revenues and direct operating expenses of certain oil and natural gas properties acquired by MBN Properties LP from The Prospective Investment and Trading Company, Ltd and its affiliates (collectively “PITCO”) included elsewhere in this prospectus, together with pro forma adjustments based on assumptions we have deemed appropriate. The unaudited pro forma consolidated statement of operations gives effect to the Offering, the acquisition of the oil and natural gas properties of the Brothers Group, Foundations, H2K, PITCO and the non-controlling interests in MBN Properties LP, and the distribution of certain assets to the owners of the Moriah Group and the Brothers Group as if the transactions had occurred on January 1, 2005. The acquisition from PITCO was completed as of September 14, 2005 and, accordingly, the operating results related to the acquired properties are included in the Moriah Group’s historical results from that date. The pro forma consolidated balance sheet gives effect to the private offering of 5,000,000 units at an offering price of $17.00 per unit, the concurrent redemption of an aggregate 4,400,000 units from our Founding Investors, the acquisition of the oil and natural gas properties of the Brothers Group, Foundations, H2K and the non-controlling interests in MBN Properties LP, and the distribution of certain assets to the owners of the Moriah Group and the Brothers Group as if the transactions had occurred on December 31, 2005. The transactions and the related adjustments are described in the accompanying notes. In the opinion of management, all adjustments have been made that are necessary to present in accordance with Regulation  S-X the pro forma condensed consolidated financial statements. Accordingly, management has made no provision in these pro forma condensed financial statements for additional general and administrative costs it anticipates it will incur as a result of becoming a public reporting company. These costs are anticipated to be $2.2 million annually in excess of the costs we estimate would be incurred if we were a private company and $422,000 higher than our pro forma 2005 general and administrative costs, which include approximately $1.8 million of costs associated with our private equity offering.
      The following unaudited pro forma consolidated balance sheet and statement of operations are presented for illustrative purposes only, and do not purport to be indicative of the financial position or results of operations that would actually have occurred if the transactions described had occurred as presented in such statements or that may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statements due to factors described in “Risk Factors” included elsewhere in this prospectus. The following unaudited pro forma combined balance sheet and statement of operations should be read in conjunction with the historical financial statements referred to above and the notes thereto included elsewhere in this prospectus.

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LEGACY RESERVES LP
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
                                                       
    Moriah   Brothers           Pro Forma    
    Group   Group   Foundations   H2K   Adjustments   Pro Forma
                         
ASSETS
                                               
Current assets:
                                               
 
Cash and cash equivalents
  $ 1,954,923     $ 4,294,126     $ —     $ —     $ 9,537,000 (d)   $ 464,355  
                                      67,800,000 (e)        
                                      (20,723,000 )(f)        
                                      (7,682,854 )(g)        
                                      (4,294,126 )(g)        
                                      (31,750,000 )(h)        
                                      (14,716,791 )(h)        
                                      (1,954,923 )(i)        
                                      (2,000,000 )(j)        
 
Accounts receivable, net:
                                               
   
Oil and natural gas
    6,051,802       1,481,111       790,186       49,742       (2,321,039 )(g)     —  
                                      (6,051,802 )(i)        
   
Joint interest owners
    113,837       1,128,956       —       —       (1,128,956 )(g)     —  
                                      (113,837 )(i)        
   
Other
    103,850       —       —       —       (103,850 )(i)     —  
 
Fair value of oil and natural gas swaps
    46,675       —       —       —       —       46,675  
 
Prepaid expenses and other current assets
    —       106,282       —       —       (106,282 )(g)     —  
                                     
     
Total current assets
    8,271,087       7,010,475       790,186       49,742       (15,610,460 )     511,030  
                                     
Property, plant and equipment, at cost:
                                               
 
Oil and natural gas properties, using the successful efforts method of accounting:
    85,366,410       20,001,062       4,774,454       243,841       92,276,158 (g)     233,891,189  
                                      30,396,464 (h)        
                                      832,800 (j)        
 
Accumulated depletion, depreciation and amortization
    (8,194,385 )     (7,583,307 )     (632,670 )     (68,353 )     8,284,330 (g)     (8,194,385 )
                                     
      77,172,025       12,417,755       4,141,784       175,488       131,789,752       225,696,804  
                                     
Other property and equipment, net
    4,198       111,745       —       —       —       115,943  
Subordinated notes receivable
    304,312       13,708,920       —       —       (13,708,920 )(g)     —  
                                      (304,312 )(j)        
Other assets, net
    1,190,569       208,197       —       —       (280,450 )(d)     630,649  
                                      (208,197 )(g)        
                                      (279,470 )(h)        
                                     
    $ 86,942,191     $ 33,457,092     $ 4,931,970     $ 225,230     $ 101,397,943     $ 226,954,426  
                                     
 
LIABILITIES AND OWNERS’ EQUITY
                                               
Current liabilities:
                                               
 
Accounts payable
  $ 451,652     $ 1,099,918     $ —     $ —     $ 700,000 (d)   $ 700,000  
                                      (1,099,918 )(g)        
                                      (451,652 )(i)        
 
Accrued oil and natural gas liabilities
    3,174,752       2,718,745       283,966       33,485       (3,036,196 )(g)     —  
                                      (3,174,752 )(i)        
 
Due to affiliates
    194,907       —       —       —       (194,907 )(i)     —  
 
Fair value of oil and natural gas swaps
    199,624       149,956       —       1,823       —       351,403  
 
Asset retirement obligation
    175,944       126,528       18,449       1,849       —       322,770  
 
Other
    365,326       172,188       —       —       (172,188 )(g)     —  
                                      (365,326 )(i)        
                                     
     
Total current liabilities
    4,562,205       4,267,335       302,415       37,157       (7,794,939 )     1,374,173  
                                     
Long-term debt
    52,473,000       15,402,000       —       —       67,800,000 (e)     67,800,000  
                                      (20,723,000 )(f)        
                                      (15,402,000 )(g)        
                                      (31,750,000 )(h)        
Fair value of oil and natural gas swaps
    3,155,054       1,231,201       —       15,574       —       4,401,829  
Asset retirement obligation
    2,126,203       1,352,841       185,375       17,744       (202,486 )(g)     3,479,677  
Subordinated notes payable — partners
    14,716,791       —       —       —       (14,716,791 )(h)     —  
Owners’ equity
    9,908,938       11,203,715       4,444,180       154,755       8,556,550 (d)     149,898,747  
                                      91,022,902 (g)        
                                      30,116,994 (h)        
                                      (4,037,775 )(i)        
                                      (1,471,512 )(j)        
                                     
    $ 86,942,191     $ 33,457,092     $ 4,931,970     $ 225,230     $ 101,397,943     $ 226,954,426  
                                     
See accompanying notes to unaudited pro forma consolidated financial statements.

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LEGACY RESERVES LP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2005
                                                                               
    Moriah       Acquirer       Brothers                
    Group   PITCO   Pro Forma   Pro Forma   Group   Foundations   H2K   Pro Forma    
    Historical   Historical   Adjustments   Acquirer   Historical   Historical   Historical   Adjustments   Pro Forma
                                     
Revenues:
                                                                       
 
Oil sales
  $ 18,225,457     $ 6,433,423     $ —     $ 24,658,880     $ 12,124,874     $ 1,251,599     $ 142,993     $ —     $ 38,178,346  
 
Natural gas sales
    7,317,744       3,681,679       —       10,999,423       3,783,771       595,302       49,231       —       15,427,727  
 
Realized and unrealized loss on oil and natural gas swaps
    (6,158,865 )     —       —       (6,158,865 )     (4,855,124 )     —       (34,009 )     —       (11,047,998 )
                                                       
     
Total revenues
    19,384,336       10,115,102       —       29,499,438       11,053,521       1,846,901       158,215       —       42,558,075  
                                                       
Expenses:
                                                                       
 
Oil and natural gas production
    6,375,613       1,942,876       —       8,318,489       3,142,361       528,430       49,264       —       12,038,544  
 
Production and other taxes
    1,635,530       724,905       —       2,360,435       965,078       118,651       13,055               3,457,219  
 
General and administrative
    1,354,213       —               1,354,213       1,187,145       43,001       —       495,295 (o)     3,878,150  
                                                              553,496 (o)        
                                                              245,000 (p)        
 
Dry hole costs
    —       —       —       —       204,968       —       890               205,858  
 
Depletion, depreciation, amortization and accretion
    2,291,013       —       3,165,349 (a)     5,456,362       826,800       286,913       14,536       8,508,022 (l)     15,092,633  
Impairment of long- lived assets
    —       —       —       —       —       5,530       —       —       5,530  
 
(Gain) loss on sale of assets
    20,523       —       —       20,523       10,723       —       (330,740 )     —       (299,494 )
                                                       
     
Total expenses
    11,676,892       2,667,781       3,165,349       17,510,022       6,337,075       982,525       (252,995 )     9,801,813       34,378,440  
                                                       
   
Operating income (loss)
    7,707,444       7,447,321       (3,165,349 )     11,989,416       4,716,446       864,376       411,210       (9,801,813 )     8,179,635  
                                                       
Other income (expense):
                                                                       
 
Interest income
    185,308       —       —       185,308       844,603       —       —       (390,938 )(n)     638,973  
 
Interest expense
    (1,584,408 )     —       (2,937,781 )(b)     (4,522,189 )     (396,676 )     —       —       (239,865 )(k)     (5,158,730 )
 
Equity in loss of partnerships
    (495,295 )     —       —       (495,295 )     (1,232,713 )     —       —       495,295 (o)     —  
                                                                679,217 (o)        
                                                                553,496 (o)        
 
Other
    45,321       —       —       45,321       95,601       —       —       —       140,922  
                                                       
 
Income before non- controlling interest
    5,858,370       7,447,321       (6,103,130 )     7,202,561       4,027,261       864,376       411,210       (8,704,608 )     3,800,800  
Non-controlling interest
    538       —       (722,906 )(c)     (722,368 )     —       —       —       722,368 (m)     —  
                                                       
     
Net income (loss)
  $ 5,858,908     $ 7,447,321     $ (6,826,036 )   $ 6,480,193     $ 4,027,261     $ 864,376     $ 411,210     $ (7,982,240 )   $ 3,800,800  
                                                       
Net income per share:
                                                                       
 
Basic and diluted
  $ 0.61                     $ 0.68                                     $ 0.21  
                                                       
Shares used in computing net income per share:
                                                                       
 
Basic and diluted
    9,584,623                       9,584,623                               8,655,444 (q)     18,240,067  
                                                       
See accompanying notes to unaudited pro forma consolidated financial statements.

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LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Pro Forma Adjustments
      The unaudited pro forma consolidated financial statements reflect the following adjustments:
Completed Transactions
a. In July 2005 Moriah Group became the primary beneficiary of MBN Properties LP. MBN Properties LP is a variable interest entity as defined by FIN 46R and is consolidated in the historical combined financials of the Moriah Group from the date of acquisition. MBN Properties LP acquired certain oil and gas assets from PITCO on September 14, 2005.
 
The purchase price allocation of the oil and gas properties acquired by MBN Properties LP on September 14, 2005 was as follows:
           
Purchase Price Consideration
       
 
Cash
  $ 66,151,723  
 
Acquisition Costs
    496,473  
 
Purchase price adjustment
    (2,774,088 )
       
Total purchase consideration
  $ 63,874,108  
       
Purchase Price Allocation
       
 
Oil and Gas Properties
  $ 64,319,277  
 
Asset retirement obligation
    (445,169 )
       
    $ 63,874,108  
       
As a result of the purchase above, record incremental depreciation, depletion, amortization and accretion, using the units of production method, resulting from the acquisition of oil and natural gas properties acquired by MBN Properties on September 14, 2005 from PITCO.
 
b. To record interest expense associated with debt of approximately $67.5 million incurred to fund the acquisition of oil and gas properties by MBN Properties LP on September 14, 2005 using the weighted average interest rate of MBN Properties LP of 6.02%.
 
c. To record the non-controlling interest share of the MBN Properties LP income (loss) related to the PITCO properties.
Formation and Offering Transactions
d. To record the equity of $8,556,550 relating to the offering proceeds less offering costs comprised of (1) the proceeds from the primary offering of 5,000,000 units at $17.00 per unit, net of the initial purchaser’s discount, the placement agent’s fees and a financial advisory fee of 6.5%, for net proceeds of $79,475,000, (2) redeem an aggregate of 4,400,000 units from our Founding Investors at a price per unit equal to the proceeds per unit before expenses but after the initial purchaser’s discounts and the placement agent’s fees ($15.895 per unit or 93.5% of $17.00 per unit) for a net redemption amount of $69,938,000, and (3) offering costs of $980,450, $700,000 of which was incurred after December 31, 2005 and is shown as accrued at December 31, 2005.
 
e. To record debt proceeds to be drawn at the closing of the Offering from the proposed new revolving credit facility of $67,800,000.
 
f. To record the repayment of the Moriah Group’s outstanding balance under its existing credit facility of $20,723,000.
 
g. To reflect the acquisition of oil and gas properties from Brothers Group, Foundations and PTH and the allocation of the purchase price on the basis of the fair values of the assets acquired and liabilities

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LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assumed. The components of the purchase price and its allocation to the assets and liabilities of the Brothers Group, Foundations and PTH are as follows:
           
Components of the purchase price:
       
Cash from borrowings under new credit facility to be paid to the Foundation for oil and gas properties
  $ 7,682,854  
Units Issued at $17.00 per unit to:
       
 
Brothers Group — 6,200,357 units
    105,406,069  
 
PTH — 83,499 units
    1,419,483  
       
Total purchase price Owners’ equity of the entities acquired:
  $ 114,508,406
 
 
Brothers Group
  $ 11,203,715  
 
Foundations
    4,444,180  
 
PTH
    154,755  
       
Total owners’ equity
    15,802,650  
Less assets not acquired:
       
Cash Accounts receivable:
    (4,294,126 )
 
Oil and natural gas
    (2,321,039 )
 
Joint interest owners
    (1,128,956 )
Prepaid expenses and other current assets
    (106,282 )
Subordinated notes receivable
    (13,708,920 )
Other assets
    (208,197 )
Plus liabilities not assumed:
       
Accounts payable
    1,099,918  
Accrued oil and gas liabilities
    3,036,196  
Other
    172,188  
Long term debt
    15,402,000  
       
Adjusted owners’ equity
    13,745,432  
       
Purchase price in excess of owners’ equity
  $ 100,762,974  
       
Purchase price allocation
       
Oil and gas properties
  $ 100,560,468  
 
Asset retirement obligation (reduction)
    (202,486 )
       
    $ 100,762,974  
       
h.  To record the acquisition of oil and gas properties from MBN Properties LP and deemed distribution of the Moriah Group’s equity interest in MBN Properties LP to the Moriah Group’s owners. (The Moriah

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LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Group already owns a 46.22% equity interest in MBN Properties LP and consolidates MBN Properties LP, because MBN Properties LP is a variable interest entity and the Moriah Group is the primary beneficiary.)
           
Cash paid and used by MBN Properties LP to repay —
       
 
The outstanding balance under its credit facility
  $ 31,750,000  
 
The outstanding balance of subordinated notes payable to partners other than the Moriah Group
    14,716,791  
 
The outstanding balance of subordinated notes payable to the Moriah Group (an intercompany transaction with no effect on the consolidated financial statements)
    20,120,281  
       
    $ 66,587,072  
       
Units issued at $17.00 per unit (3,162,438 units):
       
 
Issued (through MBN Properties LP) to the owners of the Moriah Group (1,390,850 units) (accounted for as a dividend with no effect on the consolidated financial statements)
       
 
Issued (through MBN Properties LP) to the other owners of MBN Properties LP (1,771,588 units)
  $ 30,116,994  
Carrying amount of non-controlling interest
    —  
       
Purchase price in excess of non-controlling interest
  $ 30,116,994  
       
Purchase price allocation:
       
 
Oil and gas properties
  $ 30,396,464  
 
Deferred financing costs
    (279,470 )
       
    $ 30,116,994  
       
i.  Upon the closing of the Offering certain assets and liabilities of the Moriah Group were distributed as a $4,037,775 deemed dividend to the owners. The effect on the balance sheet at December 31, 2005 is as follows:
           
Cash
  $ 1,954,923  
Accounts receivable:
       
 
Oil and natural gas
    6,051,802  
 
Joint interest owners
    113,837  
 
Other
    103,850  
Accounts payable
    (451,652 )
Accrued oil and gas liabilities
    (3,174,752 )
Due to affiliates
    (194,907 )
Other
    (365,326 )
       
 
Total
  $ 4,037,775  
       
j. To reflect Legacy Reserves LP reimbursement of costs and expenses incurred by MBN Management LLC and collection of the subordinated notes receivable from MBN Management LLC.
 
k. To record incremental interest expense associated with refinancing of $67.8 million incurred to fund the acquisition of oil and gas properties of Brothers, Foundations and H2K, using an interest rate of 6.5% to reflect the interest rate structure of the new credit facility to be executed at the time this offering closes.
l. To record incremental depreciation, depletion, amortization and accretion, using the units of production method, resulting from the difference between the historical depreciation, depletion, amortization and

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Table of Contents

LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accretion and the pro forma depreciation, depletion, amortization and accretion on acquisition of oil and natural gas properties acquired from Brothers Group, Foundations, H2K Holdings and MBN Properties LP.
 
m. To eliminate the non-controlling interest share of the MBN Properties LP income (loss) related to the PITCO properties.
 
n. To eliminate interest income on notes receivable not acquired.
 
o. The Moriah Group and the Brothers Group also own an interest in MBN Management LLC, whose purpose is to manage the oil and gas properties of MBN Properties LP and fund certain expenses and they account for their interests under the equity method of accounting. These interests were not acquired. The effect on the unaudited pro forma consolidated statements of operations is to reclassify the equity in loss of MBN Management LLC to general and administrative expense. In addition, the Brothers Group accounts for its investment in MBN Properties LP under the equity method, and an adjustment has been made to eliminate the equity method loss since the operations of MBN Properties LP will be wholly-owned. The adjustments are as follows:
             
    Year Ended
    December 31, 2005
     
Moriah Group — MBN Management LLC
  $ 495,295  
       
Brothers Group:
       
 
MBN Properties LP
  $ 679,217  
 
MBN Management LLC
    553,496  
       
   
Total Brothers Group
  $ 1,232,713  
       
p. Record additional compensation expense resulting from Employment Agreements executed at the closing of the private equity offering.
 
q. Reflect the issuance of units in exchange for oil and natural gas properties as follows:
         
Brothers Group
    6,200,357  
MBN Properties LP
    1,771,588  
Paul T. Horne
    83,499  
Additionally, reflect the issuance and sale of 600,000 units to outside investors.

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Table of Contents

LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Oil and Natural Gas Reserve Disclosures
      The following table sets forth certain unaudited pro forma information concerning our proved oil and natural gas reserves for the year ended December 31, 2005, giving effect to the acquisition of oil and natural gas properties from the Brothers Group, Foundations, H2K and PITCO as if the transactions had occurred on January 1, 2005. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represent estimates only and should not be construed as being exact:
                                                             
    Oil (MBbls)
     
        Pro Forma    
    Moriah       Sub-Total   Brothers       Pro Forma
    Group   PITCO   Acquirer(a)   Group   Foundations   H2K   Total
                             
Total Proved Reserves:
                                                       
 
Balance, December 31, 2004
    4,109       2,558       6,667       3,239       372       40       10,318  
   
Purchases of minerals-in-place
    29       —       29       6       —       —       35  
   
Extensions and discoveries
    794       785       1,579       512       87       9       2,187  
   
Revisions of previous estimates
    237       86       323       165       25       3       516  
   
Production
    (293 )     (187 )     (480 )     (237 )     (27 )     (3 )     (747 )
                                           
 
Balance, December 31, 2005
    4,876       3,242       8,118       3,685       457       49       12,309  
                                           
Proved Developed Reserves:
                                                       
 
December 31, 2004
    4,109       2,256       6,365       3,239       372       40       10,016  
 
December 31, 2005
    4,143       2,237       6,380       3,213       377       41       10,011  
 
(a) Consolidates the PITCO Acquisition at 100% without recognizing the effect of the minority interest.
                                                             
    Natural Gas (MMcf)
     
        Pro Forma    
    Moriah       Sub-Total   Brothers       Pro Forma
    Group   PITCO   Acquirer(a)   Group   Foundations   H2K   Total
                             
Total Proved Reserves:
                                                       
 
Balance, December 31, 2004
    10,470       8,810       19,280       7,372       1,066       112       27,830  
   
Purchases of minerals-in-place
    28       —       28       35       —       —       63  
   
Extensions and discoveries
    1,258       3,406       4,664       853       115       14       5,646  
   
Revisions of previous estimates
    490       1,633       2,123       311       82       6       2,522  
   
Production
    (766 )     (872 )     (1,638 )     (558 )     (78 )     (8 )     (2,282 )
                                           
 
Balance, December 31, 2005
    11,480       12,977       24,457       8,013       1,185       124       33,779  
                                           
Proved Developed Reserves:
                                                       
 
December 31, 2004
    10,470       8,810       19,280       7,372       1,066       112       27,830  
 
December 31, 2005
    10,498       10,120       20,618       7,346       1,076       113       29,153  

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Table of Contents

LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Summarized in the following tables is information for our standardized measure of discounted cash flows relating to proved reserves as of December 31, 2005, giving effect to the acquisition of oil and natural gas properties from the Brothers Group, Foundations H2K, and PITCO as if the transactions had occurred on January 1, 2005. Future cash flows are computed by applying year-end pricing relating to our proved reserves to the year-end quantities of those reserves. Future production, development, site restoration and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. The information should be viewed only as a form of standardized disclosure concerning possible future cash flows that would result under the assumptions used, but should not be viewed as indicative of fair market value. Reference is made to the Founders Group historical financial statements for the fiscal year ended December 31, 2005, and the Statements of Revenues and Direct Operating Expenses of certain oil and natural gas properties acquired from PITCO included herein, for a discussion of the assumptions used in preparing the information presented.
                                                           
    December 31, 2005
     
        Pro Forma    
    Moriah       Sub-Total   Brothers       Pro Forma
    Group   PITCO   Acquirer   Group   Foundations   H2K   Total
                             
    (Thousands)
Future cash flows
  $ 376,697     $ 307,324     $ 684,021     $ 279,102     $ 36,354     $ 3,886     $ 1,003,363  
Future costs:
                                                       
 
Production
    (145,486 )     (97,310 )     (242,796 )     (109,461 )     (14,182 )     (1,505 )     (367,944 )
 
Development
    (13,127 )     (14,482 )     (27,609 )     (8,606 )     (1,442 )     (145 )     (37,802 )
                                           
Future net cash flows before income taxes
    218,084       195,532       413,616       161,035       20,730       2,236       597,617  
10% annual discount for estimated timing of cash flows
    (119,157 )     (102,462 )     (221,619 )     (86,188 )     (11,392 )     (1,230 )     (320,429 )
                                           
Standardized measure of discounted net cash flows
  $ 98,927     $ 93,070     $ 191,997     $ 74,847     $ 9,338     $ 1,006     $ 277,188  
                                           

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Table of Contents

LEGACY RESERVES LP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table sets forth unaudited pro forma information for the principal sources of changes in discounted future net cash flows from our proved oil and natural gas for the year ended December 31, 2005, and giving effect to the acquisition of oil and natural gas properties from the Brothers Group, Foundations H2K and PITCO as if the transactions had occurred on January 1, 2005.
      The following table sets forth the principal sources of change in discounted future net cash flows (dollars in thousands):
                                                             
    Year Ended December 31, 2005
     
        Pro Forma    
    Moriah       Sub-Total   Brothers       Pro Forma
    Group   PITCO   Acquirer   Group   Foundations   H2K   Total
                             
    (Thousands)
Increase (decrease):
                                                       
Sales, net of production costs
  $ (13,606 )   $ (11,373 )   $ (24,979 )   $ (11,801 )   $ (1,200 )   $ (130 )   $ (38,110 )
 
Net change in sales prices, net of production costs
    31,307       27,338       58,645       23,631       2,435       325       85,036  
 
Changes in estimated future development costs
    (10,175 )     (13,080 )     (23,255 )     (6,434 )     (1,117 )     (109 )     (30,915 )
 
Extensions and discoveries, net of future production and development costs
    18,877       29,074       47,951       12,630       2,057       207       62,845  
 
Previously estimated development costs incurred
    (178 )     —       (178 )     (120 )     (20 )     (2 )     (320 )
 
Revisions of quantity estimates
    4,929       6,719       11,648       3,409       595       106       15,758  
 
Purchase of minerals-in-place
    477       —       477       231       —       —       708  
 
Sales of minerals-in-place
    —       (325 )     (325 )     —       —       —       (325 )
 
Other
    1,984       4,737       6,721       2,303       577       (41 )     9,560  
 
Accretion of discount
    4,955       3,749       8,704       3,874       457       50       13,085  
                                           
 
Net increase
    38,570       46,839       85,409       27,723       3,784       406       117,322  
 
Standardized measure of discounted net cash flows:
                                                       
   
Beginning of year
    60,357       46,231       106,588       47,124       5,554       600       159,866  
                                           
   
End of year
  $ 98,927     $ 93,070     $ 191,997     $ 74,847     $ 9,338     $ 1,006     $ 277,188  
                                           

F-11

Table of Contents

Report of Independent Registered Public Accounting Firm
To the Partners of
Legacy Reserves LP
      We have audited the accompanying balance sheet of Legacy Reserves LP as of December 31, 2005. This financial statement is the responsibility of the Partnership’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.
      In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Legacy Reserves LP as of December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
  /s/ BDO Seidman, LLP
Houston, Texas
May 5, 2006

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Table of Contents

LEGACY RESERVES LP
BALANCE SHEET
AS OF DECEMBER 31, 2005
         
Assets
       
Total assets
  $ —  
       
 
Partners’ equity
       
General Partner’s equity
  $ 1  
       
Limited Partner’s equity
    999  
       
Receivable from partners
    (1,000 )
       
Total equity
  $ —  
       
See accompanying notes to balance sheet.

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Table of Contents

LEGACY RESERVES LP
NOTES TO BALANCE SHEET
AS OF DECEMBER 31, 2005
(1)  Organization
      Legacy Reserves LP (the “Partnership”), a Delaware limited partnership, was formed by Legacy Reserves GP, LLC (the “General Partner”) on October 26, 2005 to own and operate oil and natural gas properties. The General Partner will invest $1 in the Partnership and owns a 0.1% general partner interest in the Partnership. Moriah Properties, Ltd., as the organizational limited partner, invested $999 in the Partnership and owns a 99.9% limited partner interest in the Partnership.
      Significant information regarding rights of the limited partners includes the following:
  •  Right to receive distributions of available cash within 45 days after the end of each quarter.
 
  •  No limited partner shall have any management power over our business and affairs; the general partner shall conduct, direct and manage our activities.
 
  •  The general partner may be removed if such removal is approved by the unitholders holding at least 66 2 / 3  percent of the outstanding units, including units held by our general partner and its affiliates.
 
  •  Right to receive information reasonably required for tax reporting purposes within 90 days after the close of the calendar year.
      In the event of a liquidation, all property and cash in excess of that required to discharge all liabilities will be distributed to the unitholders and our general partner, in proportion to their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
(2) Subsequent Events
      On March 15, 2006, the Partnership, as the successor entity to the Moriah Group, completed a private equity offering (“Legacy Formation”) in which it issued 5,000,000 limited partnership units at a gross price of $17.00 per unit, netting $79.7 million after underwriter’s discount and expenses. Simultaneous with the completion of this offering, the Partnership purchased the oil and natural gas properties of Moriah Group, the Brothers Group, H2K Holdings Ltd. and the charitable foundations. The Partnership also purchased the oil and natural gas properties owned by MBN Properties, LP. In the case of the Brothers Group and H2K Holdings Ltd. those entities exchanged their oil and natural gas properties for limited partnership units. The purchase of the oil and natural gas properties owned by the charitable foundations was solely for cash of $7.7 million. The owners of the Moriah Group, the Brothers Group and H2K Holdings Ltd. exchanged 4.4 million of their units for $69.9 million in cash. The Moriah Group has been treated as the acquiring entity in the formation transaction of the Partnership.
      As an integral part of the Legacy Formation, the Partnership entered into a new credit agreement with a new senior credit facility (the “Legacy Facility”) with the same lending group that participated in the New Facility of the Moriah Group. The terms of the Legacy Facility permits borrowings in the lesser amount of (i) the borrowing base, or (ii) $300 million. The borrowing base under the Legacy Facility, initially set at $130 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the Partnership’s oil and gas assets. Interest on the Legacy Facility is payable monthly and is charged in accordance with the Partnership’s selection of a LIBOR rate plus 1.25% to 1.875%, or prime rate up to prime rate plus 0.375%, dependent on the percentage of the borrowing base which is drawn. On March 15, 2006, the Partnership borrowed $65.8 million from the new lending group as part of the Legacy Formation.

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Table of Contents

Report of Independent Registered Public Accounting Firm
To the Members of
Legacy Reserves GP, LLC
      We have audited the accompanying balance sheet of Legacy Reserves GP, LLC as of December 31, 2005. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for your opinion.
      In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Legacy Reserves GP, LLC as of December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
  /s/ BDO Seidman, LLP
Houston, Texas
May 5, 2006

F-15

Table of Contents

LEGACY RESERVES GP, LLC
BALANCE SHEET
AS OF DECEMBER 31, 2005
         
Assets
       
Total assets
  $ —  
       
 
Member’s equity
       
Member’s equity
  $ 1,000  
       
Receivable from member
    (1,000 )
       
Total equity
  $ —  
       
See accompanying note to balance sheet.

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Table of Contents

LEGACY RESERVES GP, LLC
NOTE TO BALANCE SHEET
AS OF DECEMBER 31, 2005
      Legacy Reserves GP, LLC, a Delaware limited liability company (the “General Partner”) was formed on October 26, 2005 to become the general partner of Legacy Reserves LP (the “Partnership”), a Delaware limited partnership. MBN Properties LP will invest $1,000 and owns 100% of the membership interest in the General Partner. The General Partner will invest $1 in the Partnership and owns a 0.1% general partner interest in the Partnership.

F-17

Table of Contents

Report of Independent Registered Public Accounting Firm
Moriah Group
Midland, Texas
      We have audited the accompanying combined balance sheets of the Moriah Group, as defined in Note 1 (a), as of December 31, 2004 and 2005 and the related combined statements of operations, owners’ equity, and cash flows for each of the years in the three year period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 combined financial statements referred to above present fairly, in all material respects, the financial position of the Moriah Group at December 31, 2004 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005 , in conformity with accounting principles generally accepted in the United States of America.
      As discussed in Note 13 to the combined financial statements, effective January 1, 2003, the Company changed its method of accounting for asset retirement obligations.
  /s/ BDO SEIDMAN, LLP
Houston, Texas
May 5, 2006

F-18

Table of Contents

MORIAH GROUP
COMBINED BALANCE SHEETS
                             
    December 31,   Pro Forma
        December 31,
    2004   2005   2005
             
            (Note 19)
            (unaudited)
ASSETS
                       
Current assets:
                       
 
Cash and cash equivalents
  $ 768,763     $ 1,954,923     $ —  
 
Accounts receivable, net:
                       
   
Oil and natural gas
    2,639,640       6,051,802       —  
   
Joint interest owners
    718,909       113,837       —  
   
Other (Note 5)
    12,521       103,850       —  
 
Notes receivable — affiliated entities (Note 3)
    2,380,000       —       —  
 
Fair value of oil and natural gas swaps (Note 10)
    —       46,675       46,675  
 
Prepaid expenses and other current assets
    48,250       —       —  
                   
   
Total current assets
    6,568,083       8,271,087       46,675  
                   
Property, plant and equipment, at cost:
                       
Proved oil and natural gas properties, at cost, using the successful efforts method of accounting: (Note 15)
    18,270,228       85,363,482       85,363,482  
Unproved properties
    —       2,928       2,928  
Accumulated depletion, depreciation and amortization
    (6,046,262 )     (8,194,385 )     (8,194,385 )
                   
      12,223,966       77,172,025       77,172,025  
                   
Other property and equipment, net
    —       4,198       4,198  
Subordinated notes receivable (Note 6)
    —       304,312       —  
Other assets, net
    —       1,190,569       1,190,569  
                   
    $ 18,792,049     $ 86,942,191     $ 78,413,467  
                   
 
LIABILITIES AND OWNERS’ EQUITY
                       
Current liabilities:
                       
 
Current portion of notes payable (Note 4)
  $ 2,000,000     $ —     $ —  
 
Accounts payable
    56,224       451,652       —  
 
Accrued oil and natural gas liabilities
    2,067,731       3,174,752       —  
 
Due to affiliates (Note 6)
    —       194,907       —  
 
Fair value of oil and natural gas swaps (Note 10)
    679,789       199,624       199,624  
 
Asset retirement obligation (Note 13)
    80,482       175,944       175,944  
 
Other
    13,200       365,326       —  
                   
   
Total current liabilities
    4,897,426       4,562,205       375,568  
Long-term debt (Note 4)
    —       52,473,000       52,473,000  
Fair value of oil and natural gas swaps (Note 10)
    —       3,155,054       3,155,054  
Asset retirement obligation (Note 13)
    1,872,384       2,126,203       2,126,203  
Subordinated notes payable — partners (Note 6)
    —       14,716,791       14,716,791  
                   
Total liabilities
    6,769,810       77,033,253       72,846,616  
                   
Commitments and contingencies (Note 8)
                       
Owner’s equity
    12,022,239       9,908,938       5,566,851  
                   
    $ 18,792,049     $ 86,942,191     $ 78,413,467  
                   
See accompanying notes to combined financial statements.

F-19

Table of Contents

MORIAH GROUP
COMBINED STATEMENTS OF OPERATIONS
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Revenues:
                       
 
Oil sales
  $ 7,918,802     $ 10,997,515     $ 18,225,457  
 
Natural gas sales
    3,696,957       3,945,400       7,317,744  
 
Realized and unrealized gain (loss) on oil and natural gas swaps (Note 10)
    (282,872 )     (632,783 )     (6,158,865 )
                   
   
Total revenues
    11,332,887       14,310,132       19,384,336  
                   
Expenses:
                       
 
Oil and natural gas production
    3,495,573       4,345,249       6,375,613  
 
Production and other taxes
    661,563       927,657       1,635,530  
 
General and administrative
    543,221       731,200       1,354,213  
 
Dry hole costs
    1,464,607       822       —  
 
Depletion, depreciation, amortization and accretion
    765,620       883,457       2,291,013  
 
Impairment of long-lived assets
    471,394       —       —  
 
Loss on sale of assets
    —       —       20,523  
                   
   
Total expenses
    7,401,978       6,888,385       11,676,892  
                   
   
Operating income
    3,930,909       7,421,747       7,707,444  
Other income (expense):
                       
 
Interest income
    56,390       419,257       185,308  
 
Interest expense (Note 4)
    (94,284 )     (213,711 )     (1,584,408 )
 
Gain on sale of partnership investment
    —       1,292,169       —  
 
Equity in income (loss) of partnerships (Note 6)
    311,367       183,474       (495,295 )
 
Other
    2,554       91,483       45,321  
                   
 
Income before non-controlling interest
    4,206,936       9,194,419       5,858,370  
 
Non-controlling interest
    —       —       538  
                   
   
Income from continuing operations
    4,206,936       9,194,419       5,858,908  
 
Discontinued operations (Note 11)
                       
   
Income (loss) from operations
    10,234       14,981       —  
   
Gain on disposal
    233,073       7,165       —  
                   
   
Income from discontinued operations
    243,307       22,146       —  
 
Cumulative effect of accounting change
    (223,377 )     —       —  
                   
   
Net income
  $ 4,226,866     $ 9,216,565     $ 5,858,908  
                   
Earnings per unit — Basic and diluted:
                       
 
Income from continuing operations
  $ 0.44     $ 0.96     $ 0.61  
                   
 
Income from discontinued operations
  $ 0.03     $ —     $ —  
                   
 
Cumulative effect of accounting change
  $ (0.03 )     —       —  
                   
 
Net Income
  $ 0.44     $ 0.96     $ 0.61  
                   
Shares used in computing earnings per unit:
                       
 
Basic and diluted
    9,584,623       9,584,623       9,584,623  
                   
See accompanying notes to combined financial statements.

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MORIAH GROUP
COMBINED STATEMENTS OF OWNERS’ EQUITY
                                                 
    Common   Retained   Stockholders’   Partners’   Owners’   Total Owners’
    Stock   Earnings   Equity   Capital   Equity   Equity
                         
Balance, January 1, 2003
  $ 667     $ (10,203 )   $ (9,536 )   $ 6,333,759     $ 524,557     $ 6,848,780  
Capital contributions
    —       —       —       275,000       49,691       324,691  
Distributions to owners
    —       —       —       (2,400,241 )     (902,281 )     (3,302,522 )
Distributions of oil and natural gas properties to owners
    —       —       —       (819,471 )     —       (819,471 )
Net income (loss)
    —       (124,643 )     (124,643 )     3,564,907       786,602       4,226,866  
                                     
Balance, December 31, 2003
    667       (134,846 )     (134,179 )     6,953,954       458,569       7,278,344  
Capital contributions
    —       —       —       —       59,527       59,527  
Distributions to owners
    —       —       —       (3,331,967 )     (1,200,230 )     (4,532,197 )
Net income
    —       101,196       101,196       7,944,545       1,170,824       9,216,565  
                                     
Balance, December 31, 2004
    667       (33,650 )     (32,983 )     11,566,532       488,690       12,022,239  
Capital contributions
    —       —       —       1,000       142,690       143,690  
Deemed capital contribution
    —       —       —       155,149       —       155,149  
Distributions to owners
    —       (1,678,326 )     (1,678,326 )     (5,246,600 )     (1,346,122 )     (8,271,048 )
Net income
    —       44,693       44,693       4,850,124       964,091       5,858,908  
                                     
Balance, December 31, 2005
  $ 667     $ (1,667,283 )   $ (1,666,616 )   $ 11,326,205     $ 249,349     $ 9,908,938  
                                     
See accompanying notes to combined financial statements.

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MORIAH GROUP
COMBINED STATEMENTS OF CASH FLOWS
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Cash flows from operating activities:
                       
 
Net income
  $ 4,226,866     $ 9,216,565     $ 5,858,908  
 
Adjustment to reconcile net income to net cash provided by operating activities:
                       
 
Dry hole costs
    1,464,607       822       —  
 
Depletion, depreciation, amortization and accretion
    768,591       883,457       2,291,013  
 
Impairment of long-lived assets
    471,394       —       —  
 
Amortization of financing costs
    —       —       93,776  
 
(Gain) loss on oil and natural gas swaps
    (340,179 )     558,953       6,158,865  
 
(Gain) loss on sale of assets
    (233,073 )     (1,299,334 )     20,523  
 
Equity in (income) loss of partnerships
    (311,367 )     (183,474 )     495,295  
 
Accrued interest on subordinated notes payable — partners
    —       —       817,757  
 
Accrued interest on subordinated notes receivable — partners
    (48,624 )     —       (24,797 )
 
Distributions from oil and gas partnership
    138,600       103,950       —  
 
Non-controlling interest
    —       —       (538 )
 
Non-cash effect of accounting change
    223,377       —       —  
 
Changes in assets and liabilities:
                       
   
Increase in accounts receivable, oil and natural gas
    (228,692 )     (762,905 )     (3,412,162 )
   
(Increase) decrease in accounts receivable, joint interest owners
    (223,176 )     505,826       605,072  
   
Increase in accounts receivable, other
    —       (30,270 )     (91,329 )
   
(Increase) decrease in other assets
    19,792       7,636       (87,887 )
   
Increase (decrease) in accounts payable
    66,035       (267,960 )     395,428  
   
Increase (decrease) in accrued oil and natural gas liabilities
    804,860       (147,197 )     1,107,021  
   
Increase in due to affiliates
    —       —       194,907  
   
Increase (decrease) in other liabilities
    113       —       (13,200 )
                   
   
Total adjustments
    2,572,258       (630,496 )     8,549,744  
                   
   
Net cash provided by operating activities
    6,799,124       8,586,069       14,408,652  
                   
Cash flows from investing activities:
                       
 
Investment in oil and natural gas properties
    (4,046,672 )     (3,325,151 )     (66,910,315 )
 
Investment in other equipment
    —       —       (4,198 )
 
Proceeds from sale of assets
    248,623       2,003,052       —  
 
Investment in notes receivable
    (4,676,721 )     (3,330,000 )     (899,574 )
 
Collection of notes receivable
    —       5,675,345       2,380,000  
 
Cash settlements on oil swaps
    —       —       (3,530,651 )
                   
   
Net cash provided by (used in) investing activities
    (8,474,770 )     1,023,246       (68,964,738 )
                   
Cash flows from financing activities:
                       
 
Proceeds from long-term debt
    13,955,000       12,808,708       56,573,000  
 
Payments of long-term debt
    (9,260,000 )     (17,293,708 )     (6,100,000 )
 
Debt issuance costs
    —       —       (867,756 )
 
Proceeds from subordinated notes payable — partners
    —       —       14,264,360  
 
Capital contributed by owner
    324,691       59,527       143,690  
 
Distributions of capital
    (3,302,522 )     (4,532,197 )     (8,271,048 )
                   
   
Net cash provided by (used in) financing activities
    1,717,169       (8,957,670 )     55,742,246  
                   
   
Net increase (decrease) in cash and cash equivalents
    41,523       651,645       1,186,160  
 
Cash and cash equivalents, beginning of period
    75,595       117,118       768,763  
                   
 
Cash and cash equivalents, end of period
  $ 117,118     $ 768,763     $ 1,954,923  
                   
 
Non-Cash Investing and Financing Activities:
                       
   
Asset retirement obligation costs and liabilities
  $ 283,922     $ (41,801 )   $ 11,816  
                   
   
Asset retirement obligation associated with the acquisition of PITCO properties
  $ —     $ —     $ 445,169  
                   
   
Distribution of oil and gas properties to owners, net
  $ 819,471     $ —     $ —  
                   
   
Contributed offering costs
  $ —     $ —     $ 155,149  
                   
See accompanying notes to combined financial statements.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
     (a) Basis of Presentation
      The accompanying combined financial statements include the accounts of Moriah Resources, Inc. (“MRI”), Moriah Properties, Ltd. (“MPL”), the oil and natural gas interests individually owned by Dale A. and Rita Brown and the accounts of MBN Properties LP. These accounts are presented on a combined basis because these entities are under common control. As used herein, the term Moriah Group refers to all of these entities on a combined basis unless the context specifies otherwise. All significant intercompany accounts and transactions have been eliminated. The Moriah Group has consolidated MBN Properties LP as a variable interest entity under FASB FIN 46R since the Moriah Group is the primary beneficiary of MBN Properties LP. The partners, shareholders and owners of these entities have other investments, such as real estate, that are held either individually or through other legal entities that are not presented as part of these financial statements. The accompanying combined financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred. Effective October 1, 2005, Dale and Rita Brown assigned the selected oil and natural gas properties included in these consolidated financial statements to DAB Resources, Ltd., a Texas limited partnership whose general partner is DAB 1999 Corp. (“DAB Corp”) which holds a 1% general partner interest. The limited partners of DAB Resources are Dale Brown (49.5%) and his wife, Rita Brown (49.5%). DAB Corp is a Texas corporation which is owned by Dale Brown (50%) and Rita Brown (50%).
     (b) Organization and Description of Business
      The Moriah Group owns and operates oil and natural gas producing properties located primarily in the Permian Basin of West Texas and southeast New Mexico. The Moriah Group has acquired oil and natural gas producing properties and drilled leasehold. The Moriah Group is comprised of MRI, MPL, Dale A. and Rita Browns’ oil and natural gas interests and MBN Properties LP. MRI was organized as a sub-chapter S corporation on September 28, 1992 under the laws of the State of Texas, and serves as the 1% general partner to MPL. MPL was organized as a limited partnership on July 1, 1999 under the laws of the State of Texas. Dale A. Brown, an individual, has owned oil and natural gas working interests since 1981. Dale A. Brown, who along with his son, Cary D. Brown, are the sole owners of MRI and MPL. The assets of Moriah Properties New Mexico, Ltd. (“MNM”), a limited partnership organized under the laws of the State of Texas on October 17, 2003, were assigned into MPL effective September 1, 2005, in order to streamline the business of the limited partnerships with identical ownership and a shared general partner, MRI and the accounts of MNM have been reflected retroactively in the financial statements of MPL.
      On July 22, 2005, MPL advanced $1,649,132 in the form of paid in capital and subordinated notes receivable to MBN Properties LP which utilized the capital to fund a deposit with The Prospective Investment and Trading Company, Ltd. (“PITCO”) and its affiliates for the purchase of oil and natural gas properties described below. MPL also advanced $654,099 to fund the expenses of MBN Management LLC, the general partner of MBN Properties LP. Of this amount, $467 is for paid in capital and the balance of $653,632 is in a note receivable from MBN Management LLC. MBN Properties LP, a Delaware limited partnership, and MBN Management LLC, a Delaware limited liability company, (collectively the “MBN Group”) were formed to acquire and operate oil and natural gas producing properties in partnership with Brothers Production Properties, Ltd., and certain third party investors. Cary D. Brown, the Executive Vice President of MRI and its 50% owner, is the Chief Executive Officer and a Director of MBN Management LLC. On September 14, 2005, MBN Properties LP purchased oil and natural gas producing properties located in the Permian Basin from PITCO and its affiliates for $66,151,723 (the “PITCO Acquisition”), subject to post-closing adjustments. While MBN Management LLC is a variable interest entity, the Moriah Group accounts for its interest in that entity using the equity method since it is not the primary beneficiary of MBN Management LLC under the expected losses test of paragraph 14 of FAS FIN 46R.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
     (c) Cash Equivalents
      For purposes of the combined statement of cash flows, the Moriah Group considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
     (d) Trade Accounts Receivable
      Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Moriah Group routinely assesses the financial strength of its customers. Bad debts are recorded based on an account-by-account review after all means of collection have been exhausted and potential recovery is considered remote. The Moriah Group does not have any off-balance-sheet credit exposure related to its customers (see Note 12).
     (e) Oil and Natural Gas Properties
      The Moriah Group accounts for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to the acquisition of and development of proved areas are capitalized when incurred. The costs of development wells are capitalized whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense as incurred.
      Depreciation and depletion of producing oil and natural gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. FAS No. 19 requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves. As more fully described below, proved reserves are estimated by the Moriah Group’s independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., and are subject to future revisions based on availability of additional information. As discussed in Note 13, the Moriah Group follows FAS No. 143. Under FAS No. 143, asset retirement costs are generally recognized when the asset is placed in service, and are amortized over proved reserves using the units of production method. Asset retirement costs are estimated by the Moriah Group’s engineers using existing regulatory requirements and anticipated future inflation rates.
      Upon sale or retirement of complete fields of depreciable or depletable property, the book value thereof, less proceeds from salvage value, is charged to income.
      Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. The Moriah Group assesses impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using oil and natural gas prices as of the last day of the statement period held constant. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. As of December 31, 2004 and 2005, the estimated undiscounted future cash flows for the Moriah Group’s proved oil and natural gas properties exceeded the net capitalized costs, and no impairment was required to be recognized. In 2003, impairment of $471,394 was recognized when a dry hole was drilled on the Mountain Cat Prospect and the remainder of the unproved acreage was written off. Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred. Costs related to unproved mineral interests that are individually

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
insignificant are amortized over the shorter of the exploratory period or the lease/concession holding period which is typically three years in the Permian Basin.
     (f) Oil and Natural Gas Reserve Quantities
      The Moriah Group’s estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. LaRoche Petroleum Consultants, Ltd. prepares a reserve and economic evaluation of all the Moriah Group’s properties on a well-by-well basis utilizing information provided to it by the Moriah Group and utilizing information available from state agencies that collect information reported to it by the operators of the Moriah Group’s properties.
      Reserves and their relation to estimated future net cash flows impact the Moriah Group’s depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. The Moriah Group prepares its reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. The independent engineering firm described above adheres to the same guidelines when preparing their reserve reports. The accuracy of the Moriah Group’s reserve estimates is a function of many factors including the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.
      The Moriah Group’s proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas, and natural gas liquids eventually recovered.
     (g) Income Taxes
      No provision for income taxes is made in the Moriah Group’s consolidated financial statements because the taxable income or loss of the Moriah Group is included in the income tax returns of the individual owners.
     (h) Derivative Instruments and Hedging Activities
      The Moriah Group periodically uses derivative financial instruments to achieve a more predictable cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. The Moriah Group accounts for these activities pursuant to FAS No. 133  — Accounting for Derivative Instruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair market value and included in the balance sheet as assets or liabilities.
      The Moriah Group does not specifically designate derivative instruments as cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices. Therefore, the mark-to -market of these instruments is recorded in current earnings (see Note 10).
     (i) Use of Estimates
      Management of the Moriah Group has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ materially from those estimates. Estimates which are particularly significant to the combined financial statements include estimates of oil and natural gas reserves, accrued revenue and expenses, future cash flows from oil and natural gas properties, and depreciation, depletion and amortization.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
     (j) Revenue Recognition
      Sales of crude oil and natural gas are recognized when the delivery to the purchaser has occurred and title has been transferred. This occurs when oil or natural gas has been delivered to a pipeline or a tank lifting has occurred. Crude oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. Virtually all of the Moriah Group’s natural gas contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are determined on a monthly basis. As a result, the Moriah Group’s revenues from the sale of oil and natural gas will suffer if market prices decline and benefit if they increase. The Moriah Group believes that the pricing provisions of its oil and natural gas contracts are customary in the industry.
     (k) Investments
      Undivided interests in oil and natural gas properties owned through joint ventures are consolidated on a proportionate basis. Investments in entities where the Moriah Group exercises significant influence, but not a controlling interest are accounted for by the equity method. Under the equity method, our investments are stated at cost plus the equity in undistributed earnings and losses after acquisition.
     (l) Environmental
      The Moriah Group is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Moriah Group to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation are probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments are fixed and readily determinable.
     (m) Earnings Per Unit
      The Moriah Group computes its earnings per unit in accordance with SFAS No. 128, “Earnings per Share,” which requires the presentation of basic and diluted earnings per unit on the face of the income statement. Basic earnings per unit amounts are calculated using the average number of units outstanding during each period. Diluted earnings per unit assumes the exercise of all unit options having exercise prices less than the average market price of the units using the treasury stock method.
      Basic and diluted earnings per unit for all periods presented is computed based on the 9,584,623 units issued to the Moriah Group on March 15, 2006 in exchange for oil and natural gas properties contributed by it (including its indirect interest in oil and natural gas properties contributed by MBN Properties, LP) in conjunction with the closing of the private equity offering on the same date.
     (n) Recently Issued Accounting pronouncements
      Emerging Issues Task Force (“EITF”) Issue  04-9 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 19-1: Statement of Financial Accounting Standards (“FAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
determination cannot be made at the conclusion of drilling, FAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. In April 2005, the FASB issued FSP FAS 19-1, which was adopted effective January 1, 2005. This FSP amends FAS No. 19 to allow continued capitalization when (a) the well has found a sufficient quantity of reserves to justify proceeding with the project plan and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project which may include more than one exploratory well if the reserves are intended to be extracted in a single integrated operation. The FSP also requires increased disclosures. Adoption of this rule did not have a material impact on our combined earnings in 2005. If this FSP had been applied to 2004, it would not have had a material effect on our earnings for that year.
      FAS No. 153: In 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which was effective July 1, 2005. With certain exceptions, this requires exchanges of nonmonetary assets to be recorded at fair value. Previously, these transactions were generally recorded at book value. This pronouncement results in reporting in earnings, gains and losses on exchanges of nonmonetary assets. Adoption of this standard did not have a material impact on either our earnings or consolidated balance sheet in 2005.
      FAS No. 154: In 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FAS No. 3,” which is effective January 1, 2006. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application (restatement) to prior periods’ financial statements of changes in accounting principle. This Statement also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
      FAS Interpretation No. 47: In March 2005, the FASB issued FAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FAS Statement No. 143,” “Accounting for Asset Retirement Obligations”, which is effective no later than December 31, 2005. This pronouncement clarifies that the term “conditional asset retirement obligation” as used in FAS Statement 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. When sufficient information exists, uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability. This interpretation is not expected to have a material impact on either our earnings or consolidated balance sheet.
(2) Fair Values of Financial Instruments
      The estimated fair values of the Moriah Group’s financial instruments closely approximate the carrying amounts as discussed below:
        Cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments.
 
        Notes receivable. The carrying amounts approximate fair value due to the comparability of the interest rate to market interest rates for instruments of similar terms and credit quality.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
        Debt. The carrying amount of the revolving long-term debt approximates fair value because the Moriah Group’s current borrowing rate does not materially differ from market rates for similar bank borrowings.
 
        Commodity price derivatives. The fair market values of commodity derivative instruments are estimated based upon the current market price of the respective commodities at the date of valuation. It represents the amount, which the Moriah Group would be required to pay or able to receive, based upon the differential between a fixed and a variable commodity price as specified in the hedge contracts.
(3) Notes Receivable — Affiliated Entities
      The Moriah Group issued notes receivable to affiliated entities involved in commercial real estate and other investments. These notes bore interest at market rates and were secured by the associated real estate where applicable. The table below sets forth the notes receivable as of December 31, 2003 and 2004 and September 30, 2005. Each of these notes was paid in full during the year after issuance.
                         
    December 31,
     
    2003   2004   2005
             
Real Estate Deed of Trust note receivable bearing interest at bank prime plus 3.5% due on October 31, 2007
  $ 4,725,345     $ —     $ —  
Real Estate Deed of Trust note receivable bearing interest at bank prime plus 3.5% due on March 31, 2015
    —       2,230,000       —  
Note receivable bearing interest at bank prime due January 3, 2005 — unsecured
    —       150,000       —  
                   
    $ 4,725,345     $ 2,380,000     $ —  
                   
(4) Credit Facility
      On July 29, 1999, the Moriah Group entered into a Credit Facility (the Agreement) that permitted borrowings up to the lesser of (i) the borrowing base, or (ii) $20 million. The borrowing base was originally set at $8 million, was re-determined annually by the lender and decreased monthly based upon a schedule determined by the terms of the Agreement. Borrowings under the Agreement bore interest at a rate equal to the three-month LIBOR plus an add-on rate which increased from a minimum of 2.0% to a maximum of 3.5% based upon the amount borrowed as a percentage of the borrowing base with the interest payable monthly. The Agreement was secured by substantially all the oil and natural gas assets of the Moriah Group. The Moriah Group had $9.2 million and $7.2 million available on the borrowing base as of December 31, 2003 and 2004, respectively. The Moriah Group had $6.5 million outstanding at a rate of 4.0% and $2.0 million outstanding at a rate of 4.1% as of December 31, 2003 and 2004, respectively. The Moriah Group paid interest expense of $74,567, $239,324 and $18,323 for the years ended December 31, 2003, 2004 and 2005, respectively.
      The Agreement provided for certain restrictions, including but not limited to, limitations on additional borrowings, restrictions on use of proceeds, sales of collateral, and distributions to owners. It also required the Moriah Group to maintain certain quarterly debt service ratios. At December 31, 2003 and 2004, the Moriah Group was in compliance with all aspects of the Agreement.
      Long-term debt consists of the following at December 31, 2005:
         
MPL — due September 2009
  $ 20,723,000  
MBN Properties LP — due September 2007
    31,750,000  
       
    $ 52,473,000  
       

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      On September 13, 2005, the Moriah Group replaced its Credit Agreement with a new Senior Credit Facility (the New Facility) with a new lending group that permits borrowings in the lesser amount of (i) the borrowing base, or (ii) $75 million. The borrowing base under the New Facility, initially set at $40 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the Moriah Group’s oil and natural gas assets. Interest on the New Facility is payable monthly and is charged in accordance with the Moriah Group’s selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate plus 0.5%, dependent on the percentage of the borrowing base which is drawn. Borrowings under this New Facility are due in September 2009. The New Facility contains certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. On September 13, 2005, the Moriah Group borrowed $22,123,000 from the new lending group to provide for general corporate purposes, to fund a $4.2 million distribution to Cary Brown and Dale Brown and to advance additional subordinated notes receivable in the amount of $17,598,000 to MBN Properties LP, which purchased oil and natural gas producing properties from PITCO. The Moriah Group’s interest rate at December 31, 2005 was 6.0%. The Moriah Group paid interest expense of $220,638 for the year ended December 31, 2005.
      On September 13, 2005, MBN Properties LP entered into a Credit Agreement with a new Senior Credit Facility (the MBN Facility) with a lending group that permits borrowings in the lesser amount of (i) the borrowing base, or (ii) $75 million. The borrowing base under the MBN Facility, initially set at $35 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the MBN Properties LP’s oil and natural gas assets. Interest on the MBN Facility is payable monthly and is charged in accordance with MBN Properties LP’s selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate plus 0.50%, dependent on the percentage of the borrowing base which is drawn. Borrowings under this MBN Facility are due in September 2007. The MBN Facility contains certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. On September 13, 2005, MBN Properties LP borrowed $33,750,000 from the new lending group to purchase oil and natural gas producing properties from PITCO. The MBN Properties LP’s interest rate at December 31, 2005 was 6.33%. MBN Properties LP paid interest expense of $431,085 for the period from inception to December 31, 2005. Please refer to Note 18 regarding the private equity offering which closed on March 15, 2006 and for information regarding the payment in full of the borrowings under the Senior Credit Agreement.
(5) Acquisitions
Energen Resources Acquisition
      In March 2003, Moriah Properties, Ltd. acquired from Energen Resources an additional working interest in the SE Stinnett Unit and the Jordan University Unit for approximately $400,000 cash.
Pure Acquisition
      Effective May 1, 2003, Moriah Properties, Ltd. acquired from Pure Resources a working interest in oil and natural gas properties for approximately $337,000. These properties consist of 68 wellbores located in the Iatan, East Howard field of Mitchell County, Texas. These properties are operated by Brothers Production Company Inc., and the acquisition was funded with cash.
Langlie Mattix Acquisition
      Effective October 1, 2003, Moriah Properties, Ltd. acquired from Pecos Production Company an operated working interest in the Langlie Mattix Penrose Sand Unit (“LMPSU”) located in Lea County, New Mexico for approximately $1.36 million. The property is operated by Moriah Resources, Inc. and the acquisition was funded with cash.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
Denton Devonian Acquisition
      Effective April 1, 2004, Moriah Properties, Ltd. acquired from Fasken Oil and Ranch an additional working interest in the JM Denton lease for approximately $580,000. This property is operated by Brothers Production, Inc. Also acquired were working interests in a Fasken operated lease for approximately $1.1 million. Both of these leases are located in the Denton Devonian field in Lea County, New Mexico. This acquisition consisted of interests in 16 wellbores. The acquisition was funded with cash.
PITCO Acquisition
      On September 14, 2005, MBN Properties LP purchased oil and natural gas producing properties located in the Permian Basin from PITCO and its affiliates for $66,151,723 (the “PITCO Acquisition”), subject to post-closing adjustments estimated to be approximately $2.8 million. The all cash acquisition was funded from borrowings of $33,750,000 under MBN Properties LP’s existing credit facility and from loans from MPL and the Brothers Group (see Note 6). Including direct expenses associated with the PITCO acquisition, MBN Properties LP has recorded a purchase price of approximately $63.9 million, all of which has been allocated to the oil and natural gas properties purchased. In addition, MBN Properties LP has recorded a $445,000 asset retirement obligation (“ARO”) and related ARO asset under the guidelines of FAS 143.
      The following table reflects the unaudited pro forma results of operations for the years ended December 31, 2004 and 2005, as though the PITCO acquisition had occurred as of January 1 for each of the periods presented. The pro forma amounts are not necessarily indicative of the results that may be reported in the future:
                 
    Years Ended December 31,
     
    2004   2005
         
Revenues
  $ 27,142,792     $ 29,499,438  
             
Income from continuing operations
  $ 9,219,527     $ 6,480,193  
             
Net income
  $ 9,241,673     $ 6,480,193  
             
                   
Earnings per unit - basic and diluted:        
 
Income from continuing operations
  $ 0.96     $ 0.68  
             
 
Net Income
  $ 0.96     $ 0.68  
             
Units used in computing earnings per unit
    9,584,623       9,584,623  
             
(6) Partnership Investments
Accord Partnership
      In November 2002, Moriah Properties, Ltd and Moriah Resources, Inc. purchased a combined 34.7% interest in Accord Resources, Ltd, (“Accord”), a partnership formed specifically to acquire various working interests in oil and natural gas properties located in Wise, Young and Jack County, Texas. The Moriah Group’s cash investment in Accord was approximately $467,000 and was accounted for by the equity method. Moriah Resources, Inc. was the general partner of Accord and responsible for daily operation of the properties.
      Cash distributions received by the Moriah Group from the partnership for the years ended December 31, 2003 and 2004 were approximately $138,600 and $103,950, respectively. Effective March 31, 2004, Accord was dissolved and the interests in the oil and natural gas properties were distributed to each of the partners, including the Moriah Group. On April 1, 2004, in conjunction with the other Accord partners, the Moriah

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
Group sold all of its interests in the oil and natural gas properties to Aspen Integrated Oil and Gas, L.L.C. for approximately $2.0 million resulting in a gain on sale of assets of approximately $1.3 million.
      The following tables reflect condensed balance sheet and net income (loss) information for the Accord Partnership on a gross basis:
           
    December 31,
    2003
     
Current assets
  $ 750,549  
Property, plant and equipment, at cost, net
    5,076,446  
Other assets
    10,500  
       
 
Total assets
  $ 5,837,495  
       
Current liabilities
  $ 436,972  
Notes payable
    1,773,000  
Asset retirement obligation
    1,910,234  
Partners’ capital
    1,717,289  
       
 
Total liabilities and partners’ capital
  $ 5,837,495  
       
                   
        Three Months
    Year Ended   Ended
    December 31,   March 31,
    2003   2004
         
Oil and natural gas revenues
  $ 4,637,443     $ 1,129,819  
Oil derivative expense
    (254,440 )     —  
Other operating revenues
    178,505       174,517  
Direct lease operating expenses
    (2,162,386 )     (431,595 )
Production taxes
    (309,431 )     (71,105 )
Depletion, depreciation and accretion
    (927,467 )     (129,873 )
Other expenses
    (186,629 )     (7,958 )
             
 
Operating income
    975,595       663,805  
Other expense
    (76,996 )     (134,298 )
             
 
Partnership net income
  $ 898,599     $ 529,507  
             
      MBN Properties LP and MBN Management LLC
      MBN Properties LP, a Delaware limited partnership, and its 1% general partner, MBN Management LLC, a Delaware limited liability company, (collectively the “MBN Group”) were formed in 2005 to acquire and operate oil and natural gas producing properties in partnership with Brothers Production Properties, Ltd., and certain third party investors. On July 22, 2005, MPL advanced $1,649,132 in the form of $462 of paid in capital (46.2% partnership equity interest) and subordinated notes receivable of $1,648,670 to MBN Properties LP which utilized the capital to fund a deposit with The Prospective Investment and Trading Company, Ltd. (“PITCO”) and its affiliates for the purchase of oil and natural gas properties described in Note 5 above. On September 13, 2005, MPL advanced MBN Properties LP an additional $17,598,000 under the subordinated note receivable in conjunction with the closing of the PITCO acquisition described in Note 5 above. The subordinated note receivable from MBN Properties LP is due on July 15, 2012 and bears interest payable quarterly at the rate the Moriah Group pays under its New Facility plus 4%. The other investors in MBN Properties, LP loaned money on similar terms. The notes payable to the other investors (which have not been eliminated in consolidation) are reflected as subordinated notes payable-partners in the accompanying

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
combined balance sheet. MPL also advanced $654,099 to fund the expenses of MBN Management LLC, the general partner of MBN Properties LP. Of this amount, $467 is for paid in capital (46.7% partnership equity interest) and the balance of $653,632 is in a subordinated note receivable from MBN Management LLC due July 15, 2012 and bearing interest at 7%. At December 31, 2005, MBN Properties LP had a payable to MBN Management LLC in the amount of $194,907 related to advances made to MBN Properties LP during the period from inception through December 31, 2005. Please refer to Note 18 regarding the private equity offering which closed on March 15, 2006 and for information regarding the payment in full of these subordinated notes receivable.
      The following tables reflect condensed balance sheet and net loss information for MBN Management LLC on a gross basis:
           
    December 31,
    2005
     
Current assets
  $ 1,233,338  
Other assets
    31,899  
       
 
Total assets
  $ 1,265,237  
       
Current liabilities
  $ 640,727  
Notes payable-affiliated entities
    1,952,753  
Members’ deficit
    (1,328,243 )
       
 
Total liabilities and members’ deficit
  $ 1,265,237  
       
           
    From Inception
    Through
    December 31,
    2005
     
General and administrative expenses
  $ (1,278,685 )
       
 
Operating loss
    (1,278,685 )
Other expense
    (50,558 )
       
 
Net loss
  $ (1,329,243 )
       
(7) Related Party Transactions
      Cary Brown and Dale Brown own a non-controlling 9% interest as limited partners in the partnership which owns the building that the Moriah Group occupies. Monthly rent is $2,935 which is reimbursed by the Moriah Group to Petroleum Strategies, Inc., an affiliated entity which is owned by Cary Brown and Dale Brown. The lease expires in April 2008.
      The Moriah Group does not directly employ any persons or directly incur any office overhead. Substantially all general and administrative services are provided by Petroleum Strategies, Inc. which employs all personnel and pays for all employee salaries, benefits, and office expenses. Petroleum Strategies Inc. charges the Moriah Group for such services in an amount which is intended to be equal to the actual expenses it incurs. Amounts charged were $468,513, $677,160 and $838,899 for the years ended December 31, 2003, 2004 and 2005, respectively.
      The Moriah Group uses Lynch, Chappell and Alsup for legal services. Alan Brown, son of Dale Brown and brother of Cary Brown, is a less than ten percent shareholder in this firm. The Moriah Group paid legal fees of $2,750, $8,904 and $23,472 to this firm for the years ended December 31, 2003, 2004 and 2005, respectively.

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
Distribution of Oil and Natural Gas Properties to Owners
      In December 2003, MPL distributed a property interest equivalent to 10% of its working interest in certain oil and natural gas properties equally to Dale Brown and Cary Brown. Subsequently, in December 2003 and January 2004, Dale and Rita Brown contributed to Charities Support Foundation Inc. (“CSFI”) and Moriah Foundation Inc. (“MFI”) and Cary and Jill Brown contributed to Charities Support Foundation Inc. and Cary Brown Family Foundation (“CBFF”), undivided interests in producing oil and natural gas properties in which Moriah Properties, Ltd. also owns an interest. CSFI owns working interests burdened by net profits interests owned by MFI and CBFF. CSFI has contracted with MRI to provide certain accounting and management services related to the ownership of these oil and gas interests.
(8) Commitments and Contingencies
      From time to time the Moriah Group is a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Moriah Group is not currently a party to any proceeding that it believes, if determined in a manner adverse to the Moriah Group, could have a potential material adverse effect on its financial condition, results of operations or cash flows.
      Additionally, the Moriah Group’s operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations could continue. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of the Moriah Group could be adversely affected.
(9) Business and Credit Concentrations
Cash
      The Moriah Group maintains its cash in bank deposit accounts, which, at times, may exceed federally insured amounts. The Moriah Group has not experienced any losses in such accounts. The Moriah Group believes it is not exposed to any significant credit risk on its cash.
Revenue and Trade Receivables
      Substantially all the Moriah Group’s accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the oil and natural gas industry. This concentration of customers and joint interest owners may impact the Moriah Group’s overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, the Moriah Group has not experienced significant credit losses on such receivables. No bad debt expense was recorded in 2003, 2004, or 2005. The Moriah Group cannot ensure that such losses will not be realized in the future. A listing of oil and natural gas purchasers exceeding 10% of the Moriah Group’s sales is tabulated in Note 12.
(10) Oil and Natural Gas Swaps
      Due to the volatility of oil and natural gas prices, the Moriah Group periodically enters into price-risk management transactions (e.g., swaps, collars, and floors) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits the Moriah Group’s ability to benefit from increases in the price of oil and natural gas, it also reduces the Moriah Group’s potential exposure to adverse price movements. The Moriah Group’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
price protection against declines in oil and natural gas prices and limit the Moriah Group’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes.
      All of these price risk management transactions are considered derivative instruments and accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. These derivative instruments are intended to hedge our price-risk and may be considered hedges for economic purposes but the Moriah Group has chosen not to designate them as cash flow hedges. Therefore, all derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period earnings.
      By using derivative instruments to hedge exposures to changes in commodity prices, the Moriah Group exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Moriah Group, which creates repayment risk. The Moriah Group minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties.
      For the years ended December 31, 2003, 2004, and 2005, the Moriah Group included in revenue realized and unrealized losses related to its oil and natural gas derivatives. The impact on total revenue from hedging activities for the three years ended December 31, 2003, 2004 and 2005 was as follows:
                         
    Year Ended December 31,
     
    2003   2004   2005
             
Crude oil derivative contract settlements
  $ (444,281 )   $ 46,020     $ (3,530,651 )
Natural gas derivative contract settlements
    (178,770 )     (119,850 )     —  
Unrealized change in fair value
    340,179       (558,953 )     (2,628,214 )
                   
    $ (282,872 )   $ (632,783 )   $ (6,158,865 )
                   
      In its statement of cash flows for the nine months ended September 30, 2005, the Moriah Group classified $3,530,651 paid to settle crude oil derivative contracts as cash used in operating activities. In the accompanying statement of cash flows for the year ended December 31, 2005, the classification of such payments has been revised and they are classified as cash used in investing activities.
      On May 25, July 5, August 1, 2005 and January 13 and January 17, 2006, the Moriah Group entered into NYMEX West Texas Intermediate crude oil swaps paying floating prices and receiving fixed prices for a portion of its future oil production as indicated below:
                     
    Annual    
Calendar   Volume   Price
Year   (Bbls)   ($/Bbls)
         
  2006       275,268     $ 60.39  
  2007       209,066     $ 60.00  
  2008       195,579     $ 60.50  
  2009       203,915     $ 63.22  
  2010       192,366     $ 61.90  

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      On September 29 and December 2, 2005 and January 13, 2006 the Moriah Group entered into the NYMEX Henry Hub natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of its future natural gas production as indicated below:
                     
    Annual    
Calendar   Volume   Price
Year   (MMBtu)   ($/MMBtu)
         
  2006       620,610     $ 11.80  
  2007       562,609     $ 9.88  
  2008       518,797     $ 8.79  
  2009       486,131     $ 8.73  
  2010       454,733     $ 8.34  
      On September 14, 2005 and January 17, 2006, MBN Properties LP entered into the following NYMEX WTI oil swaps and NYMEX natural gas swaps paying floating prices and receiving fixed prices for a portion of its future oil and natural gas production as indicated below:
                                     
    Oil Swaps   Natural Gas Swaps
         
    Annual       Annual    
Calendar   Volume   Price   Volume   Price
Year   (Bbls)   ($/Bbl)   (MMBtu)   ($/MMBtu)
                 
  2006       179,224     $ 66.63       660,925     $ 10.28  
  2007       133,385     $ 64.15       588,498     $ 9.02  
  2008       117,634     $ 62.25       529,386     $ 8.30  
  2009       105,464     $ 61.05       478,314     $ 7.77  
  2010       95,267     $ 60.15       434,879     $ 7.37  
      The purpose of the hedging program was to reduce the volatility of oil and natural gas prices and its impact on the predictability of the Moriah Group’s cash flows in light of its entering into an expanded credit facility on September 13, 2005, as noted above. The MBN swaps were put in place to hedge the oil and natural gas price risk associated with the PITCO acquisition on September 14, 2005.
(11) Discontinued Operations
      During 2003 and 2004, the Moriah Group disposed of certain producing oil and natural properties which meet the guidelines for treatment as discontinued operations under FAS 144. The following table sets for the operating results for the discontinued operations:
                   
    Year Ended
    December 31,
     
    2003   2004
         
Oil sales
  $ 62,072     $ 24,625  
Natural gas sales
    796       51  
Oil and natural gas production expenses
    (46,725 )     (8,553 )
Production and other taxes
    (2,938 )     (1,142 )
Depreciation, depletion and amortization
    (2,971 )     —  
             
 
Income (loss) from discontinued operations
    10,234       14,981  
             
 
Gain on disposal
    233,073       7,165  
             
Total income from discontinued operations
  $ 243,307     $ 22,146  
             

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(12) Sales to Major Customers
      The Moriah Group operates as one business segment within the Permian Basin region. It sold crude oil and natural gas production representing 10% or more of total revenues for the years ended December 31, 2003, 2004 and 2005 as shown below:
                         
    2003   2004   2005
             
ConocoPhillips
    12%       9%       10%  
Navajo Crude Oil Marketing
    15%       17%       16%  
Plains Marketing, LP
    16%       20%       18%  
      In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of the Moriah Group’s customers are concentrated in the oil and natural gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. We believe that the loss of any of our major purchasers would not have a long-term material adverse effect on our operations.
      Upon the closing of the PITCO acquisition on September 14, 2005, a second operating segment was created for PITCO. The Moriah Group aggregates these two operating segments into a single segment for reporting purposes.
(13) Asset Retirement Obligation
      In June 2001, the FASB issued FAS No. 143, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Moriah Group’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.
      The Moriah Group adopted FAS No. 143 on January 1, 2003, which resulted in a net increase to oil and natural gas properties of $1.9 million and related liabilities of $2.1 million. These amounts reflect the ARO of the Moriah Group had the provisions of FAS No. 143 been applied since inception and resulted in a non-cash charge to earnings of $223,377. Going forward the Moriah Group will record an abandonment liability associated with its oil and natural gas wells when those assets are placed in service.
      The following table reflects the changes in the ARO during the years ended December 31, 2003, 2004 and 2005.
                         
    December 31,
     
    2003   2004   2005
             
Asset retirement obligation — beginning of period
  $ 2,144,259     $ 2,112,687     $ 1,952,866  
Liabilities incurred during the period
    330,391       5,164       446,901  
Liabilities associated with properties sold
    (95,027 )     (20,885 )     —  
Liabilities associated with properties distributed to owners
    (191,110 )     —       —  
Liabilities settled during the period
    —       —       (53,852 )
Current period accretion
    78,953       88,053       109,429  
Current period revisions to accretion expense
    (108,310 )     (185,188 )     (163,281 )
Current period revisions to oil and natural gas properties
    (46,469 )     (46,965 )     10,084  
                   
Asset retirement obligation — end of period
  $ 2,112,687     $ 1,952,866     $ 2,302,147  
                   

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The discount rate used in calculating the ARO was 4.0% in 2003, 4.1% in 2004 and 6.0% at December 31, 2005. These rates approximate the Moriah Group’s borrowing rates.
(14) Costs Incurred in Oil and Natural Gas Property Acquisition and Development Activities
      Costs incurred by the Moriah Group in oil and natural gas property acquisition and development are presented below:
                           
    Year Ended December 31,
     
    2003   2004   2005
             
Development costs
  $ 149,931     $ 1,684,134     $ 1,948,371  
Exploration costs
    1,464,607       822       —  
Acquisition costs:
                       
 
Proved properties
    2,432,134       1,640,195       64,959,016  
 
Unproved properties
    —       —       2,928  
                   
 
Total acquisition, development and exploration costs
    4,046,672       3,325,151       66,910,315  
Asset retirement costs capitalized
    2,147,039       (41,801 )     456,985  
                   
 
Total
  $ 6,193,711     $ 3,283,350     $ 67,367,300  
                   
Moriah Group’s share of costs incurred by equity method investee
  $ 624,487     $ —     $ —  
                   
      Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells, and to provide facilities to extract, treat, and gather natural gas.
(15) Oil and Natural Gas Capitalized Costs
      Aggregate capitalized costs for the Moriah Group related to oil and natural gas production activities with applicable accumulated depreciation, depletion, and amortization are presented below:
                   
    December 31,
     
    2004   2005
         
Proved oil and natural gas properties
  $ 16,427,811     $ 83,109,787  
Unproved properties
    —       2,928  
Capitalized asset retirement obligations
    1,842,417       2,253,695  
             
 
Total oil and natural gas properties
    18,270,228       85,366,410  
Accumulated depletion, depreciation and amortization
    (6,046,262 )     (8,194,385 )
             
    $ 12,223,966     $ 77,172,025  
             
(16) Net Proved Oil and Natural Gas Reserves (Unaudited)
      The proved oil and natural gas reserves of the Moriah Group have been estimated by an independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., as of December 31, 2003, 2004 and 2005. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
based on year-end prices and costs. An analysis of the change in estimated quantities of oil and natural gas reserves, all of which are located within the United States, is shown below:
                     
    Oil and   Natural
    Condensate   Gas
    (MBbls)   (MMcf)
         
Total Proved Reserves
               
 
Balance, January 1, 2003
    2,946       10,891  
   
Purchase of minerals-in-place
    416       232  
   
Sales of minerals-in-place
    (330 )     (1,088 )
   
Extensions and discoveries
    5       66  
   
Revisions of previous estimates
    574       1,021  
   
Production
    (281 )     (848 )
             
 
Balance, December 31, 2003
    3,330       10,274  
   
Purchase of minerals-in-place
    228       256  
   
Sale of minerals-in-place
    (5 )     (2 )
   
Extensions and discoveries
    206       500  
   
Revisions of previous estimates
    637       225  
   
Production
    (287 )     (783 )
             
 
Balance, December 31, 2004
    4,109       10,470  
   
Purchase of minerals-in-place
    3,541       12,800  
   
Extensions and discoveries
    794       1,258  
   
Revisions of previous estimates
    28       956  
   
Production
    (354 )     (1,027 )
             
 
Balance, December 31, 2005
    8,118       24,457  
             
Proved Developed Reserves
               
 
January 1, 2003
    2,946       10,891  
 
December 31, 2003
    3,330       10,274  
 
December 31, 2004
    4,109       10,470  
 
December 31, 2005
    6,380       20,618  
Moriah Group’s share of Proved Reserves of Equity Method Investee
               
 
December 31, 2003
    189       1,146  
 
December 31, 2004
    —       —  
 
December 31, 2005
    —       —  

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(17) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves (Unaudited)
      Summarized in the following table is information for the Moriah Group with respect to the standardized measure of discounted future net cash flows relating to proved reserves. Future cash inflows are computed by applying year-end prices relating to the Moriah Group’s proved reserves to the year-end quantities of those reserves. Future production, development, site restoration, and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. There are no future income tax expenses because the Moriah Group is a nontaxable entity.
                           
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Future production revenues
  $ 152,604     $ 220,989     $ 684,021  
Future costs:
                       
 
Production
    (68,729 )     (95,780 )     (242,796 )
 
Development
    —       (178 )     (27,609 )
                   
Future net cash flows before income taxes
    83,875       125,031       413,616  
10% annual discount for estimated timing of cash flows
    (42,490 )     (64,674 )     (221,619 )
                   
Standardized measure of discounted net cash flows
  $ 41,385     $ 60,357     $ 191,997  
                   
Moriah Group’s share of standardized measure of discounted future net cash flows of equity method investee
  $ 2,955     $ —     $ —  
                   
      The Standardized Measure is based on the following oil and natural gas prices realized over the life of the properties at the wellhead as of the following dates:
                         
    December 31,
     
    2003   2004   2005
             
Oil (per Bbl)
  $ 29.40     $ 40.55     $ 57.64  
Natural gas (per MMBtu)
  $ 5.32     $ 5.19     $ 8.82  

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows:
                             
    Year Ended December 31,
     
    2003   2004   2005
             
    (Thousands)
Increase (decrease):
                       
 
Sales, net of production costs
  $ (7,472 )   $ (9,685 )   $ (17,532 )
 
Net change in sales prices, net of production costs
    3,781       10,605       36,574  
 
Changes in estimated future development costs
    —       (86 )     (21,401 )
 
Extensions and discoveries, net of future production and development costs
    157       3,206       19,319  
 
Revisions of quantity estimates
    6,115       6,959       3,156  
 
Previously estimated development costs incurred
    —       —       (178 )
 
Purchase of minerals-in place
    3,294       3,236       102,289  
 
Sales of minerals in place
    (4,194 )     (36 )     —  
 
Other
    1,514       1,287       4,458  
 
Accretion of discount
    3,340       3,486       4,955  
                   
   
Net increase
    6,535       18,972       131,640  
Standardized measure of discounted future net cash flows:
                       
 
Beginning of year
  $ 34,850     $ 41,385     $ 60,357  
                   
 
End of year
  $ 41,385     $ 60,357     $ 191,997  
                   
      The data presented should not be viewed as representing the expected cash flow from or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts.
(18) Subsequent Event
      On March 15, 2006, Legacy Reserves LP (“Legacy”), the successor entity to the Moriah Group, completed a private equity offering (“Legacy Formation”) in which it issued 5,000,000 limited partnership units at a gross price of $17.00 per unit, netting $79.7 million after underwriter’s discount and expenses. Simultaneous with the completion of this offering, Legacy purchased the oil and natural gas properties of the Brothers Group, H2K Holdings Ltd. and the charitable foundations described in Note 7 previously. Legacy also purchased the oil and natural gas properties owned by MBN Properties, LP. In the case of the Brothers Group and H2K Holdings Ltd. those entities exchanged their oil and natural gas properties for limited partnership units. The purchase of the oil and natural gas properties owned by the charitable foundations was solely for cash of $7.7 million. The owners of the Moriah Group, the Brothers Group and H2K Holdings Ltd. (the “Founding Investors”) exchanged 4.4 million of their units for $69.9 million in cash. The Moriah Group has been treated as the acquiring entity in the formation transaction of Legacy. Legacy was formed in October 2005.
      As an integral part of the Legacy Formation, Legacy entered into a new credit agreement with a new senior credit facility (the Legacy Facility) with the same lending group that participated in the New Facility of the Moriah Group. The terms of the Legacy Facility are essentially equivalent to those of the Moriah Group’s New Facility except that it permits borrowings in the lesser amount of (i) the borrowing base, or

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MORIAH GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(ii) $300 million. The borrowing base under the Legacy Facility, initially set at $130 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the Group’s oil and gas assets. Interest on the Legacy Facility is payable monthly and is charged in accordance with Legacy’s selection of a LIBOR rate plus 1.25% to 1.875%, or prime rate up to prime rate plus 0.375%, dependent on the percentage of the borrowing base which is drawn. On March 15, 2006, Legacy borrowed $65.8 million from the new lending group as part of the Legacy Formation. The Moriah Group, the Brothers Group and MBN Properties LP each retired their outstanding balances under the New Facility with a total of $62.3 million being repaid, including accrued interest through the date of the Legacy Formation.
      Finally, as an integral part of the Legacy Formation, MBN Properties LP and MBN Management LLC have fully repaid the subordinated notes payable to the Moriah Group and Brothers Group, including accrued interest through the date of closing.
(19) Pro Forma Balance Sheet
      In the transaction discussed in Note 18, Legacy did not acquire certain assets and liabilities of the Moriah Group. The removal of these net assets will be reflected as a deemed dividend in the 2006 Moriah Group financial statements. The unaudited pro forma balance sheet as of December 31, 2005 reflects the deemed dividend to its owners which would result if the transaction completed on March 15, 2006 had occurred as of December 31, 2005.

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Report of Independent Registered Public Accounting Firm
Brothers Group
Midland, Texas
      We have audited the accompanying combined balance sheets of the Brothers Group, as defined in Note 1(a), as of and for the years ended December 31, 2004 and 2005 and the related combined statements of operations, owners’ equity, and cash flows for each of the years in the three year period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 combined financial statements referred to above present fairly, in all material respects, the financial position of the Brothers Group at December 31, 2004 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
      As discussed in Note 12 to the combined financial statements, effective January 1, 2003, the Company changed its method of accounting for asset retirement obligations.
  /s/ BDO Seidman, LLP
Houston, Texas
May 5, 2006

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BROTHERS GROUP
COMBINED BALANCE SHEETS
                     
    December 31,
     
    2004   2005
         
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 2,069,685     $ 4,294,126  
 
Accounts receivable, net:
               
   
Oil and natural gas
    1,642,621       1,481,111  
   
Joint interest owners
    1,601,182       1,128,956  
 
Notes receivable (Note 3)
    2,230,000       —  
 
Prepaid expenses and other current assets
    86,329       106,282  
             
   
Total current assets
    7,629,817       7,010,475  
             
Proved oil and natural gas properties, at cost, using the successful efforts method of accounting
    18,699,991       20,001,062  
Accumulated depletion, depreciation and amortization
    (6,984,578 )     (7,583,307 )
             
      11,715,413       12,417,755  
             
Office furniture and equipment, net
    75,064       111,745  
Notes receivable (Note 3)
    1,000,000       —  
Notes receivable — affiliated entity (Note 6)
    —       13,708,920  
Other assets, net
    13,458       208,197  
             
    $ 20,433,752     $ 33,457,092  
             
 
LIABILITIES AND OWNERS’ EQUITY
               
Current liabilities:
               
 
Current portion of notes payable (Note 4)
  $ 2,000,000     $ —  
 
Accounts payable
    521,156       1,099,918  
 
Accrued oil and natural gas liabilities
    2,930,931       2,718,745  
 
Fair value of oil and natural gas swaps (Note 10)
    —       149,956  
 
Asset retirement obligation (Note 12)
    54,815       126,528  
 
Other
    —       172,188  
             
   
Total current liabilities
    5,506,902       4,267,335  
Long-term debt (Note 4)
    —       15,402,000  
Fair value of oil and natural gas swaps (Note 10)
    —       1,231,201  
Asset retirement obligation (Note 12)
    1,498,701       1,352,841  
             
Total liabilities
    7,005,603       22,253,377  
             
 
Commitments and contingencies (Note 8)
               
Owners’ equity
    13,428,149       11,203,715  
             
    $ 20,433,752     $ 33,457,092  
             
See accompanying notes to combined financial statements.

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BROTHERS GROUP
COMBINED STATEMENTS OF OPERATIONS
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Revenues:
                       
 
Oil sales
  $ 6,321,095     $ 9,665,774     $ 12,124,874  
 
Natural gas sales
    2,276,771       2,975,229       3,783,771  
 
Realized and unrealized loss on oil and natural gas swaps (Note 10)
    (192,580 )     46,576       (4,855,124 )
                   
   
Total revenues
    8,405,286       12,687,579       11,053,521  
                   
Expenses:
                       
 
Oil and natural gas production
    2,314,883       2,352,679       3,142,361  
 
Production and other taxes
    471,862       722,168       965,078  
 
General and administrative
    978,327       1,032,848       1,187,145  
 
Dry hole costs
    812,436       345,143       204,968  
 
Depletion, depreciation, amortization and accretion
    829,051       967,415       826,800  
 
Impairment of long-lived assets
    226,986       —       —  
 
(Gain) loss on sale of assets
    10,365       (244,164 )     10,723  
                   
   
Total expenses
    5,643,910       5,176,089       6,337,075  
                   
   
Operating income
    2,761,376       7,511,490       4,716,446  
                   
Other income (expense):
                       
 
Interest income
    1,030       82,637       844,603  
 
Interest expense (Note 4)
    (163,158 )     (118,818 )     (396,676 )
 
Gain on sale of partnership investment
    —       1,335,277       —  
 
Equity in income (loss) of partnerships (Note 6)
    314,510       185,327       (1,232,713 )
 
Other
    7,406       29,425       95,601  
                   
   
Income before cumulative effect of change in accounting principle
    2,921,164       9,025,338       4,027,261  
Cumulative effect of accounting change (Note 12)
    (231,542 )     —       —  
                   
   
Net income
  $ 2,689,622     $ 9,025,338     $ 4,027,261  
                   
See accompanying notes to combined financial statements.

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BROTHERS GROUP
COMBINED STATEMENTS OF OWNERS’ EQUITY
                                                 
    Common   Retained   Stockholders’   Partners’   Owner’s   Total Owners’
    Stock   Earnings   Equity   Capital   Equity   Equity
                         
Balance, January 1, 2003
  $ 2,000     $ 991,036     $ 993,036     $ 3,849,069     $ 738,518     $ 5,580,623  
Capital contributions
    —       —       —       —       49,691       49,691  
Distributions to owners
    —       (180,883 )     (180,883 )     (745,321 )     (943,816 )     (1,870,020 )
Net income
    —       81,651       81,651       1,800,490       807,481       2,689,622  
                                     
Balance, December 31, 2003
    2,000       891,804       893,804       4,904,238       651,874       6,449,916  
Capital contributions
    —       8,258       8,258       —       106,672       114,930  
Distributions to owners
    —       —       —       (743,020 )     (1,419,015 )     (2,162,035 )
Net income (loss)
    —       (93,545 )     (93,545 )     7,612,453       1,506,430       9,025,338  
                                     
Balance, December 31, 2004
    2,000       806,517       808,517       11,773,671       845,961       13,428,149  
Capital contributions
    —       —       —       —       195,471       195,471  
Deemed capital contribution
    —       —       —       110,699       —       110,699  
Distributions to owners
    —       (484,397 )     (484,397 )     (4,423,401 )     (1,650,067 )     (6,557,865 )
Net income (loss)
    —       (49,480 )     (49,480 )     3,023,020       1,053,721       4,027,261  
                                     
Balance, December 31, 2005
  $ 2,000     $ 272,640     $ 274,640     $ 10,483,989     $ 445,086     $ 11,203,715  
                                     
See accompanying notes to combined financial statements.

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BROTHERS GROUP
COMBINED STATEMENTS OF CASH FLOWS
                               
    Year Ended December 31,
     
    2003   2004   2005
             
Cash flows from operating activities:
                       
 
Net income
  $ 2,689,622     $ 9,025,338     $ 4,027,261  
   
Adjustment to reconcile net income to net cash provided by operating activities:
                       
   
Dry hole costs
    812,436       345,143       204,968  
   
Depletion, depreciation, amortization and accretion
    829,051       967,415       826,800  
   
Impairment of long-lived assets
    226,986       —       —  
   
(Gain) loss on oil and natural gas swaps
    (241,944 )     (79,900 )     4,855,124  
   
(Gain) loss on sale of assets
    10,365       (1,579,441 )     10,723  
   
Equity in (income) loss of partnerships
    (314,510 )     (185,327 )     1,232,713  
   
Accrued interest income — related party
    —       —       (446,353 )
   
Accrued interest expense
    —       —       172,188  
   
Distributions from oil and natural gas partnership
    140,000       105,000       —  
   
Non-cash effect of accounting change
    231,542       —       —  
 
Changes in assets and liabilities:
                       
   
(Increase) decrease in accounts receivable, oil and natural gas
    655,926       (965,342 )     161,510  
   
(Increase) decrease in accounts receivable, joint interest owners
    355,916       (641,761 )     472,226  
   
(Increase) decrease in other assets
    12,948       (19,960 )     (2,193 )
   
Increase (decrease) in accounts payable
    (580,406 )     358,769       578,762  
   
Increase (decrease) in accrued oil and natural gas liabilities
    (66,497 )     843,538       (212,186 )
                   
     
Total adjustments
    2,071,813       (851,866 )     7,854,282  
                   
     
Net cash provided by operating activities
    4,761,435       8,173,472       11,881,543  
                   
Cash flows from investing activities:
                       
 
Investment in oil and natural gas properties
    (2,863,136 )     (2,897,017 )     (1,796,867 )
 
Proceeds from sale of assets
    452,159       2,344,094       —  
 
Investment in other property, plant and equipment
    (51,170 )     (29,995 )     (58,793 )
 
Investment in notes receivable
    (3,650,000 )     (2,230,000 )     (14,384,581 )
 
Collection of notes receivable
    —       2,650,000       3,230,000  
 
Cash settlements on oil and natural gas swaps
    —       —       (3,473,967 )
                   
     
Net cash used in investing activities
    (6,112,147 )     (162,918 )     (16,484,208 )
                   
Cash flows from financing activities:
                       
 
Proceeds from notes payable
    5,572,318       2,200,000       24,952,000  
 
Payments of notes payable
    (2,484,606 )     (6,672,317 )     (11,550,000 )
 
Payment of debt issuance costs
    —       —       (212,500 )
 
Capital contributed by owners
    49,691       114,930       195,471  
 
Distributions of capital
    (1,870,020 )     (2,162,035 )     (6,557,865 )
                   
     
Net cash provided by (used in) financing activities
    1,267,383       (6,519,422 )     6,827,106  
                   
     
Net increase (decrease) in cash and cash equivalents
    (83,329 )     1,491,132       2,224,441  
Cash and cash equivalents, beginning of period
    661,882       578,553       2,069,685  
                   
Cash and cash equivalents, end of period
  $ 578,553     $ 2,069,685     $ 4,294,126  
                   
Non-Cash Investing and Financing Activities:
                       
 
Asset retirement obligations costs and liabilities
  $ 262,511     $ (61,400 )   $ (297 )
                   
 
Deemed capital contribution
  $ —     $ —     $ 110,699  
                   
See accompanying notes to combined financial statements.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS
(1)  Summary of Significant Accounting Policies
  (a)  Basis of Presentation
      The accompanying combined financial statements include the accounts of Brothers Production Company, Inc. (“BPCI”), Brothers Operating Company, Inc. (“BOCI”), Brothers Production Properties, Ltd. (“BPPL”), and the oil and natural gas interests individually owned by Wanda McGraw through her ownership of J&W McGraw Properties, Ltd. and the Jack R. McGraw Family Trust. The accounts are presented on a combined basis because these entities are under common control. The partners, shareholders and owners of these entities have other investments, such as real estate, that are held either individually or through other legal entities that are not presented as part of these financial statements. The financial statements presented herein only involve activities related to oil and natural gas properties. All significant intercompany accounts and transactions have been eliminated. The accompanying financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred. As used herein, the term Brothers Group refers to all of these entities on a combined basis unless the context specifies otherwise. Effective October 1, 2005, Wanda McGraw assigned the selected oil and natural gas properties included in these consolidated financial statements to J&W McGraw Properties, Ltd., a Texas limited partnership whose general partner is Wanda J. McGraw Management, LLC. The limited partners of J&W McGraw Properties, Ltd. are Wanda McGraw (50.0%) the Jack R. McGraw Marital Trust (29.57%) and the Jack R. McGraw Family Trust (20.43%). The beneficiaries of the Jack R. McGraw Family Trust are all members of the McGraw family. The general partner holds a 1% general partner interest and is a Texas limited liability company owned by Wanda McGraw.
  (b)  Organization and Description of Business
      The Brothers Group owns and operates oil and natural gas producing properties located primarily in the Permian Basin of West Texas and southeast New Mexico. The Brothers Group has acquired oil and natural gas producing properties and drilled leasehold. The Brothers Group is comprised of BPPL, BPCI, BOCI, and Wanda McGraw. BPCI was organized as a sub-chapter S corporation on May 1, 1990 under the laws of the State of Texas. BOCI was organized as a sub-chapter S corporation on November 15, 1995 under the laws of the State of Texas, and serves as the general partner to BPPL and owns 1.0% of that entity. BPPL was organized as a limited partnership on October 21, 1999 under the laws of the State of Texas. Wanda J. McGraw, an individual, together with her late husband, Jack R. McGraw, has owned oil and natural gas working interests since April, 1981. Timothy McGraw, Scott McGraw, Kyle McGraw and Travis McGraw, (the “McGraw brothers”) are all sons of Wanda McGraw and are the sole owners of BPCI, BPPL and BOCI with each brother owning a 25% interest in each entity. Thus, the selected oil and gas activities of Wanda J. McGraw are combined with the financial statements of BPCI, BPPL and BOCI.
  (c)  Cash Equivalents
      For purposes of the combined statement of cash flows, the Brothers Group considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
  (d)  Trade Accounts Receivable
      Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Brothers Group routinely assesses the financial strength of its customers. Bad debts are recorded based on an account-by-account review after all means of collection have been exhausted and the potential recovery is considered remote. The Brothers Group does not have any off-balance-sheet credit exposure related to its customers (see Note 11).

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
  (e)  Oil and Natural Gas Properties
      The Brothers Group accounts for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to the acquisition of and development of proved areas are capitalized when incurred. The costs of development wells are capitalized whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense as incurred.
      Depreciation and depletion of producing oil and natural gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. FAS No. 19 requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves. As more fully described below, proved reserves are estimated by the Brothers Group’s independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., and are subject to future revisions based on availability of additional information. As discussed in Note 12, the Brothers Group follows FAS No. 143. Under FAS No. 143, asset retirement costs are generally recognized when the asset is placed in service, and are amortized over proved reserves using the units of production method. Asset retirement costs are estimated by the Brothers Group’s engineers using existing regulatory requirements and anticipated future inflation rates.
      Upon sale or retirement of complete fields of depreciable or depletable property, the book value thereof, less proceeds from salvage value, is charged to income.
      Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. The Brothers Group assesses impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using oil and natural gas prices as of the last day of the statement period held constant. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. As of December 31, 2004 and 2005, the estimated undiscounted future cash flows for the Brothers Group’s proved oil and natural gas properties exceeded the net capitalized costs, and no impairment was required to be recognized. In 2003, impairment of $226,986 was recognized when a dry hole was drilled on the Mountain Cat Prospect and the remainder of the unproved acreage was written off. Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred. Costs related to unproved mineral interests that are individually insignificant are amortized over the shorter of the exploratory period or the lease/concession holding period which is typically three years in the Permian Basin.
  (f)  Oil and Natural Gas Reserve Quantities
      The Brothers Group’s estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. LaRoche Petroleum Consultants, Ltd. prepares a reserve and economic evaluation of all the Brothers Group’s properties on a well-by-well basis utilizing information provided to it by the Brothers Group and utilizing information available from state agencies that collect information reported to it by the operators of the Brothers Group’s properties.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      Reserves and their relation to estimated future net cash flows impact the Brothers Group’s depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. The Brothers Group prepares its reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. The independent engineering firm described above adheres to the same guidelines when preparing their reserve reports. The accuracy of the Brothers Group’s reserve estimates is a function of many factors including the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.
      The Brothers Group’s proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas, and natural gas liquids eventually recovered.
  (g)  Income Taxes
      No provision for income taxes is made in the Brothers Group’s consolidated financial statements because the taxable income or loss of the Brothers Group is included in the income tax returns of the individual owners.
  (h)  Derivative Instruments and Hedging Activities
      The Brothers Group periodically uses derivative financial instruments to achieve a more predictable cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. The Brothers Group accounts for these activities pursuant to FAS No. 133  — Accounting for Derivative Instruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair market value and included in the balance sheet as assets or liabilities.
      The Brothers Group does not specifically designate derivative instruments as cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices. Therefore, the mark to market of these instruments is recorded in current earnings (see Note 10).
  (i)  Use of Estimates
      Management of the Brothers Group has made a number of estimates and assumptions relating to the reporting of assets, liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Estimates which are particularly significant to the consolidated financial statements include estimates of oil and natural gas reserves, accrued revenue and expenses, future cash flows from oil and natural gas properties, and depreciation, depletion and amortization.
  (j)  Revenue Recognition
      Sales of crude oil and natural gas are recognized when the delivery to the purchaser has occurred and title has been transferred. This occurs when oil or natural gas has been delivered to a pipeline or a tank lifting has occurred. Crude oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location.
      Virtually all of the Brothers Group’s natural gas contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
determined on a monthly basis. As a result, the Brothers Group’s revenues from the sale of oil and natural gas will suffer if market prices decline and benefit if they increase. The Brothers Group believes that the pricing provisions of its oil and natural gas contracts are customary in the industry.
  (k)  Investments
      Undivided interests in oil and natural gas properties owned through joint ventures are consolidated on a proportionate basis. Investments in entities where the Brother’s Group exercises significant influence, but not a controlling interest, are accounted for by the equity method. Under the equity method, our investments are stated at cost plus the equity in undistributed earnings and losses after acquisition.
  (l)  Office Furniture and Equipment
      Office furniture and equipment other than oil and natural gas properties is carried at cost. Depreciation is provided principally on the straight-line method over useful lives as follows:
     
Furniture and equipment
  5-7 years
Vehicles
  5 years
      Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. Upon the sale or other disposition of assets, the cost and related accumulated depreciation, are removed from the accounts, the proceeds applied thereto, and any resulting gain or loss is reflected in net income for the period.
  (m)  Environmental
      The Brothers Group is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Brothers Group to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation are probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments are fixed and readily determinable.
  (n)  Recently Issued Accounting pronouncements
      Emerging Issues Task Force (“EITF”) Issue  04-9 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS  19-1: Statement of Financial Accounting Standards (“FAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this determination cannot be made at the conclusion of drilling, FAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. In April 2005, the FASB issued FSP FAS  19-1, which was adopted effective January 1, 2005. This FSP amends FAS No. 19 to allow continued capitalization when (a) the well has found a sufficient quantity of reserves to justify proceeding with the project plan and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project which may include more than one exploratory well if the reserves are intended to be extracted in a single integrated operation. The FSP also requires increased disclosures. Adoption of this rule did not have a material impact on our consolidated earnings in 2005. If this FSP had been applied to 2004, it would not have had a material effect on our earnings for that year.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      FAS No. 153: In 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which became effective July 1, 2005. With certain exceptions, this requires exchanges of nonmonetary assets to be recorded at fair value. Previously, these transactions were generally recorded at book value. This pronouncement results in reporting in earnings, gains and losses on exchanges of nonmonetary assets. Adoption of this rule did not have a material impact on either our earnings or consolidated balance sheet in 2005.
      FAS No. 154: In 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FAS No. 3,” which is effective January 1, 2006. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application (restatement) to prior periods’ financial statements of changes in accounting principle. This Statement also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
      FAS Interpretation No. 47: In March 2005, the FASB issued FAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FAS Statement No. 143,” “Accounting for Asset Retirement Obligations,” which is effective no later than December 31, 2005. This pronouncement clarifies that the term “conditional asset retirement obligation” as used in FAS Statement 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. When sufficient information exists, uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability. This interpretation is not expected to have a material impact on either our earnings or consolidated balance sheet.
(2)  Fair Values of Financial Instruments
      The estimated fair values of the Brothers Group’s financial instruments closely approximate the carrying amounts as discussed below:
        Cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments.
 
        Notes receivable. The carrying amounts approximate fair value due to the comparability of the interest rate to market interest rates for instruments of similar terms and credit quality.
 
        Debt. The carrying amount of the revolving long-term debt approximates fair value because the Brothers Group’s current borrowing rate does not materially differ from market rates for similar bank borrowings.
 
        Commodity price derivatives. The fair market values of commodity derivative instruments are estimated based upon the current market price of the respective commodities at the date of valuation. It represents the amount, which the Brothers Group would be required to pay or able to receive, based upon the differential between a fixed and a variable commodity price as specified in the hedge contracts.
(3)  Notes Receivable
      In addition to the subordinated notes receivable from MBN Properties LP and MBN Management LLC (see Note 6), the Brothers Group has two outstanding notes receivable. The first note is from a company that

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
operates oil and natural gas properties in East Texas. The second note is from an affiliate entity that is involved in commercial real estate investments. These notes bear interest at market rates and are secured by the associated oil and natural gas properties and real estate, respectively. The following table sets forth the notes receivable as of December 31, 2004 and 2005:
                 
    December 31,
     
    2004   2005
         
Note receivable bearing interest at 10%, secured by oil and natural
gas properties due on April 1, 2006
  $ 1,000,000     $ —  
             
Note receivable bearing interest at bank prime plus 3.5% due on
March 31, 2015 — secured by real estate
    2,230,000       —  
             
    $ 3,230,000     $ —  
             
      The note secured by oil and natural gas properties was paid in full in November 2005.
(4)  Credit Facility
      On November 1, 1999, the Brothers Group entered into a Credit Facility (the Agreement) that permitted borrowings up to the lesser of (i) the borrowing base, or (ii) $20 million. The borrowing base was originally set at $8 million, was re-determined annually by the lender and decreased monthly based upon a schedule determined by the terms of the Agreement. Borrowings under the Agreement bore interest at a rate equal to the three-month LIBOR plus an add-on rate which increased from a minimum of 2.0% to a maximum of 3.5% based upon the amount borrowed as a percentage of the borrowing base with the interest payable monthly. The Agreement was secured by substantially all the oil and natural gas assets of the Brothers Group. The Brothers Group had $7.67 million and $5.7 million available on the borrowing base as of December 31, 2003 and 2004, respectively. The Brothers Group had $6.47 million outstanding at a rate of 4.0% and $2.0 million outstanding at a rate of 4.1% as of December 31, 2003 and 2004, respectively. The Brothers Group paid interest expense of $152,190, $114,335 and $65,962 for the years ended December 31, 2003, 2004 and 2005, respectively. The Agreement provided for certain restrictions, including but not limited to, limitations on additional borrowings, restrictions on use of proceeds, sales of collateral, and distributions to owners. It also required the Brothers Group to maintain certain quarterly debt service ratios. At December 31, 2004, the Brothers Group was in compliance with all aspects of the Agreement.
      On September 13, 2005, the Brothers Group replaced its Credit Agreement with a Senior Credit Facility (the “New Facility”) with a new lending group that permits borrowings in the lesser amount of (i) the borrowing base, or (ii) $75 million. The borrowing base under the New Facility, initially set at $30 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the Brothers Group’s oil and natural gas assets. Interest on the New Facility is payable monthly and is charged in accordance with the Brothers Group’s selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate plus 0.50%, dependent on the percentage of the borrowing base which is drawn. Borrowings under this New Facility are due in September 2009. The New Facility contains certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. On September 13, 2005, the Brothers Group borrowed $17,402,000 from the new lending group for general corporate purposes, and to advance additional subordinated notes receivable in the amount of $12,588,030 to MBN Properties LP, which purchased oil and natural gas producing properties from PITCO. The Brothers Group’s interest rate at December 31, 2005 was 6.0%. The Brothers Group paid interest expense of $312,833 for the year ended December 31, 2005. Please refer to Note 17 regarding the private equity offering which closed on March 15, 2006 and for information about the payment in full of balances outstanding under the Senior Credit Facility.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(5)  Acquisitions and Divestiture
Energen Resources Acquisition
      In March 2003, BPPL acquired from Energen Resources an additional working interest in the SE Stinnett Unit and the Jordan University Unit for approximately $437,000 cash.
Pure Acquisition
      Effective May 1, 2003, BPPL acquired from Pure Resources a working interest in oil and natural gas properties for approximately $337,000. These properties consist of 68 wellbores located in the Iatan, East Howard field of Mitchell County, Texas. These properties are operated by Brothers Production Company Inc., and the acquisition was funded with cash.
Langlie Mattix Acquisition
      Effective October 1, 2003, BPPL acquired from Pecos Production Company a non-operated working interest in the Langlie Mattix Penrose Sand Unit (“LMPSU”) located in Lea County, New Mexico for approximately $700,000. The unit consisted of 94 wellbores. This unit is operated by Moriah Resources, Inc. and funded with cash.
Denton Devonian Acquisition
      Effective April 1, 2004, BPPL acquired from Fasken Oil and Ranch an additional working interest in the JM Denton lease for approximately $360,000. This property is operated by BPCI. Also acquired were working interests in a Fasken operated lease for approximately $650,000. Both of these leases are located in the Denton Devonian field in Lea County, New Mexico. This acquisition consisted of interests in 16 wellbores. The acquisition was funded with cash.
(6)  Partnership Investments
Accord Partnership
      In November 2002, BPPL purchased a 35.0% interest in Accord Resources, Ltd, (“Accord”), a partnership formed specifically to acquire various working interests in oil and natural gas properties located in Wise, Young and Jack County, Texas. The Brothers Group’s initial cash investment in Accord was approximately $459,000 and was accounted for by the equity method. Moriah Resources, Inc. was the general partner of Accord and responsible for daily operation of the properties.
      Cash distributions received by the Brothers Group from the partnership for the years ended December 31, 2003 and 2004 were approximately $140,000 and $105,000, respectively. Effective March 31, 2004, Accord was dissolved and the interests in the oil and natural gas properties were distributed to each of the partners, including the Brothers Group. On April 1, 2004, in conjunction with the other Accord partners, the Brothers Group sold all of its interests in the oil and natural gas properties to Aspen Integrated Oil and Gas, L.L.C. for approximately $2.0 million resulting in a gain on sale of assets of approximately $1.3 million.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The following tables reflect condensed balance sheet and net income (loss) information for the Accord Partnership on a gross basis:
           
    December 31,
    2003
     
Current assets
  $ 750,549  
Property, plant and equipment, at cost, net
    5,076,446  
Other assets
    10,500  
       
 
Total assets
  $ 5,837,495  
       
Current liabilities
  $ 436,972  
Notes payable
    1,773,000  
Asset retirement obligation
    1,910,234  
Partners’ capital
    1,717,289  
       
 
Total liabilities and partners’ capital
  $ 5,837,495  
       
                   
    Year Ended December 31,
     
    2003   2004
         
Oil and natural gas revenues
  $ 4,637,443     $ 1,129,819  
Oil derivative expense
    (254,440 )     —  
Other operating revenues
    178,505       174,517  
Direct lease operating expenses
    (2,162,386 )     (431,595 )
Production taxes
    (309,431 )     (71,105 )
Depletion, depreciation and accretion
    (927,467 )     (129,873 )
Other expenses
    (186,629 )     (7,958 )
             
 
Operating income (loss)
    975,595       663,805  
Other expense
    (76,996 )     (134,298 )
             
 
Partnership net income (loss)
  $ 898,599     $ 529,507  
             
MBN Properties LP and MBN Management LLC
      MBN Properties LP, a Delaware limited partnership, and its 1% general partner, MBN Management LLC,, a Delaware limited liability company, (collectively the “MBN Group”) were formed in 2005 to acquire and operate oil and natural gas producing properties in partnership with BPPL, Moriah Properties LP and certain third party investors. On July 22, 2005, BPPL advanced $1,176,684 in the form of $330 of paid in capital (32.98% partnership equity interest) and subordinated notes receivable of $1,176,354 to MBN Properties LP which utilized the capital to fund a deposit with The Prospective Investment and Trading Company, Ltd. (“PITCO”) and its affiliates for the purchase of oil and natural gas properties. BPPL advanced MBN Properties LP an additional $12,588,030 under the subordinated note receivable in conjunction with the closing of the PITCO acquisition. The subordinated note receivable from MBN Properties LP is due on July 15, 2012 and bears interest payable quarterly at the rate the Brothers Group pays under its New Facility plus 4%. BPPL also advanced $620,221 to fund the expenses of MBN Management LLC, the general partner of MBN Properties LP. Of this amount, $333 is for paid in capital (33.3% partnership equity interest) and the balance of $619,888 is in a subordinated note receivable from MBN Management LLC due July 15, 2012 and bearing interest at 7%. Please refer to Note 17 regarding the private

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
equity offering closed March 15, 2006 and for information about the payment in full of these subordinated notes receivable.
      While MBN Properties LP and MBN Management LLC are both variable interest entities under the guidelines of FAS FIN 46R, the Brothers Group accounts for its interest in these entities using the equity method since it is not the primary beneficiary of MBN Properties LP and no entity is the primary beneficiary of MBN Management LLC under the expected losses test of paragraph 14 of FAS FIN 46R.
      The following tables reflect condensed balance sheet and net loss information for MBN Properties LP on a gross basis:
           
    December 31,
    2005
     
Current assets
  $ 4,210,262  
Property, plant and equipment, at cost, net
    63,277,804  
Other assets
    923,961  
       
 
Total assets
  $ 68,412,027  
       
Current liabilities
  $ 2,049,690  
Long-term debt
    31,750,000  
Fair value of oil and gas swaps
    1,449,300  
Asset retirement obligation
    456,336  
Subordinated notes payable — partners
    34,837,072  
Partners’ deficit
    (2,130,371 )
       
 
Total liabilities and partners’ deficit
  $ 68,412,027  
       
           
    From Inception
    Through
    December 31,
    2005
     
Oil and natural gas revenues
  $ 5,877,119  
Oil derivative expense
    (2,221,625 )
Direct lease operating expenses
    (1,575,558 )
Production taxes
    (375,978 )
General and administrative expenses
    (453,842 )
Depletion, depreciation, amortization and accretion
    (1,637,171 )
       
 
Operating loss
    (387,055 )
Other expense
    (1,744,315 )
       
Partnership net loss
  $ (2,131,370 )
       

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The following tables reflect condensed balance sheet and net loss information for MBN Management LLC on a gross basis:
           
    December 31,
    2005
     
Current assets
  $ 1,233,338  
Other assets
    31,899  
       
 
Total assets
  $ 1,265,237  
       
Current liabilities
  $ 640,727  
Notes payable — affiliated entities
    1,952,753  
Members’ deficit
    (1,328,243 )
       
 
Total liabilities and members’ deficit
  $ 1,265,237  
       
           
    From Inception
    Through
    December 31,
    2005
     
General and administrative expenses
  $ (1,278,685 )
       
 
Operating loss
    (1,278,685 )
Other expense
    (50,558 )
       
 
Net loss
  $ (1,329,243 )
       
(7)  Related Party Transactions
      McGraw Brothers Investments, a Texas General partnership owned 25% by each of the four McGraw brothers, owns a 9% non-controlling limited partnership interest in a partnership which owns the building that the Brothers Group occupies. The lease expires in April 2008. Monthly rent is $3,903.
      The lease agreement had an original term of 60 months and expired on April 30, 2005. The lease was recently renewed for a period of 36 months. For the years ended December 31, 2003, 2004 and 2005, the Brothers Group recognized expense under the operating lease of $46,839 each year. As of December 31, 2005, future payments are as follows:
         
2006
  $ 46,839  
2007
  $ 46,839  
2008
  $ 15,613  
(8)  Commitments and Contingencies
      From time to time the Brothers Group is a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Brothers Group is not currently a party to any proceeding that it believes, if determined in a manner adverse to the Brothers Group, could have a potential material adverse effect on its consolidated financial condition, results of operations or cash flows.
      Additionally, the Brothers Group’s operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations could continue. To the extent laws are enacted or other

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Table of Contents

BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of the Brothers Group could be adversely affected.
(9)  Business and Credit Concentrations
  Cash
      The Brothers Group maintains its cash in bank deposit accounts, which, at times, may exceed federally insured amounts. The Brothers Group has not experienced any losses in such accounts. The Brothers Group believes it is not exposed to any significant credit risk on its cash.
  Revenue and Trade Receivables
      Substantially all the Brothers Group’s accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the oil and natural gas industry. This concentration of customers and joint interest owners may impact the Brothers Group’s overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, the Brothers Group has not experienced significant credit losses on such receivables. No bad debt expense was recorded in 2003, 2004 or 2005. The Brothers Group cannot ensure that such losses may not be realized in the future. A listing of oil and natural gas purchasers exceeding 10% of the Brothers Group’s sales is tabulated in Note 11.
(10)  Oil and Natural Gas Swaps
      Due to the volatility of oil and natural gas prices, the Brothers Group periodically enters into price-risk management transactions (e.g., swaps, collars, and floors) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits the Brothers Group’s ability to benefit from increases in the price of oil and natural gas, it also reduces the Brothers Group’s potential exposure to adverse price movements. The Brothers Group’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices, and limit the Brothers Group’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes.
      All of these price risk management transactions are considered derivative instruments and accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. These derivative instruments are intended to hedge our price risk and may be considered hedges for economic purposes, but the Brothers Group has chosen not to designate these transactions as cash flow hedges. Therefore, all derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period earnings.
      By using derivative instruments to hedge exposures to changes in commodity prices, the Brothers Group exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Brothers Group, which creates repayment risk. The Brothers Group minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties.
      For the years ended December 31, 2003, 2004 and 2005, the Brothers Group included in revenue realized and unrealized losses related to its oil and natural gas derivatives. There was no ineffectiveness

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
recognized during the years ended December 31, 2003, 2004 and 2005. The impact on total revenue from hedging activities for the three years ended December 31, 2003, 2004 and 2005 was as follows:
                         
    Year Ended December 31,
     
    2003   2004   2005
             
Crude oil derivative contract settlements
  $ (321,844 )   $ 46,576     $ (3,473,967 )
Natural gas derivative contract settlements
    (112,680 )     (79,900 )     —  
Unrealized change in fair value
    241,944       79,900       (1,381,157 )
                   
    $ (192,580 )   $ 46,576     $ (4,855,124 )
                   
      In its statement of cash flows for the nine months ended September 30, 2005, the Brothers Group classified $3,473,967 paid to settle crude oil derivative contracts as cash used in operating activities. In the accompanying statement of cash flows for the year ended December 31, 2005, the classification of such payments has been revised and they are classified as cash used in investing activities.
      The Brothers Group had no outstanding derivative instruments at December 31, 2004.
      On February 25, 2005, BPCI and BPPL entered into a NYMEX West Texas Intermediate crude oil swap of floating prices for fixed prices with Wells Fargo Bank, N.A. 7,000 Bbls per month for the period from October 2005 through December 2006. This contract was settled for a $2,008,767 cash payment on September 14, 2005.
      On May 25, July 5 and August 1, 2005 and January 13, 2006 and January 17, 2006, the Brothers Group entered into NYMEX West Texas Intermediate (“WTI”) crude oil swaps paying floating prices and receiving fixed prices for a portion of its future oil production as indicated below:
                 
    Annual    
    Volume   Price
Calendar Year   (Bbls)   ($/Bbls)
         
2006
    209,605     $ 60.33  
2007
    160,558     $ 60.00  
2008
    150,199     $ 60.50  
2009
    145,270     $ 63.22  
2010
    136,875     $ 61.90  
      On September 29, 2005, December 2, 2005 and January 13, 2006, the Brothers Group entered into NYMEX Henry Hub natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of its future natural gas production as indicated below:
                 
    Annual    
    Volume   Price
Calendar Year   (MMBtu)   ($/MMBtu)
         
2006
    442,338     $ 11.80  
2007
    400,998     $ 9.88  
2008
    369,311     $ 8.80  
2009
    346,385     $ 8.73  
2010
    324,120     $ 8.34  
      The purpose of the hedging program was to reduce the volatility of oil and natural gas prices and its impact on the predictability of the Brothers Group’s cash flows in light of its entering into an expanded credit facility on September 13, 2005, as noted above.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(11) Sales to Major Customers
      The Brothers Group operates as one business segment within the Permian Basin region. It sold crude oil and natural gas production representing 10% or more of total revenues for the years ended December 31, 2003, 2004 and 2005 as shown below:
                         
    2003   2004   2005
             
Amoco Production Company
    7%       8%       10%  
ConocoPhillips
    11%       8%       13%  
Navajo Crude Oil Marketing
    14%       16%       17%  
Plains Marketing, LP
    14%       15%       13%  
      In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of the Brothers Group’s customers are concentrated in the oil and natural gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. We believe that the loss of any of our major purchasers would not have a long-term material adverse effect on our operations.
(12) Asset Retirement Obligation
      In June 2001, the FASB issued FAS No. 143, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Brothers Group’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.
      The Brothers Group adopted FAS No. 143 on January 1, 2003, which resulted in a net increase to oil and natural gas properties of $1.52 million and related liabilities of $1.76 million. These amounts reflect the ARO of the Brothers Group had the provisions of FAS No. 143 been applied since inception and resulted in a non-cash charge to earnings of $231,542. Going forward the Brothers Group will record an abandonment liability associated with its oil and natural gas wells when those assets are placed in service.
      The following table reflects the changes in the ARO during the years ended December 31, 2003, 2004 and 2005:
                         
    December 31,
     
    2003   2004   2005
             
Asset retirement obligation — beginning of period
  $ 1,759,071     $ 1,946,596     $ 1,553,516  
Liabilities incurred during the period
    312,050       16,408       823  
Liabilities associated with properties sold
    (84,530 )     (277,140 )     —  
Liabilities settled during the period
    —       —       (26,791 )
Current period accretion
    74,758       70,184       77,281  
Current period revisions to accretion expense
    (65,214 )     (124,724 )     (124,340 )
Current period revisions to oil and natural gas properties
    (49,539 )     (77,808 )     (1,120 )
                   
Asset retirement obligation — end of period
  $ 1,946,596     $ 1,553,516     $ 1,479,369  
                   
      The discount rate used in calculating the ARO was 4.0% in 2003, 4.1% in 2004 and 6.0% in 2005. These rates approximate the Brothers Group’s borrowing rates.

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(13) Costs Incurred in Oil and Natural Gas Property Acquisition, Development and Exploration Activities
      Costs incurred by the Brothers Group in oil and natural gas property acquisition and development are presented below:
                             
    Year Ended December 31
     
    2003   2004   2005
             
Development costs
  $ 145,089     $ 1,337,235     $ 1,435,644  
Exploration costs
    812,436       345,143       204,968  
Acquisition costs:
                       
 
Proved properties
    1,905,611       1,214,639       156,255  
                   
   
Total acquisition, development and exploration costs
    2,863,136       2,897,017       1,796,867  
Asset retirement costs capitalized
    1,681,975       (61,400 )     (297 )
                   
   
Total
  $ 4,545,111     $ 2,835,617     $ 1,796,570  
                   
Brothers Group’s share of costs incurred by equity method investee
  $ 630,795     $ —     $ —  
                   
      Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells, and to provide facilities to extract, treat, and gather natural gas.
(14) Oil and Natural Gas Capitalized Costs
      Aggregate capitalized costs for the Brothers Group related to natural gas and oil production activities with applicable accumulated depreciation, depletion, and amortization are presented below:
                   
    December 31,
     
    2004   2005
         
Proved oil and natural gas properties
  $ 17,271,551     $ 18,596,626  
Capitalized asset retirement obligations
    1,428,440       1,404,436  
             
 
Total oil and natural gas properties
    18,699,991       20,001,062  
Accumulated depletion, depreciation and amortization
    (6,984,578 )     (7,583,307 )
             
    $ 11,715,413     $ 12,417,755  
             
(15) Net Proved Oil and Natural Gas Reserves (Unaudited)
      The proved oil and natural gas reserves of the Brothers Group have been estimated by an independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., as of December 31, 2002, 2003, 2004 and 2005. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
rules based on year-end prices. An analysis of the change in estimated quantities of oil and natural gas reserves, all of which are located within the United States, is shown below:
                     
    Oil and   Natural
    Condensate   Gas
    (MBbls)   (MMcf)
         
Total Proved Reserves
               
 
Balance, January 1, 2003
    2,233       6,859  
   
Purchase of minerals-in-place
    317       139  
   
Extensions and discoveries
    3       41  
   
Revisions of previous estimates
    346       623  
   
Production
    (219 )     (534 )
             
 
Balance, December 31, 2003
    2,680       7,128  
   
Purchase of minerals-in-place
    162       179  
   
Sales of minerals-in-place
    (30 )     (7 )
   
Extensions and discoveries
    140       474  
   
Revisions of previous estimates
    529       190  
   
Production
    (242 )     (592 )
             
 
Balance, December 31, 2004
    3,239       7,372  
   
Purchase of minerals-in-place
    6       35  
   
Extensions and discoveries
    512       853  
   
Revisions of previous estimates
    165       311  
   
Production
    (237 )     (558 )
             
 
Balance, December 31, 2005
    3,685       8,013  
             
Proved Developed Reserves
               
 
January 1, 2003
    2,233       6,859  
 
December 31, 2003
    2,679       7,128  
 
December 31, 2004
    3,239       7,372  
 
December 31, 2005
    3,213       7,346  
Brothers Group’s share of Proved Reserves of Equity Method Investee
               
 
January 1, 2003
    154       1,246  
 
December 31, 2003
    191       1,158  
 
December 31, 2004
    —       —  
 
December 31, 2005
    —       —  

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BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(16) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves (Unaudited)
      Summarized in the following table is information for the Brothers Group with respect to the standardized measure of discounted future net cash flows relating to proved reserves. Future cash inflows are computed by applying year-end prices relating to the Brothers Group’s proved reserves to the year-end quantities of those reserves. Future production, development, site restoration, and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. There are no future income tax expenses because the Brothers Group is a nontaxable entity.
                           
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Future cash flows
  $ 116,612     $ 169,660     $ 279,102  
Future costs:
                       
 
Production
    (53,693 )     (73,605 )     (109,461 )
 
Development
    —       (120 )     (8,606 )
                   
Future net cash flows before income taxes
    62,919       95,935       161,035  
10% annual discount for estimated timing of cash flows
    (31,427 )     (48,811 )     (86,188 )
                   
Standardized measure of discounted net cash flows
  $ 31,492     $ 47,124     $ 74,847  
                   
Brothers Group’s share of standardized measure of discounted future net cash flows of equity method investee
  $ 2,984     $ —     $ —  
                   
      The Standardized Measure is based on the following oil and natural gas prices realized over the life of the properties at the wellhead as of the following dates:
                         
    December 31,
     
    2003   2004   2005
             
Oil (per Bbl)
  $ 29.32     $ 40.48     $ 56.83  
Natural gas (per MMBtu)
  $ 5.34     $ 5.23     $ 8.70  
      The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows:
                           
    Year Ended December 31,
     
    2003   2004   2005
             
    (Thousands)
Increase (decrease):
                       
 
Sales, net of production costs
  $ (5,811 )   $ (9,566 )   $ (11,801 )
 
Net change in sales prices, net of production costs
    2,959       8,991       23,631  
 
Changes in estimated future development costs
    —       (59 )     (6,434 )
 
Extensions and discoveries, net of future production and development costs
    100       2,819       12,630  
 
Previously estimated development costs incurred
    —       —       (120 )
 
Revisions of quantity estimates
    3,664       5,916       3,409  
 
Purchase of minerals-in place
    2,446       2,315       231  
 
Sales of minerals in place
    —       (250 )     —  

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Table of Contents

BROTHERS GROUP
NOTES TO FINANCIAL STATEMENTS — (Continued)
                             
    Year Ended December 31,
     
    2003   2004   2005
             
    (Thousands)
 
Other
    1,104       2,813       2,303  
 
Accretion of discount
    2,353       2,653       3,874  
                   
   
Net increase
    6,815       15,632       27,723  
Standardized measure of discounted future net cash flows:
                       
   
Beginning of year
  $ 24,677     $ 31,492     $ 47,124  
                   
   
End of year
  $ 31,492     $ 47,124     $ 74,847  
                   
      The data presented should not be viewed as representing the expected cash flow from or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts.
(17) Subsequent Event
      On March 15, 2006, Legacy Reserves LP (“Legacy”), the successor entity to the Moriah Group, completed a private equity offering (“Legacy Formation”) in which it issued 5,000,000 limited partnership units at a gross price of $17.00 per unit, netting $79.7 million after underwriter’s discount and expenses. Simultaneous with the completion of this offering, Legacy purchased the oil and natural gas properties of the Brothers Group, H2K Holdings Ltd. and the charitable foundations described in Note 4 previously. Legacy also purchased the oil and natural gas properties owned by MBN Properties, LP. In the case of the Brothers Group and H2K Holdings Ltd. those entities exchanged their oil and natural gas properties for limited partnership units. The purchase of the oil and natural gas properties owned by the charitable foundations was solely for cash of $7.7 million. The owners of the Moriah Group, the Brothers Group and H2K Holdings Ltd. (the “Founding Investors”) exchanged 4.4 million of their units for $69.9 million in cash. The Moriah Group has been treated as the acquiring entity in the formation transaction of Legacy. Legacy was formed in October 2005.
      As an integral part of the Legacy Formation, Legacy entered into a new credit agreement with a new senior credit facility (the Legacy Facility) with the same lending group that participated in the New Facility of the Brothers Group. The terms of the Legacy Facility are essentially equivalent to those of the Brothers Group’s New Facility except that it permits borrowings in the lesser amount of (i) the borrowing base, or (ii) $300 million. The borrowing base under the Legacy Facility, initially set at $130 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of the Group’s oil and gas assets. Interest on the Legacy Facility is payable monthly and is charged in accordance with Legacy’s selection of a LIBOR rate plus 1.25% to 1.875%, or prime rate up to prime rate plus 0.375%, dependent on the percentage of the borrowing base which is drawn. On March 15, 2006, Legacy borrowed $65.8 million from the new lending group as part of the Legacy Formation. The Moriah Group, the Brothers Group and MBN Properties LP each retired their outstanding balances under the New Facility with a total of $62.3 million being repaid, including accrued interest through the date of the Legacy Formation.
      Finally, as an integral part of the Legacy Formation, MBN Properties LP and MBN Management LLC have fully repaid the subordinated notes payable to the Moriah Group and Brothers Group, including accrued interest through the date of closing.

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Report of Independent Certified Public Accountants
Selected Interests of Paul T. Horne
Midland, Texas
      We have audited the accompanying balance sheets of the Selected Interests of Paul T. Horne, as defined in Note 1(a), at December 31, 2004 and 2005 and the related statements of operations, owner’s equity, and cash flows for each of the years in the three year period ended December 31, 2005. These financial statements are the responsibility of the Entity’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 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the financial position of the Selected Interests of Paul T. Horne at December 31, 2004 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
      As discussed in Note 8 to the financial statements, effective January 1, 2003, Selected Interests of Paul T. Horne changed its method of accounting for asset retirement obligations.
  /s/ Johnson Miller & Co., CPA’S PC
Midland, Texas
May 5, 2006

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SELECTED INTERESTS OF PAUL T. HORNE
BALANCE SHEETS
                     
    December 31,
     
    2004   2005
         
ASSETS
               
Current assets:
               
 
Accounts receivable, oil and natural gas
  $ 41,874     $ 49,742  
             
   
Total current assets
    41,874       49,742  
             
Proved oil and natural gas properties, at cost, using the successful
efforts method of accounting:
    223,685       243,841  
Accumulated depletion, depreciation and amortization
    (55,193 )     (68,353 )
             
      168,492       175,488  
             
    $ 210,366     $ 225,230  
             
 
LIABILITIES AND OWNERS’ EQUITY
               
Current liabilities:
               
 
Accrued liabilities, oil and gas
  $ 14,604     $ 33,485  
 
Fair value of oil and gas swaps (Note 6)
    —       1,823  
 
Asset retirement obligation (Note 8)
    902       1,849  
             
   
Total current liabilities
    15,506       37,157  
Fair value of oil and natural gas swaps (Note 6)
    —       15,574  
Asset retirement obligation (Note 8)
    19,488       17,744  
             
Total liabilities
    34,994       70,475  
             
 
Commitments and contingencies (Note 4)
               
Owner’s equity
    175,372       154,755  
             
    $ 210,366     $ 225,230  
             
See accompanying notes to financial statements.

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SELECTED INTERESTS OF PAUL T. HORNE
STATEMENTS OF OPERATIONS
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Revenues:
                       
 
Oil sales
  $ 68,012     $ 103,368     $ 142,993  
 
Natural gas sales
    31,642       37,001       49,231  
 
Realized and unrealized loss on oil and natural gas swaps (Note 6)
    —       —       (34,009 )
                   
   
Total revenues
    99,654       140,369       158,215  
                   
Expenses:
                       
 
Oil and natural gas production
    38,218       35,692       49,264  
 
Production and other taxes
    5,673       8,701       13,055  
 
Dry hole costs
    10,217       315       890  
 
Depletion, depreciation and accretion
    15,640       16,524       14,536  
 
Impairment of long-lived assets (Note 1)
    4,655       —       —  
 
(Gain) on sale of assets
    —       —       (330,740 )
                   
   
Total expenses
    74,403       61,232       (252,995 )
                   
   
Income from continuing operations
    25,251       79,137       411,210  
                   
Other income (expense):
                       
Discontinued operations (Note 13)
                       
 
Income (loss) from operations
    (57 )     —       —  
 
Gain on disposal
    1,944       —       —  
                   
   
Income from discontinued operations
    1,887       —       —  
                   
Cumulative effect of accounting change (Note 8)
    (1,609 )     —       —  
                   
   
Net income
  $ 25,529     $ 79,137     $ 411,210  
                   
See accompanying notes to financial statements.

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SELECTED INTERESTS OF PAUL T. HORNE
STATEMENTS OF OWNER’S EQUITY
         
    Total
    Owner’s
    Equity
     
Balance, January 1, 2003
  $ 144,065  
Capital contributions
    31,270  
Distribution to owner
    (40,181 )
Net income
    25,529  
       
Balance, December 31, 2003
    160,683  
Capital contributions
    17,832  
Distribution to owner
    (82,280 )
Net income
    79,137  
       
Balance, December 31, 2004
    175,372  
Capital contributions
    20,258  
Distribution to owner
    (452,085 )
Net income
    411,210  
       
Balance, December 31, 2005
  $ 154,755  
       
See accompanying notes to financial statements.

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SELECTED INTERESTS OF PAUL T. HORNE
STATEMENTS OF CASH FLOWS
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Cash flows from operating activities:
                       
 
Net income
  $ 25,529     $ 79,137     $ 411,210  
 
Adjustment to reconcile net income to net cash provided by operating activities:
                       
   
Dry hole costs
    10,217       315       890  
   
Depletion, depreciation, amortization and accretion
    15,640       16,524       14,536  
   
Impairment of long-lived assets
    4,655       —       —  
   
Loss on oil and natural gas swaps
    —       —       34,009  
   
Gain on sale of assets
    (1,944 )     —       (330,740 )
   
Non-cash effect of accounting change
    1,609       —       —  
 
Changes in assets and liabilities:
                       
   
(Increase) decrease in accounts receivable, oil and natural gas
    (7,937 )     (18,116 )     (7,868 )
   
Increase (decrease) in accrued liabilities, oil and natural gas
    507       4,735       18,881  
                   
   
Total adjustments
    22,747       3,458       (270,292 )
                   
   
Net cash provided by operating activities
    48,276       82,595       140,918  
                   
 
Cash flows from investing activities:
                       
   
Investment in oil and natural gas properties
    (41,487 )     (18,147 )     (23,519 )
   
Proceeds from sale of assets
    2,122       —       331,040  
   
Cash settlements on oil swaps
    —       —       (16,612 )
                   
   
Net cash provided by (used in) investing activities
    (39,365 )     (18,147 )     290,909  
                   
 
Cash flows from financing activities:
                       
   
Capital contributed by owner
    31,270       17,832       20,258  
   
Distributions to owner
    (40,181 )     (82,280 )     (452,085 )
                   
   
Net cash used in financing activities
    (8,911 )     (64,448 )     (431,827 )
                   
   
Net increase (decrease) in cash and cash equivalents
    —       —       —  
 
Cash and cash equivalents, beginning of period
    —       —       —  
                   
 
Cash and cash equivalents, end of period
  $ —     $ —     $ —  
                   
 
Non-Cash Investing and Financing Activities:
                       
   
Asset retirement obligations costs and liabilities
  $ 1,629     $ (1,952 )   $ (1,839 )
                   
See accompanying notes to financial statements.

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS
(1)  Summary of Significant Accounting Policies
     (a)  Basis of Presentation
      The accompanying financial statements include the accounts of Paul T. Horne, an individual (“PTH”), with respect to the selected interests in oil and natural gas properties he owns. PTH has other investments, such as real estate, which are not included in these financial statements. The accompanying financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred.
     (b)  Organization and Description of Business
      Paul T. Horne, an individual, owns interests in oil and natural gas properties located primarily in the Permian Basin of West Texas and southeast New Mexico. Mr. Horne is a degreed petroleum engineer, who worked for Mobil Oil Corporation for 15 years in a variety of engineering and management roles primarily in the Permian Basin prior to joining Moriah Resources, Inc. (“MRI”) as its Operations Manager in January, 2000. Mr. Horne has participated with MRI and its affiliate Moriah Properties, Ltd. (“MPL”) in making certain acquisitions and drilling wells during his employment. Effective June 1, 2002, Mr. Horne executed a tax-free exchange with MPL trading his interest in approximately 16 properties for a 1.0% pro-rata interest across all of MPL’s properties, proportionately reduced to MPL’s actual working interest and net revenue interest. Subsequent to the exchange, Mr. Horne has participated at a 1.0% interest in all of MPL’s oil and natural gas property acquisitions and drilling projects. Mr. Horne is also the Vice President of Operations for MBN Management, LLC, an entity in which MPL owns a significant but non-controlling interest. On January 1, 2006, PTH contributed his oil and natural gas properties to H2K Holdings Ltd., a limited partnership which he owns on a 50/50 basis with his wife.
     (c)  Oil and Natural Gas Properties
      PTH accounts for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to the acquisition of and development of proved areas are capitalized when incurred. The costs of development wells are capitalized whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense as incurred.
      Depreciation and depletion of producing oil and natural gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. FAS No. 19 requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves. As more fully described below, proved reserves are estimated by PTH’s independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., and are subject to future revisions based on availability of additional information. As discussed in Note (8), PTH follows FAS No. 143. Under FAS No. 143, asset retirement costs are generally recognized when the asset is placed in service, and are amortized over proved reserves using the units of production method. Asset retirement costs are estimated by PTH’s engineers using existing regulatory requirements and anticipated future inflation rates.
      Upon sale or retirement of complete fields of depreciable or depleted property, the book value thereof, less proceeds or salvage value, is credited to income.

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
      Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. PTH assesses impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using oil and natural gas prices as of the last day of the statement period held constant. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. As of December 31, 2003, 2004 and 2005, the estimated undiscounted future cash flows for PTH’s proved oil and natural gas properties exceeded the net capitalized costs, and no impairment was required to be recognized. Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred. Costs related to unproved mineral interests that are individually insignificant are amortized over the shorter of the exploratory period or the lease/concession holding period which is typically three years in the Permian Basin.
     (d)  Oil and Natural Gas Reserve Quantities
      PTH’s estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. LaRoche Petroleum Consultants, Ltd. prepares a reserve and economic evaluation of all PTH’s properties on a well-by-well basis utilizing information provided to it by PTH and utilizing information available from state agencies that collect information reported to it by the operators of PTH’s properties.
      Reserves and their relation to estimated future net cash flows impact PTH’s depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. PTH prepares its reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. The independent engineering firm described above adheres to the same guidelines when preparing their reserve reports. The accuracy of PTH’s reserve estimates is a function of many factors including the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.
      PTH’s proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas, and natural gas liquids eventually recovered.
     (e)  Income Taxes
      No provision for income taxes is made in PTH’s financial statements because the taxable income or loss of PTH is included in the income tax returns of the owner.
     (f)  Derivative Instruments and Hedging Activities
      PTH periodically uses derivative financial instruments to achieve a more predictable cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. Currently, these transactions are swaps. PTH accounts for these activities pursuant to FAS No. 133  — Accounting for Derivative Instruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair market value and included in the balance sheet as assets or liabilities.
      PTH does not specifically designate derivative instruments as cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices. Therefore, the mark to market of these instruments is recorded in current earnings (see Note 6).

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
     (g)  Use of Estimates
      PTH has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Estimates which are particularly significant to the financial statements include estimates of oil and natural gas reserves, accrued revenue and expenses, future cash flows from oil and natural gas properties, and depreciation, depletion and amortization.
     (h)  Revenue Recognition
      Sales of crude oil and natural gas are recognized when the delivery to the purchaser has occurred and title has been transferred. This occurs when oil or natural gas has been delivered to a pipeline or a tank lifting has occurred. Crude oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. Virtually all of PTH’s natural gas contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are determined on a monthly basis. As a result, PTH’s revenues from the sale of oil and natural gas will suffer if market prices decline and benefit if they increase. PTH believes that the pricing provisions of its oil and natural gas contracts are customary in the industry.
     (i)  Environmental
      PTH is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require PTH to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation are probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments are fixed and readily determinable.
     (j)  Recently Issued Accounting pronouncements
      Emerging Issues Task Force (“EITF”) Issue  04-9 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 19-1: Statement of Financial Accounting Standards (“FAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this determination cannot be made at the conclusion of drilling, FAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. In April 2005, the FASB issued FSP FAS 19-1, which we adopted effective January 1, 2005. This FSP amends FAS No. 19 to allow continued capitalization when (i) the well has found a sufficient quantity of reserves to justify proceeding with the project plan and (ii) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project which may include more than one exploratory well if the reserves are intended to be extracted in a single integrated operation. The FSP also requires increased disclosures. Adoption of this rule did not have a material impact on our earnings in 2005. If this FSP had been applied to 2004, it would not have had a material effect on his earnings for that year.
      FAS No. 153: In 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which became effective July 1, 2005. With certain exceptions, this

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
requires exchanges of nonmonetary assets to be recorded at fair value. Previously, these transactions were generally recorded at book value. This pronouncement results in reporting in earnings, gains and losses on exchanges of nonmonetary assets. Adoption of this rule did not have a material impact on either his earnings or balance sheet in 2005.
      FAS No. 154: In 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FAS No. 3,” which is effective January 1, 2006. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application (restatement) to prior periods’ financial statements of changes in accounting principle. This Statement also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
      FAS Interpretation No. 47: In March 2005, the FASB issued FAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FAS Statement No. 143,” “Accounting for Asset Retirement Obligations” which is effective no later than December 31, 2005. This pronouncement clarifies that the term “conditional asset retirement obligation” as used in FAS Statement 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. When sufficient information exists, uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability. This interpretation is not expected to have a material impact on either his earnings or balance sheet.
(2)  Acquisitions and Divestiture
  Energen Resources Acquisition
      In March 2003, PTH acquired from Energen Resources an additional working interest in the SE Stinnett Unit and the Jordan University Unit for approximately $4,000 cash.
  Pure Acquisition
      Effective May 1, 2003, PTH acquired from Pure Resources a working interest in oil and natural gas properties for approximately $3,000. These properties consist of 68 wellbores located in the Iatan, East Howard field of Mitchell County, Texas. These properties are operated by Brothers Production Company Inc., and the acquisition was funded with cash.
  Langlie Mattix Acquisition
      Effective October 1, 2003, PTH acquired from Pecos Production Company a non-operated working interest in the Langlie Mattix Penrose Sand Unit (“LMPSU”) located in Lea County, New Mexico for approximately $7,000. This unit is operated by Moriah Resources, Inc. and funded with cash.
  Denton Devonian Acquisition
      Effective April 1, 2004, PTH acquired from Fasken Oil and Ranch an additional working interest in the JM Denton lease for approximately $6,000. This property is operated by BPCI. Also acquired were working interests in a Fasken operated lease for approximately $10,000. Both of these leases are located in the Denton Devonian field in Lea County, New Mexico. The acquisition was funded with cash.

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
(3)  Related Party Transactions
      PTH serves as Operations Manager for Moriah Resources, Inc. (“MRI”) and has done so since January, 2000. Mr. Horne has participated with MRI and its affiliate Moriah Properties, Ltd. (“MPL”) in making certain acquisitions and drilling wells during his employment. Effective June 1, 2002, Mr. Horne executed a like kind exchange with MPL trading his interest in approximately 16 properties for a 1.0% pro-rata interest across all of MPL’s properties, proportionately reduced to MPL’s actual working interest and net revenue interest. Subsequent to the exchange, Mr. Horne has participated at a 1.0% interest in all of MPL’s oil and natural gas property acquisitions and drilling projects. Mr. Horne is also the Vice President of Operations for MBN Management, LLC, an entity in which MPL owns a significant but non-controlling interest. MRI performs certain accounting functions for PTH as part of its routine accounting activities.
(4)  Commitments and Contingencies
      PTH’s operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations could continue. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of PTH could be adversely affected.
(5)  Business and Credit Concentrations
  Revenue Receivables
      Substantially all PTH’s accounts receivable result from oil and natural gas sales. This concentration of customers may impact PTH’s overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, PTH has not experienced significant credit losses on such receivables. No bad debt expense was recorded in 2003, 2004, or 2005. PTH cannot ensure that such losses will not be realized in the future. A listing of oil and natural gas purchasers exceeding 10% of PTH’s sales is tabulated in Note 7.
(6)  Oil and Natural Gas Swaps
      Due to the volatility of oil and natural gas prices, PTH periodically enters into price-risk management transactions (e.g., swaps, collars, and floors) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits PTH’s ability to benefit from increases in the price of oil and natural gas, it also reduces PTH’s potential exposure to adverse price movements. PTH’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices, and limit PTH’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes.
      All of these price risk management transactions are considered derivative instruments and accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” These derivative instruments are intended to hedge our price risk and may be considered hedges for economic purposes, but PTH has chosen not to designate these transactions as cash flow hedges. Therefore, all derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period earnings.
      By using derivative instruments to hedge exposures to changes in commodity prices, PTH exposes himself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes PTH creates repayment risk. PTH minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties.
      PTH had no commodity derivative contract activity for the years ended December 31, 2003, 2004 and 2005. The impact on total revenue from hedging activities for the years ended December 31, 2003, 2004 and 2005 was as follows:
                         
    Year Ended December 31,
     
    2003   2004   2005
             
Crude oil derivative contract settlements
  $ —     $ —     $ (16,612 )
Unrealized change in fair value
    —       —       (17,397 )
                   
    $ —     $ —     $ (34,009 )
                   
      In its statement of cash flows for the nine months ended September 30, 2005, the Selected Interests of Paul T. Horne classified $16,612 paid to settle crude oil derivative contracts as cash used in operating activities. In the accompanying statement of cash flows for the year ended December 31, 2005, the classification of such payments has been revised and they are classified as cash used in investing activities.
      On May 25, July 5, August 1, and December 2, 2005 and January 13, 2006, PTH entered into NYMEX West Texas Intermediate (“WIT”) crude oil swaps paying floating prices and receiving fixed prices for a portion of future production as indicated below.
                     
    Annual    
Calendar   Volume   Price
Year   (Bbls)   ($/Bbls)
         
  2006       3,127     $ 60.39  
  2007       2,376     $ 60.00  
  2008       2,222     $ 60.50  
  2009       2,310     $ 63.22  
  2010       2,179     $ 61.90  
      On September 29, 2005 and January 13, 2006, PTH entered into NYMEX Henry Hub natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of his future production as indicated below.
                     
    Annual    
Calendar   Volume   Price
Year   (MMBtu)   ($/MMBtu)
         
  2006       7,052     $ 11.80  
  2007       6,393     $ 9.88  
  2008       5,240     $ 8.80  
  2009       5,524     $ 8.73  
  2010       5,167     $ 8.34  
      The purpose of the hedging program was to reduce the volatility of oil and natural gas prices and improving the predictability of PTH’s cash flows.

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
(7)  Sales to Major Customers
      PTH operates as one business segment within the Permian Basin region. It sold crude oil and natural gas production representing 10% or more of total revenues for the years ended December 31, 2003, 2004 and 2005 as shown below:
                         
    2003   2004   2005
             
Amoco Production Company
    7 %     9 %     10 %
ConocoPhillips
    14 %     9 %     14 %
Navajo Crude Oil Marketing
    15 %     17 %     16 %
Plains Marketing, LP
    16 %     20 %     23 %
      In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of PTH’s customers are concentrated in the oil and natural gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. We believe that the loss of any of our major purchasers would not have a long-term material adverse effect on our operations.
(8)  Asset Retirement Obligation
      In June 2001, the FASB issued FAS No. 143, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at PTH’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.
      PTH adopted FAS No. 143 on January 1, 2003, which resulted in a net increase to oil and natural gas properties of approximately $18,200 and related liabilities of approximately $19,800. These amounts reflect the ARO of PTH had the provisions of FAS No. 143 been applied since inception and resulted in a non-cash charge to earnings of approximately $1,600. Going forward PTH will record an abandonment liability associated with its oil and natural gas wells when those assets are placed in service.
      The following table reflects the changes of the ARO during the years ended December 31, 2003, 2004 and 2005:
                         
    December 31,
     
    2003   2004   2005
             
Asset retirement obligation — beginning of period
  $ 19,807     $ 21,766     $ 20,390  
Liabilities incurred during the period
    3,300       52       72  
Liabilities settled during the period
    (498 )     —       (452 )
Current period accretion
    828       932       1,034  
Current period revisions to accretion expense
    —       (356 )     8  
Current period revisions to oil and natural gas properties
    (1,671 )     (2,004 )     (1,459 )
                   
Asset retirement obligation — end of period
  $ 21,766     $ 20,390     $ 19,593  
                   
      The discount rate used in calculating the ARO was 4.0% in 2003, 4.1% in 2004 and 6.0% in 2005, respectively. These rates approximate PTH’s borrowing rates.

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
(9)  Costs Incurred in Oil and Natural Gas Property Acquisition and Development
      Costs incurred by PTH in natural gas and oil property acquisition and development are presented below:
                             
    Year Ended December 31,
     
    2003   2004   2005
             
Development costs
  $ —     $ 16,798     $ 18,397  
Exploration costs
    10,217       315       890  
Acquisition costs: Unproved properties
    5,355       —       —  
 
Proved properties
    25,915       1,034       4,232  
                   
   
Total acquisition, development and exploration costs
    41,487       18,147       23,519  
Asset retirement costs capitalized
    20,980       (1,952 )     (1,839 )
                   
   
Total
  $ 62,467     $ 16,195     $ 21,680  
                   
      Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells, and to provide facilities to extract, treat, and gather natural gas.
(10)  Oil and Natural Gas Capitalized Costs
      Aggregate capitalized costs for PTH related to oil and natural gas production activities with applicable accumulated depreciation, depletion, and amortization are presented below:
                           
    December 31,
     
    2003   2004   2005
             
Proved oil and natural gas properties
  $ 187,285     $ 205,116     $ 227,147  
Capitalized asset retirement obligations
    20,521       18,569       16,694  
                   
 
Total oil and natural gas properties
    207,806       223,685       243,841  
Accumulated depletion, depreciation and amortization
    (39,246 )     (55,193 )     (68,353 )
                   
    $ 168,560     $ 168,492     $ 175,488  
                   
(11)  Net Proved Oil and Natural Gas Reserves (Unaudited)
      The proved oil and natural gas reserves of PTH have been estimated by an independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., as of December 31, 2003, 2004 and 2005. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules based on

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
year-end prices. An analysis of the change in estimated quantities of oil and natural gas reserves, all of which are located within the United States, is shown below:
                     
    Oil and   Natural
    Condensate   Gas
    (MBbls)   (MMcf)
         
Total Proved Reserves
               
 
Balance, January 1, 2003
    25.8       105.4  
   
Purchase of minerals-in-place
    4.6       2.4  
   
Extensions and discoveries
    0.1       0.7  
   
Revisions of previous estimates
    4.8       9.5  
   
Production
    (2.4 )     (8.2 )
             
 
Balance, December 31, 2003
    32.9       109.8  
   
Purchase of minerals-in-place
    2.3       2.6  
   
Extensions and discoveries
    2.0       4.8  
   
Revisions of previous estimates
    6.1       3.1  
   
Production
    (2.8 )     (8.4 )
             
 
Balance, December 31, 2004
    40.5       111.9  
   
Purchase of minerals-in-place
    —       —  
   
Extensions and discoveries
    8.7       14.1  
   
Revisions of previous estimates
    2.9       6.1  
   
Production
    (2.9 )     (8.2 )
             
 
Balance, December 31, 2005
    49.2       123.9  
             
Proved Developed Reserves
               
 
January 1, 2003
    25.8       105.4  
 
December 31, 2003
    32.9       109.8  
 
December 31, 2004
    40.5       111.9  
 
December 31, 2005
    41.4       112.8  
(12)  Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves (Unaudited)
      Summarized in the following table is information for PTH with respect to the standardized measure of discounted future net cash flows relating to proved reserves. Future cash inflows are computed by applying year-end prices relating to PTH’s proved reserves to the year-end quantities of those reserves. Future

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
production, development, site restoration, and abandonment costs are derived based on current costs assuming continuation of existing economic conditions.
                           
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Future cash flows
  $ 1,554     $ 2,229     $ 3,886  
Future costs:
                       
 
Production
    (707 )     (983 )     (1,505 )
 
Development
    —       (2 )     (145 )
                   
Future net cash flows before income taxes
    847       1,244       2,236  
10% annual discount for estimated timing of cash flows
    (432 )     (644 )     (1,230 )
                   
Standardized measure of discounted net cash flows
  $ 415     $ 600     $ 1,006  
                   
      The Standardized Measure is based on the following oil and natural gas prices realized over the life of the properties at the wellhead as of the following dates:
                         
    December 31,
     
    2003   2004   2005
             
Oil (per Bbl)
  $ 29.35     $ 40.47     $ 56.84  
Natural gas (per MMBtu)
  $ 5.33     $ 5.20     $ 8.69  
      The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows:
                             
    Year Ended
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Increase (decrease):
                       
 
Sales, net of production costs
  $ (56 )   $ (96 )   $ (130 )
 
Net change in sales prices, net of production costs
    47       97       325  
 
Changes in estimated future development costs
    —       (1 )     (109 )
 
Extensions and discoveries, net of future production and development costs
    2       33       207  
 
Previously estimated development costs incurred
    —       —       (2 )
 
Revisions of quantity estimates
    49       70       106  
 
Purchase of minerals-in place
    36       36       —  
 
Other
    (1 )     12       (41 )
 
Accretion of discount
    28       34       50  
                   
   
Net increase
    105       185       406  
Standardized measure of discounted future net cash flows:
                       
 
Beginning of year
    310       415       600  
                   
 
End of year
  $ 415     $ 600     $ 1,006  
                   
      The data presented should not be viewed as representing the expected cash flow from or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many

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SELECTED INTERESTS OF PAUL T. HORNE
NOTES TO FINANCIAL STATEMENTS — (Continued)
judgmental determinations and frequent revisions. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts.
(13)  Discontinued Operations
      PTH has disposed of certain producing oil and natural properties which meet the guidelines for treatment as discontinued operations under FAS 144. The following table sets for the operating results for these discontinued operations:
                           
    Year Ended December 31,
     
    2003   2004   2005
             
Oil sales
  $ 282     $ —     $ —  
Natural gas sales
    —       —       —  
Oil and natural gas production expenses
    (326 )     —       —  
Production and other taxes
    (13 )     —       —  
                   
 
Income (loss) from discontinued operations
    (57 )     —       —  
                   
 
Gain on disposal
    1,944       —       —  
                   
      —       —       —  
 
Total income from discontinued operations
  $ 1,887     $ —     $ —  
                   
(14)  Subsequent Event
      On March 15, 2006, Legacy Reserves LP (“Legacy”), the successor entity to the Moriah Group, completed a private equity offering (“Legacy Formation”) in which it issued 5,000,000 limited partnership units at a gross price of $17.00 per unit. Simultaneous with the completion of this offering, Legacy purchased the oil and natural gas properties of H2K Holdings Ltd. H2K Holdings Ltd. exchanged its oil and natural gas properties for limited partnership units. The Moriah Group has been treated as the acquiring entity in the formation transaction of Legacy. Legacy was formed in October 2005.

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Report of Independent Certified Public Accountants
Selected Properties of Charities Support Foundation Inc. and Affiliates
Midland, Texas
      We have audited the accompanying combined balance sheets of the Selected Properties of Charities Support Foundation Inc. and Affiliates, as defined in Note 1(a), at December 31, 2004 and 2005 and the related combined statements of operations, equity, and cash flows for the two year period ended December 31, 2005. These financial statements are the responsibility of the Foundations’ 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 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Foundations’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 combined financial statements referred to above present fairly, in all material respects, the financial position of the Selected Properties of Charities Support Foundation Inc and Affiliates at December 31, 2004 and 2005, and the results of its operations and its cash flows for the two year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
  /s/ Johnson Miller & Co., CPA’s PC
Midland Texas
May 5, 2006

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
COMBINED BALANCE SHEETS
                     
    December 31,
     
    2004   2005
         
ASSETS
Current assets:
               
Accounts receivable, oil and natural gas
  $ 747,788     $ 790,186  
             
 
Total current assets
    747,788       790,186  
             
Proved oil and gas properties, at cost, using the successful efforts method of accounting
    4,631,708       4,774,454  
Accumulated depletion, depreciation and amortization
    (343,576 )     (632,670 )
             
      4,288,132       4,141,784  
             
    $ 5,035,920     $ 4,931,970  
             
 
LIABILITIES AND EQUITY
Current liabilities:
               
 
Accrued liabilities, oil and natural gas
  $ 295,805     $ 283,966  
 
Accrued retirement obligation (Note 6)
    —       18,449  
             
   
Total current liabilities
    295,805       302,415  
Asset retirement obligation (Note 6)
    204,448       185,375  
             
Total liabilities
    500,253       487,790  
             
 
Commitments and contingencies (Note 3)
               
Equity
    4,535,667       4,444,180  
             
    $ 5,035,920     $ 4,931,970  
             
See accompanying notes to combined financial statements.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
                     
    Year Ended December 31,
     
    2004   2005
         
Revenues:
               
 
Oil sales
  $ 993,638     $ 1,251,599  
 
Natural gas sales
    408,758       595,302  
             
   
Total revenues
    1,402,396       1,846,901  
             
Expenses:
               
 
Oil and natural gas production
    358,797       528,430  
 
Production and other taxes
    88,908       118,651  
 
General and administrative
    32,086       43,001  
 
Depletion, depreciation and accretion
    330,828       286,913  
 
Impairment of long-lived assets
    —       5,530  
             
   
Total expenses
    810,619       982,525  
             
   
Net income
  $ 591,777     $ 864,376  
             
See accompanying notes to combined financial statements.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
COMBINED STATEMENTS OF EQUITY
         
    Total
    Equity
     
Balance, January 1, 2003
  $ —  
Donated oil and natural gas property
    2,983,400  
       
Balance, December 31, 2003
    2,983,400  
Donated oil and natural gas property
    1,278,600  
Capital contributions
    152,512  
Distributions to foundations
    (470,622 )
Net income
    591,777  
       
Balance, December 31, 2004
    4,535,667  
Capital contributions
    132,580  
Distributions to foundations
    (1,088,443 )
Net income
    864,376  
       
Balance, December 31, 2005
  $ 4,444,180  
       
See accompanying notes to combined financial statements.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
                       
    Year Ended
    December 31,
     
    2004   2005
         
Cash flows from operating activities:
               
 
Net income
  $ 591,777     $ 864,376  
 
Adjustment to reconcile net income to net cash provided by operating activities:
               
   
Depletion, depreciation, amortization and accretion
    330,828       286,913  
   
Impairment of long-lived assets
    —       5,530  
 
Changes in assets and liabilities:
               
   
(Increase) decrease in accounts receivable, oil and natural gas
    (747,788 )     (42,398 )
   
Increase (decrease) in accrued liabilities, oil and natural gas
    295,805       (11,839 )
             
     
Total adjustments
    (121,155 )     238,206  
             
     
Net cash provided by operating activities
    470,622       1,102,582  
             
Cash flows from investing activities:
               
 
Investment in oil and natural gas properties
    (152,512 )     (146,719 )
             
     
Net cash used in investing activities
    (152,512 )     (146,719 )
             
Cash flows from financing activities:
               
 
Capital contributed
    152,512       132,580  
 
Distributions to foundations
    (470,622 )     (1,088,443 )
             
     
Net cash used in financing activities
    (318,110 )     (955,863 )
             
     
Net increase (decrease) in cash and cash equivalents
    —       —  
Cash and cash equivalents, beginning of period
    —       —  
             
Cash and cash equivalents, end of period
  $ —     $ —  
             
Non-Cash Investing and Financing Activities:
               
 
Asset retirement obligation costs and liabilities, net
  $ (4,638 )   $ 594  
             
 
Contribution of oil and gas properties
  $ 1,278,600     $ —  
             
See accompanying notes to combined financial statements.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
     (a) Basis of Presentation
      The accompanying combined financial statements include the activities of Charities Support Foundation, Inc. (“CSFI”), Moriah Foundation, Inc. (“MFI”), and Cary Brown Family Foundation (“CBFF”) with respect to certain oil and natural gas properties contributed to them by Dale A. Brown and Cary D. Brown on December 31, 2003 and January 1, 2004. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred. As used herein, the term Charitable Foundations refers to all of these entities on a combined basis unless the context specifies otherwise.
     (b) Organization and Description of Business
      The Charitable Foundations operate as three separate public charities with offices in Colorado Springs, Colorado. Among other investments the Charitable Foundations own interests in oil and natural gas producing properties primarily located in the Permian Basin of West Texas and southeast New Mexico. The Charitable Foundations are comprised of Charities Support Foundation, Inc. (“CSFI”), Moriah Foundation, Inc. (“MFI”), and Cary Brown Family Foundation (“CBFF”). Charities Support Foundation, Inc. was organized as a Section 501(c)(3) and Section 509(a)(3) non-profit organization on July 31, 1997 under the laws of the State of Colorado, and provides support to qualifying charitable purposes and management services to other charitable entities, donor advised funds, charitable trusts and charitable annuities. CSFI in this capacity provides services to both MFI and CBFF. Moriah Foundation, Inc. was organized on May 26, 2000 under the laws of the State of Colorado as a Section 501(c)(3) and Section 509(a)(3) non-profit supporting organization to Christian Community Foundation. Cary Brown Family Foundation was organized on November 19, 2003, under the laws of the State of Texas as a Section 501(c)(3) and Section 509(a)(3) non-profit supporting organization to Christian Community Foundation. In December 2003 and January 2004 Dale and Rita Brown contributed to CSFI and MFI, and Cary and Jill Brown contributed to CSFI and CBFF, undivided interests in producing oil and natural gas properties in which Moriah Properties, Ltd and Moriah New Mexico, Ltd. also own interests. CSFI owns working interests burdened by net profits interests owned by MFI and CBFF. CSFI has contracted with Moriah Resources, Inc. to provide certain accounting and management services related to the ownership of these oil and natural gas interests. Dale Brown and Cary Brown each own 50% of the common stock of Moriah Resources Inc. Dale Brown serves on the board of Christian Community Foundation. Cary Brown serves on the board of CSFI.
     (c) Oil and Natural Gas Properties
      The Charitable Foundations account for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to the acquisition of and development of proved areas are capitalized when incurred. The costs of development wells are capitalized whether productive or non- productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense as incurred.
      Depreciation and depletion of producing oil and natural gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. FAS No. 19 requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
proved developed reserves. As more fully described below, proved reserves are estimated by the Charitable Foundations’ independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., and are subject to future revisions based on availability of additional information. As discussed in Note (6), the Charitable Foundations follow FAS No. 143. Under FAS No. 143, asset retirement costs are generally recognized when the asset is placed in service, and are amortized over proved reserves using the units of production method. Asset retirement costs are estimated by the Charitable Foundations’ engineers using existing regulatory requirements and anticipated future inflation rates.
      Upon sale or retirement of complete fields of depreciable or depleted property, the book value thereof, less proceeds or salvage value, is credited to income.
      Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. The Charitable Foundations assess impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using oil and natural gas prices as of the last day of the statement period held constant. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. As of December 31, 2003, 2004 and 2005, the estimated undiscounted future cash flows for the Charitable Foundations’ proved oil and natural gas properties exceeded the net capitalized costs, and no impairment was required to be recognized. Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred. Costs related to unproved mineral interests that are individually insignificant are amortized for impairment over the shorter of the exploratory period or the lease/concession holding period which is typically three years in the Permian Basin.
     (d) Oil and Gas Reserve Quantities
      The Charitable Foundations’ estimate of proved reserves is based on the quantities of oil and gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. LaRoche Petroleum Consultants, Ltd. prepares a reserve and economic evaluation of all the Charitable Foundations’ properties on a well-by-well basis utilizing information provided to it by the Charitable Foundations and utilizing information available from state agencies that collect information reported to it by the operators of the Charitable Foundations’ properties.
      Reserves and their relation to estimated future net cash flows impact the Charitable Foundations’ depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. The Charitable Foundations prepare their reserve estimates, and the projected cash flows derived from these reserve estimates, in accordance with SEC guidelines. The independent engineering firm described above adheres to the same guidelines when preparing their reserve reports. The accuracy of the Charitable Foundations’ reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.
      The Charitable Foundations’ proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas, and natural gas liquids eventually recovered.
     (e) Income Taxes
      No provision for income taxes is made in the Charitable Foundations’ combined financial statements because the net profits or losses of the Charitable Foundations are not taxable.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
     (f) Use of Estimates
      Management of the Charitable Foundations has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Estimates which are particularly significant to the financial statements include estimates of oil and natural gas reserves, accrued revenue and expenses, future cash flows from oil and natural gas properties, and depreciation, depletion and amortization.
     (g) Revenue Recognition
      Sales of crude oil and natural gas are recognized when the delivery to the purchaser has occurred and title has been transferred. This occurs when oil or natural gas has been delivered to a pipeline or a tank lifting has occurred. Crude oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. Virtually all of CSFI’s natural gas contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are determined on a monthly basis. As a result, CSFI’s revenues from the sale of oil and natural gas will suffer if market prices decline and benefit if they increase. CSFI believes that the pricing provisions of its oil and natural gas contracts are customary in the industry.
     (h) Recently Issued Accounting pronouncements
      Emerging Issues Task Force (“EITF”) Issue  04-9 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 19-1: Statement of Financial Accounting Standards (“FAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this determination cannot be made at the conclusion of drilling, FAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. In April 2005, the FASB issued FSP FAS 19-1, which we adopted effective January 1, 2005. This FSP amends FAS No. 19 to allow continued capitalization when (i) the well has found a sufficient quantity of reserves to justify proceeding with the project plan and (ii) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project which may include more than one exploratory well if the reserves are intended to be extracted in a single integrated operation. The FSP also requires increased disclosures. Adoption of this rule did not have a material impact on earnings in 2005. If this FSP had been applied to 2004, it would not have had a material effect on our earnings for that year.
      FAS No. 153: In 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which became effective July 1, 2005. With certain exceptions, this requires exchanges of nonmonetary assets to be recorded at fair value. Previously, these transactions were generally recorded at book value. This pronouncement results in reporting in earnings, gains and losses on exchanges of nonmonetary assets. Adoption of this rule did not have a material impact on either our earnings or balance sheet in 2005.
      FAS No. 154: In 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FAS No. 3,” which is effective January 1, 2006. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application (restatement) to prior periods’ financial statements of changes in

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
accounting principle. This Statement also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
      FAS Interpretation No. 47: In March 2005, the FASB issued FAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FAS Statement No. 143,” “Accounting for Asset Retirement Obligations” which is effective no later than December 31, 2005. This pronouncement clarifies that the term “conditional asset retirement obligation” as used in FAS Statement 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. When sufficient information exists, uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability. This interpretation is not expected to have a material impact on either our earnings or combined balance sheet.
     (i) Environmental
      The Charitable Foundations are subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Charitable Foundations to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation are probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments are fixed and readily determinable.
(2) Related Party Transactions
      CSFI has contracted with Moriah Resources, Inc. to provide certain accounting and management services related to the ownership of these oil and natural gas interests.
(3) Commitments and Contingencies
      From time to time the Charitable Foundations are parties to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Charitable Foundations are not currently a party to any proceeding that it believes, if determined in a manner adverse to the Charitable Foundations, could have a potential material adverse effect on its financial condition, results of operations or cash flows.
      Additionally, the Charitable Foundations’ operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations could continue. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of the Charitable Foundations could be adversely affected.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(4) Business and Credit Concentrations
Revenue and Trade Receivables
      Substantially all the Charitable Foundations’ accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the oil and natural gas industry. This concentration of customers and joint interest owners may impact the Charitable Foundations’ overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, the Charitable Foundations have not experienced significant credit losses on such receivables. No bad debt expense was recorded in 2005. The Charitable Foundations cannot ensure that such losses may not be realized in the future. A listing of oil and natural gas purchasers exceeding 10% of the Charitable Foundations’ sales is tabulated in Note 5.
(5) Sales to Major Customers
      The Charitable Foundations operate as one business segment within the Permian Basin region. They sold crude oil and natural gas production representing 10% or more of total revenues for the years ended December 31, 2004 and 2005:
                 
    2004   2005
         
ConocoPhillips
    9 %     14 %
Navajo Crude Oil Marketing
    17 %     16 %
Plains Marketing, LP
    20 %     24 %
      In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of the Charitable Foundations’ customers are concentrated in the oil and natural gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. We believe that the loss of any of our major purchasers would not have a long-term material adverse effect on our operations.
(6) Asset Retirement Obligation
      In June 2001, the FASB issued FAS No. 143, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Charitable Foundations’ credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
      The following table reflects the changes of the ARO during the years ended December 31, 2003, 2004 and 2005:
                         
    December 31,
     
    2003   2004   2005
             
Asset retirement obligation — beginning of period
  $ —     $ 155,284     $ 204,448  
Liabilities assumed upon donation of properties
    155,284       66,550       —  
Liabilities settled during the period
    —       —       (4,568 )
Current period accretion
    —       6,211       9,950  
Current period revisions to accretion expense
    —       (18,959 )     (6,600 )
Current period revisions to oil and natural gas properties
    —       (4,638 )     594  
                   
Asset retirement obligation — end of period
  $ 155,284     $ 204,448     $ 203,824  
                   
(7) Costs Incurred in Oil and Natural Gas Property Acquisition and Development Activities
      Costs incurred by the Charitable Foundations in natural gas and oil property acquisition and development are presented below:
                   
    Year Ended
    December 31,
     
    2004   2005
         
Development costs
  $ 152,512     $ 146,719  
             
 
Total development costs
  $ 152,512     $ 146,719  
             
      Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells, and to provide facilities to extract, treat, and gather natural gas.
(8) Oil and Natural Gas Capitalized Costs
      Aggregate capitalized costs for the Charitable Foundations related to natural gas and oil production activities with applicable accumulated depreciation, depletion, and amortization are presented below:
                           
    December 31,
     
    2003   2004   2005
             
Proved oil and natural gas properties
  $ 2,983,400     $ 4,414,512     $ 4,561,231  
Capitalized asset retirement obligations
    155,284       217,196       213,223  
                   
 
Total oil and natural gas properties
    3,138,684       4,631,708       4,774,454  
Accumulated depletion, depreciation and amortization
    —       (343,576 )     (632,670 )
                   
    $ 3,138,684     $ 4,288,132     $ 4,141,784  
                   
(9) Net Proved Oil and Natural Gas Reserves (Unaudited)
      The proved oil and natural gas reserves of the Charitable Foundations have been estimated by an independent petroleum engineer, LaRoche Petroleum Consultants, Ltd., as of December 31, 2003, 2004 and 2005. These reserve estimates have been prepared in compliance with the Securities and Exchange

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
Commission rules based on year-end prices. An analysis of the change in estimated quantities of oil and natural gas reserves, all of which are located within the United States, is shown below:
                     
    Oil and   Natural
    Condensate   Gas
    (MBbls)   (MMcf)
         
Total Proved Reserves
               
 
Balance, January 1, 2003
    —       —  
   
Donations of minerals-in-place
    231       762  
             
 
Balance, December 31, 2003
    231       762  
   
Donations of minerals-in-place
    99       326  
   
Extensions and discoveries
    20       56  
   
Revisions of previous estimates
    48       2  
   
Production
    (26 )     (80 )
             
 
Balance, December 31, 2004
    372       1,066  
   
Extension and discoveries
    87       115  
   
Revisions of previous estimates
    25       82  
   
Production
    (27 )     (78 )
             
 
Balance, December 31, 2005
    457       1,185  
             
Proved Developed Reserves
               
 
December 31, 2003
    231       762  
 
December 31, 2004
    372       1,066  
 
December 31, 2005
    377       1,076  
(10) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves (Unaudited)
      Summarized in the following table is information for the Charitable Foundations with respect to the standardized measure of discounted future net cash flows relating to proved reserves. Future cash inflows are computed by applying year-end prices relating to the Charitable Foundations’ proved reserves to the year-end quantities of those reserves. Future production, development, site restoration, and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. There are no future income tax expenses because the Charitable Foundations are nontaxable entities.
                           
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Future cash flows
  $ 10,828     $ 20,622     $ 36,354  
Future costs:
                       
 
Production
    (4,933 )     (9,170 )     (14,182 )
 
Development
    —       (20 )     (1,442 )
                   
Future net cash flows before income taxes
    5,895       11,432       20,730  
10% annual discount for estimated timing of cash flows
    (3,010 )     (5,878 )     (11,392 )
                   
Standardized measure of discounted net cash flows
  $ 2,885     $ 5,554     $ 9,338  
                   

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SELECTED PROPERTIES OF CHARITIES SUPPORT FOUNDATION INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
      The Standardized Measure is based on the following oil and natural gas prices realized over the life of the properties at the wellhead as of the following dates:
                         
    December 31,
     
    2003   2004   2005
             
Oil (per Bbl)
  $ 29.35     $ 40.27     $ 56.69  
Natural gas (per MMBtu)
  $ 5.32     $ 5.28     $ 8.82  
      The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows:
                             
    Year Ended
    December 31,
     
    2003   2004   2005
             
    (Thousands)
Increase (decrease):
                       
 
Sales, net of production costs
  $ —     $ (955 )   $ (1,200 )
 
Net change in sales prices, net of production costs
    —       994       2,435  
 
Changes in estimated future development costs
    —       (10 )     (1,117 )
 
Extensions and discoveries, net of future production and development costs
    —       361       2,057  
 
Previously estimated development costs incurred
    —       —       (20 )
 
Revisions of quantity estimates
    —       486       595  
 
Donations of minerals-in place
    2,885       1,225       —  
 
Other
    —       218       577  
 
Accretion of discount
    —       350       457  
                   
   
Net increase
    2,885       2,669       3,784  
Standardized measure of discounted future net cash flows:
                       
 
Beginning of year
    —       2,885       5,554  
                   
 
End of year
  $ 2,885     $ 5,554     $ 9,338  
                   
      The data presented should not be viewed as representing the expected cash flow from or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts.
(11) Subsequent Event
      On March 15, 2006, Legacy Reserves LP (“Legacy”), the successor entity to the Moriah Group, completed a private equity offering (“Legacy Formation”) in which it issued 5,000,000 limited partnership units at a gross price of $17.00 per unit. Simultaneous with the completion of this offering, Legacy purchased the oil and natural gas properties of the Charitable Foundations solely for $7.7 million cash. The Moriah Group has been treated as the acquiring entity in the formation transaction of Legacy. Legacy was formed in October 2005.

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Report of Independent Registered Public Accounting Firm
MBN Properties, LP
Midland, Texas
      We have audited the accompanying statements of revenues and direct operating expenses of the oil and natural gas properties (the “PITCO Properties”), as defined in Note 1, acquired on September 14, 2005 by MBN Properties, LP (the Company) for each of the years in the three year period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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. The PITCO Properties are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the PITCO Properties’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.
      The accompanying statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1 and are not intended to be a complete presentation of the results of operations of the PITCO Properties.
      In our opinion, the statements of revenues and direct operating expenses referred to above present fairly, in all material respects, the revenues and direct operating expenses of the PITCO Properties for each of the years in the three year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
  /s/ BDO Seidman, LLP
Houston, Texas
November 7, 2005

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PITCO PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES —
OIL AND NATURAL GAS PROPERTIES ACQUIRED FROM
THE PROSPECTIVE INVESTMENT AND TRADING COMPANY, LTD.
                                           
    Year Ended December 31,   Six Months Ended June 30,
         
    2002   2003   2004   2004   2005
                     
                (Unaudited)
Revenue — Oil and natural gas sales
  $ 7,732,266     $ 10,524,858     $ 12,832,660     $ 5,715,561     $ 6,515,477  
                               
Direct Operating Expenses:
                                       
 
Severance and ad valorem taxes
    722,847       904,555       1,112,708       426,486       473,391  
 
Lease operating expenses
    1,873,833       2,088,465       2,567,721       1,329,024       1,062,944  
 
Well workover expenses
    526,040       672,098       529,644       265,854       305,908  
                               
Total direct operating expenses
    3,122,720       3,665,118       4,210,073       2,021,364       1,842,243  
                               
Revenue in excess of direct operating expenses
  $ 4,609,546     $ 6,859,740     $ 8,622,587     $ 3,694,197     $ 4,673,234  
                               
See accompanying notes to statements of revenue and direct operating expenses.

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PITCO PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) Basis of Presentation
      The accompanying financial statements present the revenues and direct operating expenses of the oil and natural gas properties (the “PITCO Properties”) acquired by MBN Properties LP (the “Company”) from The Prospective Investment and Trading Company, LTD., PITCO Investments, LTD., JAG Oil Limited Partnership, AS IS Investments, L.L.C., and High Hopes Oil Company, L.L.C., collectively, “PITCO,” for the period January 1, 2002 through June 30, 2005. The PITCO Properties were purchased by the Company on September 14, 2005, for $66,151,723, subject to post-closing adjustments. The PITCO Properties consist of working interests, net profits interests, and royalty interests primarily located in the Permian Basin of West Texas and southeast New Mexico.
      The accompanying statements of revenues and direct operating expenses of the Properties do not include indirect general and administrative expenses, interest expense, depreciation, depletion and amortization, or any provision for income taxes. Management of the Company believes historical expenses of this nature incurred by PITCO and its affiliates are not indicative of the costs to be incurred by the Company.
      Revenues in the accompanying statements of revenues and direct operating expenses are recognized on the entitlement method. The direct operating expenses are recognized on the accrual basis and consist of the direct costs of operating the PITCO Properties including severance and ad valorem (property) taxes, lifting costs, gathering, well repair and well workover costs. Direct costs also include contractual overhead charged to properties operated by others, but does not include general corporate overhead.
      Historical financial information reflecting financial position, results of operations, and cash flows of the Properties is not presented because it would be impractical and costly to obtain since such financial information was not historically prepared by PITCO. Other assets acquired and liabilities assumed were not material. In addition, the PITCO Properties were a part of a larger enterprise prior to the acquisition by the Company, and representative amounts of indirect general and administrative expenses, depreciation, depletion and amortization, interest and other indirect costs were not necessarily allocated to the PITCO Properties acquired, nor would such allocated historical costs be relevant to future operations of the PITCO Properties. The historical statements of revenues and direct operating expenses of PITCO’s interest in the PITCO Properties are presented in order to substantially comply with the rules and regulations of the Securities and Exchange Commission for businesses acquired.
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
      The statements of revenues and direct operating expenses of the PITCO Properties for the six months ended June 30, 2004 and 2005 are unaudited. In the opinion of the company’s management, such statements include the adjustments and accruals which are necessary for a fair presentation of results for the Properties. These interim results are not necessarily indicative of results for a full year.
(2) Supplemental Financial Information for Oil and Natural Gas Producing Activities (Unaudited)
      The following reserve estimates have been prepared by an independent petroleum engineering firm, LaRoche Petroleum Consultants, Ltd., as of December 31, 2002, 2003, 2004. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules based on year-end prices for oil and natural gas with appropriate adjustments by property for location, quality, gathering and marketing adjustments.

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PITCO PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES — (Continued)
     (a) Reserve Quantity Information
      Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data demonstrates with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods.
      Below are the net quantities of net total proved reserves, and net proved developed reserves of the Properties. An analysis of the change in estimated quantities of reserves, all of which are located within the United States, is presented below.
                     
    Oil   Natural Gas
    (MBbl)   (MMcf)
         
    (In thousands)
PROVED RESERVES:
               
 
December 31, 2001
    1,480       9,236  
   
Revisions of previous estimates
    622       1,688  
   
Production
    (187 )     (1,114 )
             
 
Balance, December 31, 2002
    1,915       9,810  
   
Extensions, discoveries, improved recovery
    290       —  
   
Revisions of previous estimates
    92       932  
   
Production
    (187 )     (1,062 )
             
 
Balance, December 31, 2003
    2,110       9,680  
   
Extensions, discoveries, improved recovery
    375       —  
   
Revisions of previous estimates
    265       122  
   
Production
    (192 )     (992 )
             
 
Balance, December 31, 2004
    2,558       8,810  
             
PROVED DEVELOPED RESERVES:
               
 
December 31, 2002
    1,915       9,810  
 
December 31, 2003
    2,110       9,680  
 
December 31, 2004
    2,256       8,810  
     (b) Standardized Measure of Discounted Future Net Cash Flows Relating to Oil and Natural Gas Reserves
      The standardized measure of discounted future net cash flows relating to proved oil and gas reserves (Standardized Measure) is a disclosure requirement under Statement of Financial Accounting Standards No. 69. The Standardized Measure does not purport to be, nor should it be interpreted to present, the fair market value of the proved oil and natural gas reserves of the Properties. An estimate of fair market value would also take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties, and consideration of expected future economic and operating conditions. The estimates of future cash flows and future production and development costs are based on period-end sales prices for oil and natural gas, estimated future production of proved reserves and estimated future production and development costs of proved reserves, based on current costs and economic conditions. The estimated future net cash flows are then discounted at a rate of 10%. No deduction has been made for general and administrative expenses, interest expense, depreciation, depletion and amortization or for federal or state income taxes.

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PITCO PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES — (Continued)
      The Standardized Measure (before income taxes) relating to proved oil and natural gas reserves are presented below (in thousands):
                         
    December 31,
     
    2002   2003   2004
             
Future cash inflows
  $ 97,486     $ 116,802     $ 152,761  
Future production costs
    (36,971 )     (44,396 )     (58,861 )
Future development costs
    —       —       (727 )
                   
Future net cash flows
    60,515       72,406       93,173  
10% annual discount for estimated timing of cash flows
    (27,243 )     (34,411 )     (46,942 )
                   
Standardized measure of discounted net cash flows
  $ 33,272     $ 37,995     $ 46,231  
                   
      The Standardized Measure is based on the following oil and natural gas price realized over the life of the properties at the wellhead as of the following dates:
                         
    December 31,
     
    2002   2003   2004
             
Oil (per Bbl)
  $ 29.14     $ 30.23     $ 40.99  
Natural gas (per MMBtu)
  $ 4.23     $ 5.46     $ 5.42  
      Changes in the Standardized Measure (before income taxes) relating to proved oil and natural gas reserves is as follows (in thousands):
                         
    Year Ended December 31,
     
    2002   2003   2004
             
Standardized Measure (before income taxes) — beginning of period
  $ 16,219     $ 33,272     $ 37,995  
Sales of oil and natural gas, net or production costs
    (4,610 )     (6,860 )     (8,623 )
Net change in prices and production costs
    11,423       4,014       6,470  
Net change in future development costs
    —       —       (686 )
Extensions and improved recovery
    —       2,135       3,820  
Revisions of previous quantity estimates
    8,464       2,521       3,310  
Accretion of discount
    1,488       3,117       3,565  
Changes in timing of production and other
    288       (204 )     380  
                   
Standardized Measure (before taxes) — end of period
  $ 33,272     $ 37,995     $ 46,231  
                   
      Estimates of economically recoverable oil and natural gas reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree speculative and may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties and are based on data gained from production histories and on assumptions as to geologic formations, reservoir behavior, equipment condition and other matters. Actual quantities of oil and natural gas produced in the future may differ materially from the amounts estimated.

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APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
LEGACY RESERVES LP

Table of Contents

TABLE OF CONTENTS
                 
ARTICLE I

Definitions
  Section 1.1     Definitions     A-1  
  Section 1.2     Construction     A-10  
 
ARTICLE II

Organization
  Section 2.1     Formation     A-10  
  Section 2.2     Name     A-11  
  Section 2.3     Registered Office; Registered Agent; Principal Office; Other Offices     A-11  
  Section 2.4     Purpose and Business     A-11  
  Section 2.5     Powers     A-11  
  Section 2.6     Power of Attorney     A-11  
  Section 2.7     Term     A-12  
  Section 2.8     Title to Partnership Assets     A-13  
 
ARTICLE III

Rights of Limited Partners
  Section 3.1     Limitation of Liability     A-13  
  Section 3.2     Management of Business     A-13  
  Section 3.3     Outside Activities of the Limited Partners     A-13  
  Section 3.4     Rights of Limited Partners     A-13  
 
ARTICLE IV

Certificates; Record Holders; Transfer of
Partnership Interests; Redemption of Partnership Interests
  Section 4.1     Certificates     A-14  
  Section 4.2     Mutilated, Destroyed, Lost or Stolen Certificates     A-14  
  Section 4.3     Record Holders     A-15  
  Section 4.4     Transfer Generally     A-15  
  Section 4.5     Registration and Transfer of Limited Partner Interests     A-16  
  Section 4.6     Transfer of the General Partner’s General Partner Interest     A-16  
  Section 4.7     [Reserved]     A-17  
  Section 4.8     Restrictions on Transfers     A-17  
  Section 4.9     Citizenship Certificates; Non-citizen Assignees     A-17  
  Section 4.10     Redemption of Partnership Interests of Non-citizen Assignees     A-18  
 
ARTICLE V

Capital Contributions and
Issuance of Partnership Interests
  Section 5.1     Organizational Contributions     A-19  
  Section 5.2     Contributions by the General Partner     A-19  
  Section 5.3     Contributions by Founding Investors and the Initial Purchaser and Accredited Investors     A-19  
  Section 5.4     Interest and Withdrawal     A-20  
  Section 5.5     Capital Accounts     A-20  

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  Section 5.6     Issuances of Additional Partnership Securities     A-22  
  Section 5.7     [Reserved]     A-22  
  Section 5.8     Limited Preemptive Right     A-23  
  Section 5.9     Splits and Combinations     A-23  
  Section 5.10     Fully Paid and Non-Assessable Nature of Limited Partner Interests     A-23  
 
ARTICLE VI

Allocations and Distributions
  Section 6.1     Allocations for Capital Account Purposes     A-23  
  Section 6.2     Allocations for Tax Purposes     A-26  
  Section 6.3     Requirement and Characterization of Distributions; Distributions to Record Holders     A-29  
 
ARTICLE VII

Management and Operation of Business
  Section 7.1     Management     A-29  
  Section 7.2     Certificate of Limited Partnership     A-31  
  Section 7.3     Restrictions on the General Partner’s Authority     A-31  
  Section 7.4     Reimbursement of the General Partner     A-32  
  Section 7.5     Outside Activities     A-32  
  Section 7.6     Loans from the General Partner; Loans or Contributions from the Partnership or Group Members     A-33  
  Section 7.7     Indemnification     A-33  
  Section 7.8     Liability of Indemnitees     A-35  
  Section 7.9     Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties     A-35  
  Section 7.10     Other Matters Concerning the General Partner     A-36  
  Section 7.11     Purchase or Sale of Partnership Securities     A-37  
  Section 7.12     [Reserved]     A-37  
  Section 7.13     Reliance by Third Parties     A-37  
 
ARTICLE VIII

Books, Records, Accounting and Reports
  Section 8.1     Records and Accounting     A-38  
  Section 8.2     Fiscal Year     A-38  
  Section 8.3     Reports     A-38  
 
ARTICLE IX

Tax Matters
  Section 9.1     Tax Returns and Information     A-38  
  Section 9.2     Tax Elections     A-38  
  Section 9.3     Tax Controversies     A-39  
  Section 9.4     Withholding     A-39  
 
ARTICLE X

Admission of Partners
  Section 10.1     Admission of Founding Investors and Initial Limited Partners     A-39  
  Section 10.2     Admission of Limited Partners     A-39  

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  Section 10.3     Admission of Successor General Partner     A-40  
  Section 10.4     Amendment of Agreement and Certificate of Limited Partnership     A-40  
 
ARTICLE XI

Withdrawal or Removal of Partners
  Section 11.1     Withdrawal of the General Partner     A-40  
  Section 11.2     Removal of the General Partner     A-41  
  Section 11.3     Interest of Departing General Partner and Successor General Partner     A-42  
  Section 11.4     [Reserved]     A-43  
  Section 11.5     Withdrawal of Limited Partners     A-43  
 
ARTICLE XII

Dissolution and Liquidation
  Section 12.1     Dissolution     A-43  
  Section 12.2     Continuation of the Business of the Partnership After Dissolution     A-44  
  Section 12.3     Liquidator     A-44  
  Section 12.4     Liquidation     A-44  
  Section 12.5     Cancellation of Certificate of Limited Partnership     A-45  
  Section 12.6     Return of Contributions     A-45  
  Section 12.7     Waiver of Partition     A-45  
  Section 12.8     Capital Account Restoration     A-45  
 
ARTICLE XIII

Amendment of Partnership
Agreement; Meetings; Record Date
  Section 13.1     Amendments to be Adopted Solely by the General Partner     A-46  
  Section 13.2     Amendment Procedures     A-47  
  Section 13.3     Amendment Requirements     A-47  
  Section 13.4     Meetings     A-48  
  Section 13.5     Notice of a Meeting     A-50  
  Section 13.6     Record Date     A-50  
  Section 13.7     Adjournment     A-50  
  Section 13.8     Waiver of Notice; Approval of Meeting; Approval of Minutes     A-50  
  Section 13.9     Quorum and Voting     A-50  
  Section 13.10     Conduct of a Meeting     A-51  
  Section 13.11     Action Without a Meeting     A-51  
  Section 13.12     Right to Vote and Related Matters     A-52  
 
ARTICLE XIV

Merger
  Section 14.1     Authority     A-52  
  Section 14.2     Procedure for Merger or Consolidation     A-52  
  Section 14.3     Approval by Limited Partners of Merger or Consolidation     A-53  
  Section 14.4     Certificate of Merger     A-54  
  Section 14.5     Amendment of Partnership Agreement     A-54  
  Section 14.6     Effect of Merger     A-54  

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ARTICLE XV

Right to Acquire Limited Partner Interests
  Section 15.1     Right to Acquire Limited Partner Interests     A-54  
 
ARTICLE XVI

General Provisions
  Section 16.1     Addresses and Notices     A-56  
  Section 16.2     Further Action     A-56  
  Section 16.3     Binding Effect     A-56  
  Section 16.4     Integration     A-56  
  Section 16.5     Creditors     A-57  
  Section 16.6     Waiver     A-57  
  Section 16.7     Third-Party Beneficiaries     A-57  
  Section 16.8     Counterparts     A-57  
  Section 16.9     Applicable Law     A-57  
  Section 16.10     Invalidity of Provisions     A-57  
  Section 16.11     Consent of Partners     A-57  
  Section 16.12     Facsimile Signatures     A-57  

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AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF LEGACY RESERVES LP
      THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF LEGACY RESERVES LP dated as of March  15 , 2006, is entered into by and among Legacy Reserves GP, LLC, a Delaware limited liability company, as the General Partner, Moriah Properties Ltd., a Texas limited partnership, as the Organizational Limited Partner, and any other Persons who become Partners in the Partnership or parties hereto as provided herein. In consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
Section 1.1      Definitions.
      The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.
      “Accredited Investor” shall have the meaning assigned to such term in Rule 501(a) promulgated under the Securities Act.
      “Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each fiscal year of the Partnership, (a) increased by any amounts that such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all deductions in respect of depletion that, as of the end of such fiscal year are expected to be made to such Partner’s Capital Account in respect of the oil and gas properties of the Partnership (ii) the amount of all losses and deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii) and (iii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner’s Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The “Adjusted Capital Account” of a Partner in respect of a General Partner Interest, a Unit or any other specified interest in the Partnership shall be the amount that such Adjusted Capital Account would be if such General Partner Interest, Unit or any other specified interest in the Partnership were the only interest in the Partnership held by such Partner from and after the date on which such General Interest, Unit or other interest was first issued.
      “Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Section 5.5(d)(i) or Section 5.5(d)(ii).
      “Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
      “Agreed Allocation” means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of Section 6.1, including, without limitation, a Curative Allocation (if appropriate to the context in which the term “Agreed Allocation” is used).
      “Agreed Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the General Partner. The General Partner shall use

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such method as it determines to be appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Partnership in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property.
      “Agreement” means this Amended and Restated Agreement of Limited Partnership of Legacy Reserves LP, as it may be amended, supplemented or restated from time to time.
      “Associate” means, when used to indicate a relationship with any Person, (a) any corporation or organization of which such Person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.
      “Available Cash” means, with respect to any Quarter ending prior to the Liquidation Date:
        (a) the sum of (i) all cash and cash equivalents of the Partnership Group on hand at the end of such Quarter and (ii) all additional cash and cash equivalents of the Partnership Group on hand on the date of determination of Available Cash with respect to such Quarter resulting from Working Capital Borrowings made subsequent to the end of such Quarter, less
 
        (b) the amount of any cash reserves established by the General Partner to (i) provide for the proper conduct of the business of the Partnership Group (including reserves for future capital expenditures including drilling and acquisitions and for anticipated future credit needs of the Partnership Group), (ii) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which any Group Member is a party or by which it is bound or its assets are subject or (iii) provide funds for distributions under Section 6.3 with respect to any one or more of the next four Quarters; provided, that disbursements made by a Group Member or cash reserves established, increased or reduced after the end of such Quarter but on or before the date of determination of Available Cash with respect to such Quarter shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such Quarter if the General Partner so determines.
      Notwithstanding the foregoing, “Available Cash” with respect to the Quarter in which the Liquidation Date occurs and any subsequent Quarter shall equal zero.
      “Board of Directors” means the board of directors or managers of a corporation or limited liability company, as applicable, or if a limited partnership, the board of directors or board of managers of the general partner of such limited partnership, as applicable.
      “Book-Tax Disparity” means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Section 5.5 and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.
      “Business Day” means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States of America or the State of Texas shall not be regarded as a Business Day.
      “Capital Account” means the capital account maintained for a Partner pursuant to Section 5.5. The “Capital Account” of a Partner in respect of a General Partner Interest, a Unit or any other Partnership Interest shall be the amount that such Capital Account would be if such General Partner Interest, Unit or other Partnership Interest were the only interest in the Partnership held by such Partner from and after the date on which such General Partner Interest, Unit or other Partnership Interest was first issued.

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      “Capital Contribution” means any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Partner contributes to the Partnership.
      “Carrying Value” means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, Simulated Depletion, amortization and cost recovery deductions charged to the Partners’ Capital Accounts in respect of such Contributed Property, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Section 5.5(d)(i) and Section 5.5(d)(ii) and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.
      “Cause” means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud or willful misconduct in its capacity as a general partner of the Partnership.
      “Certificate” means (a) a certificate (i) substantially in the form of Exhibit A to this Agreement, (ii) issued in global form in accordance with the rules and regulations of the Depositary or (iii) in such other form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more Units or (b) a certificate, in such form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more other Partnership Securities.
      “Certificate of Limited Partnership” means the Certificate of Limited Partnership of the Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 7.2, as such Certificate of Limited Partnership may be amended, supplemented or restated from time to time.
      “Citizenship Certification” means a properly completed certificate in such form as may be specified by the General Partner by which a Limited Partner certifies that he (and if he is a nominee holding for the account of another Person, that to the best of his knowledge such other Person) is an Eligible Citizen.
      “Closing Date” means the first date on which the Units are sold by the Partnership to the Initial Purchaser and the Accredited Investors pursuant to the provisions of the Purchase Agreement.
      “Closing Price” has the meaning assigned to such term in Section 15.1(a).
      “Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any successor law.
      “Combined Interest” has the meaning assigned to such term in Section 11.3(a).
      “Commission” means the United States Securities and Exchange Commission.
      “Conflicts Committee” means a committee of the Board of Directors of the General Partner composed entirely of two or more directors who are not (a) security holders, officers or employees of the General Partner, (b) officers, directors or employees of any Affiliate of the General Partner, (c) officers, directors or employees of any Group Member or (d) holders of any ownership interest in any Group Member other than Units and who also meet the independence standards required of directors who serve on an audit committee of a board of directors established by the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder and by the National Securities Exchange on which the Units are or may be listed or admitted to trading.
      “Contributed Property” means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 5.5(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property.
      “Contribution Agreement” means that certain Contribution, Conveyance and Assumption Agreement, dated as of the Closing Date, among the General Partner, the Partnership, the Operating Partnership GP, the

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Operating Partnership and the other parties named therein, together with the additional conveyance documents and instruments contemplated or referenced thereunder, as such may be amended, supplemented or restated from time to time.
      “Curative Allocation” means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 6.1(c)(ix).
      “Current Market Price” has the meaning assigned to such term in Section 15.1(a).
      “Delaware Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del C. Section  17-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.
      “Departing General Partner” means a former General Partner from and after the effective date of any withdrawal or removal of such former General Partner pursuant to Section 11.1 or Section 11.2.
      “Depositary” means, with respect to any Units issued in global form, The Depository Trust Company and its successors and permitted assigns.
      “Director” means a member of the Board of Directors of the General Partner.
      “Economic Risk of Loss” has the meaning set forth in Treasury Regulation Section 1.752-2(a).
      “Eligible Citizen” means a Person whose status as a Limited Partner the General Partner determines does not or would not subject such Group Member to a significant risk of cancellation or forfeiture of any of its properties or any interest therein.
      “Event of Withdrawal” has the meaning assigned to such term in Section 11.1(a).
      “Founder Contributed Assets” means the assets to be contributed to the Partnership in exchange for Units as set forth in the Contribution Agreement.
      “Founders Registration Rights Agreement” means that certain Founders Registration Rights Agreement, dated as of the Closing Date, among the General Partner, the Partnership and the other parties named therein, as such may be amended, supplemented or restated from time to time.
      “Founding Investors” means (i) the natural persons that are the direct or indirect beneficial owners as of the Closing Date of the Persons referred to in the Contribution Agreement as “Contributing Parties”, (ii) any family members (including spouses) of any Persons described in clause (i), and (iii) any Affiliates of the Persons described in clauses (i) or (ii), including the Contributing Parties as of the Closing Date, but only for such time as they remain so affiliated.
      “General Partner” means Legacy Reserves GP, LLC, a Delaware limited liability company, and its successors and permitted assigns that are admitted to the Partnership as a general partner of the Partnership, in its capacity as general partner of the Partnership (except as the context otherwise requires).
      “General Partner Interest” means the ownership interest of the General Partner in the Partnership (in its capacity as a general partner without reference to any Limited Partner Interest held by it) and includes any and all benefits to which the General Partner is entitled as provided in this Agreement, together with all obligations of the General Partner to comply with the terms and provisions of this Agreement.
      “General Partner Unit” means a fractional part of the General Partner Interest having the rights and obligations specified with respect to the General Partner Interest. A General Partner Unit is not a Unit.
      “Group” means a Person that with or through any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to 10 or more Persons), exercising investment power or disposing of any Partnership Interests with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, Partnership Interests.

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      “Group Member” means a member of the Partnership Group.
      “Group Member Agreement” means the partnership agreement of any Group Member, other than the Partnership, that is a limited or general partnership, the limited liability company agreement of any Group Member that is a limited liability company, the certificate of incorporation and bylaws or similar organizational documents of any Group Member that is a corporation, the joint venture agreement or similar governing document of any Group Member that is a joint venture and the governing or organizational or similar documents of any other Group Member that is a Person other than a limited or general partnership, limited liability company, corporation or joint venture, as such may be amended, supplemented or restated from time to time.
      “Indemnitee” means (a) the General Partner, (b) any Departing General Partner, (c) any Person who is or was an Affiliate of the General Partner or any Departing General Partner, (d) any officer of the Partnership or any Subsidiary of the Partnership, (e) any Person who is or was a member, partner, director, officer, fiduciary or trustee of any Person that any of the preceding clauses of this definition describes, (f) any Person who is or was serving at the request of the General Partner or any Departing General Partner or any Affiliate of the General Partner or any Departing General Partner as an officer, director, member, partner, fiduciary or trustee of another Person, provided that that Person shall not be an Indemnitee by reason of providing, on a fee-for-services basis, trustee, fiduciary or custodial services, and (g) any Person the General Partner designates as an “Indemnitee” for purposes of this Agreement.
      “Independent Director” means a Director meeting the independence and experience requirements as set forth in the rules of the principal National Securities Exchange on which the Units are traded.
      “Initial Limited Partners” means the Persons admitted to the Partnership in accordance with Section 10.1.
      “Initial Offering” means the initial offering and sale of Units to the Initial Purchaser and Accredited Investors, as described in the Offering Memorandum.
      “Initial Public Offering” means the closing of an initial offering and sale of Units to the public by the Partnership or any selling Unitholders pursuant to a Registration Statement generating aggregate gross proceeds to the Partnership and such selling Unitholders of not less than $20 million and following which the Units are listed or admitted to trading on a National Securities Exchange.
      “Initial Purchaser” means Friedman, Billings, Ramsey & Co., Inc. in its capacity as the initial purchaser of Units pursuant to the Purchase Agreement.
      “Issue Price” means the price at which a Unit is purchased from the Partnership, excluding the Initial Purchaser’s discount or any underwriting discount or placement fee charged to the Partnership.
      “Limited Partner” means, unless the context otherwise requires, the Organizational Limited Partner prior to its withdrawal from the Partnership, each Initial Limited Partner, each additional Person that becomes a Limited Partner pursuant to the terms of this Agreement and any Departing General Partner upon the change of its status from General Partner to Limited Partner pursuant to Section 11.3, in each case, in such Person’s capacity as a limited partner of the Partnership.
      “Limited Partner Interest” means the ownership interest of a Limited Partner in the Partnership, which may be evidenced by Units or other Partnership Securities or a combination thereof or interest therein, and includes any and all benefits to which such Limited Partner is entitled as provided in this Agreement, together with all obligations of such Limited Partner to comply with the terms and provisions of this Agreement.
      “Liquidation Date” means (a) in the case of an event giving rise to the dissolution of the Partnership of the type described in clauses (a) and (b) of the first sentence of Section 12.2, the date on which the applicable time period during which the holders of Outstanding Units have the right to elect to continue the business of the Partnership has expired without such an election being made, and (b) in the case of any other event giving rise to the dissolution of the Partnership, the date on which such event occurs.

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      “Liquidator” means one or more Persons selected by the General Partner to perform the functions described in Section 12.4 as liquidating trustee of the Partnership within the meaning of the Delaware Act.
      “Merger Agreement” has the meaning assigned to such term in Section 14.1.
      “National Securities Exchange” means an exchange registered with the Commission under Section 6(a) of the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time, and any successor to such statute, or The Nasdaq Stock Market or any successor thereto.
      “Net Agreed Value” means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed and (b) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property (as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution, in either case, as determined under Section 752 of the Code.
      “Net Income” means, for any taxable year, the excess, if any, of the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Income shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(c).
      “Net Loss” means, for any taxable year, the excess, if any, of the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Loss shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(c).
      “Net Termination Gain” means, for any taxable year, the sum, if positive, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Gain shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(c).
      “Net Termination Loss” means, for any taxable year, the sum, if negative, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Loss shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(c).
      “Non-citizen Assignee” means a Person whom the General Partner has determined does not constitute an Eligible Citizen and as to whose Partnership Interest the General Partner has become substituted as the Limited Partner pursuant to Section 4.9.
      “Nonrecourse Built-in Gain” means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 6.2(c)(iii), Section 6.2(d)(i)(A), Section 6.2(d)(ii)(A) and Section 6.2(d)(iii) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.
      “Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code), Simulated Depletion or

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Simulated Loss that, in accordance with the principles of Treasury Regulation Section  1.704-2(b), are attributable to a Nonrecourse Liability.
      “Nonrecourse Liability” has the meaning set forth in Treasury Regulation Section  1.752-1(a)(2).
      “Notice of Election to Purchase” has the meaning assigned to such term in Section 15.1(b).
      “Offering Memorandum” means the private placement memorandum dated March 6, 2006 relating to the private placement of Units of the Partnership.
      “Omnibus Agreement” means that Omnibus Agreement, dated as of the Closing Date, among the General Partner, the Partnership, the Operating Partnership GP, the Operating Partnership and the other parties thereto.
      “Operating Partnership Agreement” means the Limited Partnership Agreement of the Operating Partnership, as it may be amended, supplemented or restated from time to time.
      “Operating Partnership” means Legacy Reserves Operating LP, a Delaware limited partnership, and any successors thereto.
      “Operating Partnership GP Agreement” means the Limited Liability Company Agreement of the Operating Partnership GP, as it may be amended, supplemented or restated from time to time.
      “Operating Partnership GP” means Legacy Reserves Operating GP LLC, a Delaware limited liability company, and any successors thereto, in its capacity as general partner of the Operating Partnership.
      “Opinion of Counsel” means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) acceptable to the General Partner.
      “Option Closing Date” means the date or dates on which any Units are sold by the Partnership to the Initial Purchaser upon exercise of the Over-Allotment Option.
      “Organizational Limited Partner” means Moriah Properties, Inc. in its capacity as the organizational limited partner of the Partnership pursuant to this Agreement.
      “Outstanding” means, with respect to Partnership Securities, all Partnership Securities that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination; provided, however, that if at any time any Person or Group (other than the Founding Investors) beneficially owns 20% or more of any Outstanding Partnership Securities of any class then Outstanding, all Partnership Securities owned by such Person or Group shall not be voted on any matter and shall not be considered to be Outstanding when sending notices of a meeting of Limited Partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under this Agreement, except that Units so owned shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Units shall not, however, be treated as a separate class of Partnership Securities for purposes of this Agreement); provided, further, that the foregoing limitation shall not apply to (i) any Person or Group who acquired 20% or more of any Outstanding Partnership Securities of any class then Outstanding directly from the Founding Investors, (ii) any Person or Group who acquired 20% or more of any Outstanding Partnership Securities of any class then Outstanding directly or indirectly from a Person or Group described in clause (i) provided that the General Partner shall have notified such Person or Group in writing that such limitation shall not apply, or (iii) any Person or Group who acquired 20% or more of any Partnership Securities issued by the Partnership with the prior approval of the board of directors of the General Partner.
      “Over-Allotment Option” means the over-allotment option granted to the Initial Purchaser by the Partnership pursuant to the Purchase Agreement.
      “Partner Nonrecourse Debt” has the meaning set forth in Treasury Regulation Section  1.704-2(b)(4).
      “Partner Nonrecourse Debt Minimum Gain” has the meaning set forth in Treasury Regulation Section  1.704-2(i)(2).

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      “Partner Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section  1.704-2(i), are attributable to a Partner Nonrecourse Debt.
      “Partners” means the General Partner and the Limited Partners.
      “Partnership” means Legacy Reserves LP, a Delaware limited partnership, and any successors thereto.
      “Partnership Group” means the Partnership and its Subsidiaries treated as a single consolidated entity.
      “Partnership Interest” means an ownership interest in the Partnership, which shall include the General Partner Interest and Limited Partner Interests.
      “Partnership Minimum Gain” means that amount determined in accordance with the principles of Treasury Regulation Section  1.704-2(d).
      “Partnership Security” means any class or series of equity interest in the Partnership (but excluding any options, rights, warrants and appreciation rights relating to any equity interest in the Partnership), including Units.
      “Percentage Interest” means as of any date of determination (a) as to the General Partner with respect to the General Partner Interest and as to any Unitholder with respect to Units, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) below by (ii) the quotient obtained by dividing (A) the number of General Partner Units held by the General Partner or the number of Units held by such Unitholder, as the case may be, by (B) the total number of all Outstanding Units, and (b) as to the holders of other Partnership Securities issued by the Partnership in accordance with Section 5.6, the percentage established as a part of such issuance.
      “Person” means an individual or a corporation, firm, limited liability company, partnership, joint venture, trust, unincorporated organization or other enterprise (including an employee benefit plan), association, governmental agency or political subdivision thereof or other entity.
      “Pro Rata” means (a) when modifying Units or any class thereof, apportioned equally among all designated Units in accordance with their relative Percentage Interests and (b) when modifying Partners or Record Holders, apportioned among all Partners or Record Holders, as the case may be, in accordance with their relative Percentage Interests.
      “Purchase Agreement” means the Purchase/Placement Agreement dated March 6, 2006 among Freidman, Billings, Ramsey & Co., Inc., as the Initial Purchaser and the Placement Agent, the Partnership and the General Partner providing for the purchase of Units by the Initial Purchaser and the Accredited Investors.
      “Purchase Date” means the date determined by the General Partner as the date for purchase of all Outstanding Limited Partner Interests of a certain class (other than Limited Partner Interests owned by the General Partner and its Affiliates) pursuant to Article XV.
      “Quarter” means, unless the context requires otherwise, a fiscal quarter, or, with respect to the first fiscal quarter after the Closing Date, the portion of such fiscal quarter after the Closing Date, of the Partnership.
      “Recapture Income” means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.
      “Record Date” means the date established by the General Partner or otherwise in accordance with this Agreement for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing

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without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners or (b) the identity of Record Holders entitled to receive any report or distribution or to participate in any offer.
      “Record Holder” means the Person in whose name a Unit is registered on the books of the Transfer Agent as of the opening of business on a particular Business Day, or with respect to other Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books that the General Partner has caused to be kept as of the opening of business on such Business Day.
      “Redeemable Interests” means any Partnership Interests for which a redemption notice has been given, and has not been withdrawn, pursuant to Section 4.10.
      “Registration Rights Agreement” means that certain Registration Rights Agreement, dated as of the Closing Date, among the General Partner, the Partnership and Friedman, Billings, Ramsey & Co., Inc., as such may be amended, supplemented or restated from time to time.
      “Registration Statement” means a Registration Statement as it may be filed by the Partnership with the Commission under the Securities Act to register the offering and sale of Units in an Initial Public Offering.
      “Required Allocations” means (a) any limitation imposed on any allocation of Net Losses or Net Termination Losses under Section 6.1(a)(ii)(B) and (C) and (b) any allocation of an item of income, gain, loss, deduction, Simulated Depletion or Simulated Loss pursuant to Section 6.1(c)(i), Section 6.1(c)(ii), Section 6.1(c)(iii), Section 6.1(c)(vi) or Section 6.1(c)(viii).
      “Residual Gain” or “Residual Loss” means any item of gain or loss or Simulated Gain or Simulated Loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain loss or Simulated Gain or Simulated Loss is not allocated pursuant to Section 6.2(d)(i)(A) or Section 6.2(d)(ii)(A), respectively, to eliminate Book-Tax Disparities.
      “Securities Act” means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute.
      “Simulated Basis” means the Carrying Value of any oil and gas property (as defined in Section 614 of the Code).
      “Simulated Depletion” means, with respect to an oil and gas property (as defined in Section 614 of the Code), a depletion allowance computed in accordance with federal income tax principles (as if the Simulated Basis of the property were its adjusted tax basis) and in the manner specified in Treasury Regulation §  1.704-1(b)(2)(iv)(k)(2). For purposes of computing Simulated Depletion with respect to any property, the Simulated Basis of such property shall be deemed to be the Carrying Value of such property, and in no event shall such allowance for Simulated Depletion, in the aggregate, exceed such Simulated Basis.
      “Simulated Gain” means the excess of the amount realized from the sale or other disposition of an oil or gas property over the Carrying Value of such property.
      “Simulated Loss” means the excess of the Carrying Value of an oil or gas property over the amount realized from the sale or other disposition of such property.
      “Special Approval” means approval by a majority of the members of the Conflicts Committee.
      “Subsidiary” means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if more than 50% of the partnership interests of such partnership (considering all of the partnership interests of the partnership as a single class) is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person, or a combination thereof, or (c) any other Person (other than a corporation or a

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partnership) in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.
      “Surviving Business Entity” has the meaning assigned to such term in Section 14.2(b).
      “Trading Day” has the meaning assigned to such term in Section 15.1(a).
      “Transfer” has the meaning assigned to such term in Section 4.4(a).
      “Transfer Agent” means such bank, trust company or other Person (including the General Partner or one of its Affiliates) as shall be appointed from time to time by the General Partner to act as registrar and transfer agent for the Units; provided, that if no Transfer Agent is specifically designated for any other Partnership Securities, the General Partner shall act in such capacity.
      “Unit” means a Partnership Security representing a fractional part of the Partnership Interests of all Limited Partners, and having the rights and obligations specified with respect to Units in this Agreement, but shall not include General Partner Units (or General Partner Interests represented thereby).
      “Unitholders” means the holders of Units.
      “Unit Majority” means at least a majority of the Outstanding Units.
      “Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date (as determined under Section 5.5(d)) over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date).
      “Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date) over (b) the fair market value of such property as of such date (as determined under Section 5.5(d)).
      “U.S. GAAP” means United States generally accepted accounting principles consistently applied.
      “Withdrawal Opinion of Counsel” has the meaning assigned to such term in Section 11.1(b).
      “Working Capital Borrowings” means borrowings used solely for working capital purposes or to pay distributions to Partners made pursuant to a credit facility or other arrangement to the extent such borrowings are required to be reduced to a relatively small amount each year (or for the year in which the Initial Offering is consummated, the 12-month period beginning on the Closing Date) for an economically meaningful period of time.
Section  1.2      Construction.
      Unless the context requires otherwise: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (b) references to Articles and Sections refer to Articles and Sections of this Agreement; and (c) the term “include” or “includes” means includes, without limitation, and “including” means including, without limitation.
ARTICLE II
Organization
Section  2.1      Formation.
      The General Partner and the Organizational Limited Partner have previously formed the Partnership as a limited partnership pursuant to the provisions of the Delaware Act and hereby amend and restate the original Agreement of Limited Partnership of Legacy Reserves LP in its entirety. This amendment and restatement shall become effective on the date of this Agreement. Except as expressly provided to the contrary in this

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Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes and a Partner has no interest in specific Partnership property.
Section  2.2      Name.
      The name of the Partnership shall be “Legacy Reserves LP”. The Partnership’s business may be conducted under any other name or names as determined by the General Partner, including the name of the General Partner. The words “Limited Partnership,” “LP,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.
Section  2.3      Registered Office; Registered Agent; Principal Office; Other Offices.
      Unless and until changed by the General Partner, the registered office and registered agent of the Partnership in the State of Delaware shall be the initial registered office and registered agent named in the Certificate of Limited Partnership of the Partnership or such other place or agent as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner determines to be necessary or appropriate. The address of the General Partner shall be 303 W. Wall Street, Suite 1500, Midland, Texas 79701 or such other place as the General Partner may from time to time designate by notice to the Limited Partners.
Section  2.4      Purpose and Business.
      The purpose and nature of the business to be conducted by the Partnership shall be to (a) engage directly in, or enter into or form, hold or dispose of any corporation, partnership, joint venture, limited liability company or other arrangement to engage indirectly in, any business activity that is approved by the General Partner and that lawfully may be conducted by a limited partnership organized pursuant to the Delaware Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership pursuant to the agreements relating to such business activity and (b) do anything necessary or appropriate to the foregoing, including the making of capital contributions or loans to a Group Member; provided, however, that the General Partner shall not cause the Partnership to engage, directly or indirectly, in any business activity that the General Partner determines would cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes. To the fullest extent permitted by law, the General Partner shall have no duty or obligation to propose or approve, and may decline to propose or approve, the conduct by the Partnership of any business free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to so propose or approve, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.
Section  2.5      Powers.
      The Partnership shall be empowered to do any and all acts and things necessary and appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described in Section 2.4 and for the protection and benefit of the Partnership.
Section  2.6      Power of Attorney.
      (a) Each Limited Partner hereby constitutes and appoints the General Partner and, if a Liquidator shall have been selected pursuant to Section 12.3, the Liquidator (and any successor to the Liquidator by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in -fact, as the

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case may be, with full power of substitution, as his true and lawful agent and attorney-in -fact, with full power and authority in his name, place and stead, to:
        (i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) all certificates, documents and other instruments (including this Agreement and the Certificate of Limited Partnership and all amendments or restatements hereof or thereof) that the General Partner or the Liquidator determines to be necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (B) all certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (C) all certificates, documents and other instruments (including conveyances and a certificate of cancellation) that the General Partner or the Liquidator determines to be necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article IV, Article X, Article XI or Article XII; (E) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Partnership Securities issued pursuant to Section 5.6; and (F) all certificates, documents and other instruments (including agreements and a certificate of merger) relating to a merger, consolidation or conversion of the Partnership pursuant to Article XIV; and
 
        (ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to (A) make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or (B) effectuate the terms or intent of this Agreement; provided, that when required by Section 13.3 or any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner and the Liquidator may exercise the power of attorney made in this Section 2.6(a)(ii) only after the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XIII or as may be otherwise expressly provided for in this Agreement.
      (b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and, to the maximum extent permitted by law, not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner and the transfer of all or any portion of such Limited Partner’s Partnership Interest and shall extend to such Limited Partner’s heirs, successors, assigns and personal representatives. Each such Limited Partner hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each such Limited Partner, to the maximum extent permitted by law, hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator may request in order to effectuate this Agreement and the purposes of the Partnership.
Section  2.7      Term.
      The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue in existence until the dissolution of the Partnership in accordance with the provisions of Article XII. The existence of the Partnership as a separate legal entity shall continue until the cancellation of the Certificate of Limited Partnership as provided in the Delaware Act.

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Section  2.8      Title to Partnership Assets.
      Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however , that the General Partner shall use reasonable efforts to cause record title to such assets to be vested in the Partnership as soon as reasonably practicable; provided , further, that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer to the Partnership of record title to all Partnership assets held by the General Partner and its Affiliates, and, prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the General Partner. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership assets is held.
ARTICLE III
Rights of Limited Partners
Section  3.1      Limitation of Liability.
      The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act.
Section  3.2      Management of Business.
      No Limited Partner, in its capacity as such, shall participate in the operation, management or control (within the meaning of the Delaware Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. Any action taken by any Affiliate of the General Partner or any officer, director, employee, manager, member, general partner, agent or trustee of the General Partner or any of its Affiliates, or any officer, director, employee, manager, member, general partner, agent or trustee of a Group Member, in its capacity as such, shall not be deemed to be participation in the control of the business of the Partnership by a limited partner of the Partnership (within the meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement.
Section  3.3      Outside Activities of the Limited Partners.
      Subject to the provisions of Section 7.5, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners, any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership Group. Neither the Partnership nor any of the other Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner.
Section  3.4      Rights of Limited Partners.
      (a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 3.4(b), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a Limited Partner in the Partnership, upon reasonable written demand stating the purpose of such demand and at such Limited Partner’s own expense:
        (i) promptly after becoming available, to obtain a copy of the Partnership’s federal, state and local income tax returns for each year;

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        (ii) to obtain a current list of the name and last known business, residence or mailing address of each Partner;
 
        (iii) to obtain true and full information regarding the amount of cash and a description and statement of the Net Agreed Value of any other Capital Contribution by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner;
 
        (iv) to obtain a copy of this Agreement and the Certificate of Limited Partnership and all amendments thereto, together with a copy of the executed copies of all powers of attorney pursuant to which this Agreement, the Certificate of Limited Partnership and all amendments thereto have been executed;
 
        (v) to obtain true and full information regarding the status of the business and financial condition of the Partnership Group; and
 
        (vi) to obtain such other information regarding the affairs of the Partnership as is just and reasonable.
      (b) Notwithstanding any other provision of this Agreement, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner deems reasonable, (i) any information that the General Partner reasonably believes to be in the nature of trade secrets or (ii) other information the disclosure of which the General Partner in good faith believes (A) is not in the best interests of the Partnership Group, (B) could damage the Partnership Group or its business or (C) that any Group Member is required by law or by agreement with any third party to keep confidential (other than agreements with Affiliates of the Partnership the primary purpose of which is to circumvent the obligations set forth in this Section 3.4).
ARTICLE IV
Certificates; Record Holders; Transfer of
Partnership Interests; Redemption of Partnership Interests
Section  4.1      Certificates.
      Upon the Partnership’s issuance of Units to any Person, the Partnership shall issue, upon the request of such Person, one or more Certificates in the name of such Person evidencing the number of such Units being so issued. In addition, (a) upon the General Partner’s request, the Partnership shall issue to it one or more Certificates in the name of the General Partner evidencing its interests in the Partnership and (b) upon the request of any Person owning any other Partnership Securities, the Partnership shall issue to such Person one or more Certificates evidencing such Partnership Securities. Certificates shall be executed on behalf of the Partnership by the Chairman of the Board, President or any Executive Vice President or Vice President and the Chief Financial Officer or the Secretary or any Assistant Secretary of the General Partner. No Unit Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent; provided, however , that if the General Partner elects to issue Units in global form, the Unit Certificates shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Units have been duly registered in accordance with the directions of the Partnership.
Section  4.2      Mutilated, Destroyed, Lost or Stolen Certificates.
      (a) If any mutilated Certificate is surrendered to the Transfer Agent, the appropriate officers of the General Partner on behalf of the Partnership shall execute, and the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number and type of Partnership Securities as the Certificate so surrendered.

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      (b) The appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and the Transfer Agent shall countersign, a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:
        (i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;
 
        (ii) requests the issuance of a new Certificate before the General Partner has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;
 
        (iii) if requested by the General Partner, delivers to the General Partner a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may direct to indemnify the Partnership, the Partners, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and
 
        (iv) satisfies any other reasonable requirements imposed by the General Partner.
      If a Limited Partner fails to notify the General Partner within a reasonable period of time after he has notice of the loss, destruction or theft of a Certificate, and a transfer of the Limited Partner Interests represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Limited Partner shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate.
      (c) As a condition to the issuance of any new Certificate under this Section 4.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.
Section  4.3      Record Holders.
      The Partnership shall be entitled to recognize the Record Holder as the Partner with respect to any Partnership Interest and, accordingly, shall not be bound to recognize any equitable or other claim to, or interest in, such Partnership Interest on the part of any other Person, regardless of whether the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Partnership Interests, as between the Partnership on the one hand, and such other Persons on the other, such representative Person shall be the Record Holder of such Partnership Interest.
Section  4.4      Transfer Generally.
      (a) The term “transfer,” when used in this Agreement with respect to a Partnership Interest, shall be deemed to refer to a transaction (i) by which the General Partner assigns its General Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise or (ii) by which the holder of a Limited Partner Interest assigns such Limited Partner Interest to another Person who is or becomes a Limited Partner, and includes a sale, assignment, gift, exchange or any other disposition by law or otherwise, including any transfer upon foreclosure of any pledge, encumbrance, hypothecation or mortgage.
      (b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article IV. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article IV shall be null and void.

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      (c) Nothing contained in this Agreement shall be construed to prevent a disposition by any stockholder, member, partner or other owner of the General Partner of any or all of the issued and outstanding equity interests of the General Partner.
Section  4.5      Registration and Transfer of Limited Partner Interests.
      (a) The General Partner shall keep or cause to be kept on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 4.5(b), the Partnership will provide for the registration and transfer of Limited Partner Interests. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Units and transfers of such Units as herein provided. The Partnership shall not recognize transfers of Certificates evidencing Limited Partner Interests unless such transfers are effected in the manner described in this Section 4.5. Upon surrender of a Certificate for registration of transfer of any Limited Partner Interests evidenced by a Certificate, and subject to the provisions of Section 4.5(b), the appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and in the case of Units, the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number and type of Limited Partner Interests as was evidenced by the Certificate so surrendered.
      (b) Except as otherwise provided in Section 4.9, the General Partner shall not recognize any transfer of Limited Partner Interests until the Certificates evidencing such Limited Partner Interests are surrendered for registration of transfer. No charge shall be imposed by the General Partner for such transfer; provided, that as a condition to the issuance of any new Certificate under this Section 4.5, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto.
      (c) Subject to (i) the foregoing provisions of this Section 4.5, (ii) Section 4.3, (iii) Section 4.8, (iv) with respect to any class or series of Limited Partner Interests, the provisions of any statement of designations or amendment to this Agreement establishing such class or series, (v) any contractual provisions binding on any Limited Partner and (vi) provisions of applicable law including the Securities Act, Partnership Interests shall be freely transferable.
Section  4.6      Transfer of the General Partner’s General Partner Interest.
      (a) Subject to Section 4.6(c), prior to March 31, 2016, the General Partner shall not transfer all or any part of its General Partner Interest to a Person unless such transfer (i) has been approved by the prior written consent or vote of the holders of at least a majority of the Outstanding Units (excluding any Units held by the General Partner and its Affiliates) or (ii) is of all, but not less than all, of its General Partner Interest to (A) an Affiliate (other than an individual) of the General Partner or (B) another Person (other than an individual) in connection with the merger or consolidation of the General Partner with or into another Person or the transfer by the General Partner of all or substantially all of its assets to another Person (other than an individual).
      (b) Subject to Section 4.6(c), on or after March 31, 2016, the General Partner may transfer all or any part of its General Partner Interest without Unitholder approval.
      (c) Notwithstanding anything contained in this Agreement to the contrary, no transfer by the General Partner of all or any part of its General Partner Interest to another Person or replacement of the General Partner pursuant to Section 10.3 shall be permitted unless (i) the transferee or successor (as applicable) agrees to assume the rights and duties of the General Partner under this Agreement and to be bound by the provisions of this Agreement, including Section 13.4(c), (ii) the Partnership receives an Opinion of Counsel that such transfer or replacement would not result in the loss of limited liability of any Limited Partner or of any limited partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed) and (iii) such transferee also agrees to purchase all (or the appropriate portion thereof, if applicable) of the partnership or membership interest of the General Partner as the general partner or managing member, if any, of each other Group Member. In the case of a transfer or replacement pursuant to and in compliance

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with this Section 4.6, the transferee or successor (as applicable) shall, subject to compliance with the terms of Section 10.3, be admitted to the Partnership as a General Partner immediately prior to the transfer of the General Partner Interest, and the business of the Partnership shall continue without dissolution.
Section  4.7      [Reserved].
Section  4.8      Restrictions on Transfers.
      (a) Except as provided in Section 4.8(c), but notwithstanding the other provisions of this Article IV, no transfer of any Partnership Interests shall be made if such transfer would (i) violate the then applicable federal or state securities laws or rules and regulations of the Commission, any state securities commission or any other governmental authority with jurisdiction over such transfer, (ii) terminate the existence or qualification of the Partnership under the laws of the jurisdiction of its formation or (iii) cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed).
      (b) The General Partner may impose restrictions on the transfer of Partnership Interests if it receives an Opinion of Counsel that such restrictions are necessary to avoid a significant risk of the Partnership becoming taxable as a corporation or otherwise becoming taxable as an entity for federal income tax purposes. The General Partner may impose such restrictions by amending this Agreement; provided, however , that any amendment that would result in the delisting or suspension of trading of any class of Limited Partner Interests on the principal National Securities Exchange on which such class of Limited Partner Interests is then listed or admitted to trading must be approved, prior to such amendment being effected, by the holders of at least a majority of the Outstanding Limited Partner Interests of such class.
      (c) Nothing contained in this Article IV, or elsewhere in this Agreement, shall preclude the settlement of any transactions involving Partnership Interests entered into through the facilities of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading.
Section  4.9      Citizenship Certificates; Non-citizen Assignees.
      (a) If any Group Member is or becomes subject to any federal, state or local law or regulation that the General Partner determines would create a substantial risk of cancellation or forfeiture of any property in which the Group Member has an interest based on the nationality, citizenship or other related status of a Limited Partner, the General Partner may request any Limited Partner to furnish to the General Partner, within 30 days after receipt of such request, an executed Citizenship Certification or such other information concerning his nationality, citizenship or other related status (or, if the Limited Partner is a nominee holding for the account of another Person, the nationality, citizenship or other related status of such other Person) as the General Partner may request. If a Limited Partner fails to furnish to the General Partner within the aforementioned 30-day period such Citizenship Certification or other requested information or if upon receipt of such Citizenship Certification or other requested information the General Partner determines that a Limited Partner (or, if the Limited Partner is a nominee holding for the account of another Person, such other Person) is not an Eligible Citizen, the Partnership Interests owned by such Limited Partner shall be subject to redemption in accordance with the provisions of Section 4.10. In addition, the General Partner may require that the status of any such Limited Partner be changed to that of a Non-citizen Assignee and, thereupon, the General Partner shall be substituted for such Non-citizen Assignee as the Limited Partner in respect of his Limited Partner Interests.
      (b) The General Partner shall, in exercising voting rights in respect of Limited Partner Interests held by it on behalf of Non-citizen Assignees, distribute the votes in the same ratios as the votes of Partners (including the General Partner) in respect of Limited Partner Interests other than those of Non-citizen Assignees are cast, either for, against or abstaining as to the matter.
      (c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no right to receive a distribution in kind pursuant to Section 12.4 but shall be entitled to the cash equivalent thereof, and the Partnership shall provide cash in exchange for an assignment of the Non-citizen Assignee’s share of any distribution in kind. Such payment and assignment shall be treated for Partnership purposes as a purchase by

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the Partnership from the Non-citizen Assignee of his Limited Partner Interest (representing his right to receive his share of such distribution in kind).
      (d) At any time after he can and does certify that he has become an Eligible Citizen, a Non-citizen Assignee may, upon application to the General Partner, request that with respect to any Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to Section 4.10, such Non-citizen Assignee be admitted as a Limited Partner, and upon approval of the General Partner, such Non-citizen Assignee shall be admitted as a Limited Partner and shall no longer constitute a Non-citizen Assignee and the General Partner shall cease to be deemed to be the Limited Partner in respect of the Non-citizen Assignee’s Limited Partner Interests.
Section  4.10      Redemption of Partnership Interests of Non-citizen Assignees.
      (a) If at any time a Limited Partner fails to furnish a Citizenship Certification or other information requested within the 30-day period specified in Section 4.9(a), or if upon receipt of such Citizenship Certification or other information the General Partner determines, with the advice of counsel, that a Limited Partner is not an Eligible Citizen, the Partnership may, unless the Limited Partner establishes to the satisfaction of the General Partner that such Limited Partner is an Eligible Citizen or has transferred his Partnership Interests to a Person who is an Eligible Citizen and who furnishes a Citizenship Certification to the General Partner prior to the date fixed for redemption as provided below, redeem the Limited Partner Interests of such Limited Partner as follows:
        (i) The General Partner shall, not later than the 30th day before the date fixed for redemption, give notice of redemption to the Limited Partner, at his last address designated on the records of the Partnership or the Transfer Agent, by registered or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Redeemable Interests, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon surrender of the Certificate evidencing the Redeemable Interests and that on and after the date fixed for redemption no further allocations or distributions to which the Limited Partner would otherwise be entitled in respect of the Redeemable Interests will accrue or be made.
 
        (ii) The aggregate redemption price for Redeemable Interests shall be an amount equal to the Current Market Price (the date of determination of which shall be the date fixed for redemption) of Partnership Interests of the class to be so redeemed multiplied by the number of Partnership Interests of each such class included among the Redeemable Interests. The redemption price shall be paid, as determined by the General Partner, in cash or by delivery of a promissory note of the Partnership in the principal amount of the redemption price, bearing interest at the rate of 5% annually and payable in three equal annual installments of principal together with accrued interest, commencing one year after the redemption date.
 
        (iii) Upon surrender by or on behalf of the Limited Partner, at the place specified in the notice of redemption, of the Certificate evidencing the Redeemable Interests, duly endorsed in blank or accompanied by an assignment duly executed in blank, the Limited Partner or his duly authorized representative shall be entitled to receive the payment therefor.
 
        (iv) After the redemption date, Redeemable Interests shall no longer constitute issued and Outstanding Partnership Interests.
      (b) The provisions of this Section 4.10 shall also be applicable to Partnership Interests held by a Limited Partner as nominee of a Person determined to be other than an Eligible Citizen.
      (c) Nothing in this Section 4.10 shall prevent the recipient of a notice of redemption from transferring his Partnership Interest before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such a transfer, the General Partner shall withdraw the notice of redemption, provided the transferee of such Partnership Interest certifies to the satisfaction of the General Partner that he is an Eligible Citizen. If the transferee fails to make such certification, such redemption shall be effected from the transferee on the original redemption date.

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ARTICLE V
Capital Contributions and
Issuance of Partnership Interests
Section  5.1      Organizational Contributions.
      In connection with the formation of the Partnership under the Delaware Act, the General Partner made an initial Capital Contribution to the Partnership in the amount of $1, for a 0.1% General Partner Interest in the Partnership and has been admitted as the General Partner of the Partnership, and the Organizational Limited Partner made an initial Capital Contribution to the Partnership in the amount of $999 for a 99.9% Limited Partner Interest in the Partnership and has been admitted as a Limited Partner of the Partnership. As of the Closing Date, simultaneously with the admission of the Initial Limited Partners as limited partners of the Partnership, the interest of the Organizational Limited Partner shall be redeemed; and the initial Capital Contribution of the Organizational Limited Partner shall thereupon be refunded and the Organizational Limited Partner shall cease to be a limited partner of the Partnership. Ninety-nine and nine tenths percent of any interest or other profit that may have resulted from the investment or other use of such initial Capital Contributions shall be allocated and distributed to the Organizational Limited Partner, and the balance thereof shall be allocated and distributed to the General Partner.
Section  5.2      Contributions by the General Partner.
      (a) On the Closing Date and pursuant to the Contribution Agreement, the General Partner shall contribute to the Partnership a 0.1% undivided interest in all of the Founder Contributed Assets in exchange for a number of General Partner Units constituting .1001% of the Units to be issued to the Limited Partners.
      (b) Upon the issuance of any additional Limited Partner Interests by the Partnership, the General Partner may, in exchange for a proportionate number of General Partner Units, make additional Capital Contributions in an amount equal to the product obtained by multiplying (i) the quotient determined by dividing (A) the General Partner’s Percentage Interest by (B) 100 less the General Partner’s Percentage Interest times (ii) the amount contributed to the Partnership by the Limited Partners in exchange for such additional Limited Partner Interests. Except as set forth in Article XII, the General Partner shall not be obligated to make any additional Capital Contributions to the Partnership.
Section  5.3      Contributions by Founding Investors, the Initial Purchaser and Accredited Investors.
      (a) On the Closing Date and pursuant to the Contribution Agreement, Founding Investors shall contribute in the aggregate a 99.9% undivided interest in all of the Founder Contributed Assets. In exchange for such Capital Contributions by the Founding Investors, the Partnership shall issue Units to such Founding Investor in the amount set forth for such Founding Investor in the Contribution Agreement.
      (b) On the Closing Date and pursuant to the Purchase Agreement, the Initial Purchaser shall contribute to the Partnership cash in an amount equal to the Issue Price per Unit sold in the Initial Offering, multiplied by the number of Units specified in the Purchase Agreement to be purchased by the Initial Purchaser at the Closing Date. In exchange for such Capital Contribution by the Initial Purchaser, the Partnership shall issue Units to the Initial Purchaser in an amount equal to the quotient obtained by dividing (i) the cash contribution to the Partnership by the Initial Purchaser by (ii) the Issue Price per Unit sold in the Initial Offering. Upon the exercise of the Over-Allotment Option, the Initial Purchaser shall contribute to the Partnership cash in an amount equal to the Issue Price per Unit sold in the Initial Offering, multiplied by the number of Units to be purchased by the Initial Purchaser at the Option Closing Date. In exchange for such Capital Contribution by the Initial Purchaser, the Partnership shall issue Units to the Initial Purchaser in an amount equal to the quotient obtained by dividing (x) the cash contributions to the Partnership by the Initial Purchaser on the Option Closing Date by (y) the Issue Price per Unit sold in the Initial Offering.
      (c) On the Closing Date and pursuant to the Purchase Agreement, each Accredited Investor shall contribute to the Partnership cash in an amount equal to the Issue Price per Unit sold in the Initial Offering, multiplied by the number of Units specified in the Purchase Agreement to be purchased by such Accredited Investor at the Closing Date. In exchange for such Capital Contribution by each Accredited Investor, the

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Partnership shall issue Units to each Accredited Investor in an amount equal to the quotient obtained by dividing (i) the cash contribution to the Partnership by such Accredited Investor by (ii) the Issue Price per Unit sold in the Initial Offering. Upon the exercise of the Over-Allotment Option, each Accredited Investor shall contribute to the Partnership cash in an amount equal to the Issue Price per Unit sold in the Initial Offering, multiplied by the number of Units to be purchased by such Accredited Investor at the Option Date. In exchange for such Capital Contribution by each Accredited Investor, the Partnership shall issue Units to each Accredited Investor in an amount equal to the quotient obtained by dividing (x) the cash contributions to the Partnership by such Accredited Investor on the Option Closing Date by (y) the Issue Price per Unit sold in the Initial Offering.
      (d) No Partnership Interests will be issued or issuable as of or at the Closing Date other than (i) the Units issuable pursuant to Section 5.3(a), Section 5.3(b) and Section 5.3(c) in an aggregate number equal to 18,292,683 Units (after giving effect to the redemption of Units pursuant to the Initial Offering) and (ii) the Units to be issued or issuable under the Legacy Reserves LP Long-Term Incentive Plan.
Section  5.4      Interest and Withdrawal.
      No interest shall be paid by the Partnership on Capital Contributions. No Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner shall have priority over any other Partner either as to the return of Capital Contributions or as to profits, losses or distributions. Any such return shall be a compromise to which all Partners agree within the meaning of Section 17-502(b) of the Delaware Act.
Section  5.5      Capital Accounts.
      (a) The Partnership shall maintain for each Partner (or a beneficial owner of Partnership Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner) owning a Partnership Interest a separate Capital Account with respect to such Partnership Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions made to the Partnership with respect to such Partnership Interest and (ii) all items of Partnership income and gain (including, without limitation, income and gain exempt from tax) computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to such Partnership Interest and (y) all items of Partnership deduction and loss computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1.
      (b) For purposes of computing the amount of any item of income, gain, loss or deduction, Simulated Depletion, Simulated Gain or Simulated Loss which is to be allocated pursuant to Article VI and is to be reflected in the Partners’ Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes (including any method of depreciation, cost recovery or amortization used for that purpose), provided, that:
        (i) Solely for purposes of this Section 5.5, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner based upon the provisions of the applicable Group Member Agreement or governing, organizational or similar documents) of all property owned by (x) any other Group Member classified as a partnership for federal income tax purposes and (y) any other partnership, limited liability company, unincorporated business or other entity classified as a partnership for federal income tax purposes of which a Group Member is, directly or indirectly, a partner.
 
        (ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any,

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  shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 6.1.
 
        (iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction, Simulated Depletion, Simulated Gain and Simulated Loss shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment in the Capital Accounts shall be treated as an item of gain or loss.
 
        (iv) Any income, gain, loss, Simulated Gain or Simulated Loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.
 
        (v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery, amortization or Simulated Depletion attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 5.5(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery, amortization or Simulated Depletion, any further deductions for such depreciation, cost recovery, amortization or Simulated Depletion attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery, amortization or Simulated Depletion derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however , that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery, amortization or Simulated Depletion deductions shall be determined using any method that the General Partner may adopt.
 
        (vi) If the Partnership’s adjusted basis in a depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code shall, to the extent possible, be allocated in the same manner to the Partners to whom such deemed deduction was allocated.

      (c) A transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred.
      (d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for cash or Contributed Property, the issuance of Partnership Interests for the provision of services, or the conversion of the General Partner’s Combined Interest to Units pursuant to Section 11.3(b), the Capital Account of all Partners and the Carrying Value of each Partnership property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Partners at such time pursuant to Section 6.1 in the same manner as any item of gain or loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to the issuance of additional Partnership Interests shall be determined by the General Partner using such method of valuation as it may adopt; provided, however , that

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the General Partner, in arriving at such valuation, must take fully into account the fair market value of the Partnership Interests of all Partners at such time. The General Partner shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines) to arrive at a fair market value for individual properties.
      (ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Partner of any Partnership property (other than a distribution of cash that is not in redemption or retirement of a Partnership Interest), the Capital Accounts of all Partners and the Carrying Value of all Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Partners, at such time, pursuant to Section 6.1 in the same manner as any item of gain or loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss the aggregate cash amount and fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to a distribution shall (A) in the case of an actual distribution that is not made pursuant to Section 12.4, be determined and allocated in the same manner as that provided in Section 5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section 12.4, be determined and allocated by the Liquidator using such method of valuation as it may adopt.
Section  5.6      Issuances of Additional Partnership Securities.
      (a) The Partnership may issue additional Partnership Securities and options, rights, warrants and appreciation rights relating to the Partnership Securities for any Partnership purpose at any time and from time to time to such Persons for such consideration and on such terms and conditions as the General Partner shall determine, all without the approval of any Limited Partners.
      (b) Each additional Partnership Security authorized to be issued by the Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership Securities), as shall be fixed by the General Partner, including (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and liquidation of the Partnership; (iv) whether, and the terms and conditions upon which, the Partnership may redeem the Partnership Security; (v) whether such Partnership Security is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Security will be issued, evidenced by certificates and assigned or transferred; (vii) the method for determining the Percentage Interest as to such Partnership Security; and (viii) the right, if any, of each such Partnership Security to vote on Partnership matters, including matters relating to the relative rights, preferences and privileges of such Partnership Security.
      (c) The General Partner is hereby authorized and directed to take all actions that it determines to be necessary or appropriate in connection with (i) each issuance of Partnership Securities and options, rights, warrants and appreciation rights relating to Partnership Securities pursuant to this Section 5.6, (ii) the conversion of the General Partner Interest into Units pursuant to the terms of this Agreement, (iii) the admission of additional Limited Partners and (iv) all additional issuances of Partnership Securities. The General Partner shall determine the relative rights, powers and duties of the holders of the Units or other Partnership Securities being so issued. The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Securities or in connection with the conversion of the General Partner Interest into Units pursuant to the terms of this Agreement, including compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency or any National Securities Exchange on which the Units or other Partnership Securities are listed or admitted to trading.
      (d) No fractional Units shall be issued by the Partnership.
Section  5.7      [Reserved].

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Section  5.8      Limited Preemptive Right.
      Except as provided in this Section 5.8 and in Section 5.2(b), no Person shall have any preemptive, preferential or other similar right with respect to the issuance of any Partnership Security, whether unissued, held in the treasury or hereafter created. The General Partner shall have the right to purchase Partnership Securities from the Partnership whenever, and on the same terms that, the Partnership issues Partnership Securities to any Person to the extent necessary to maintain the Percentage Interests of the General Partner, with respect to the General Partner Interest, equal to that which existed immediately prior to the issuance of such Partnership Securities.
Section  5.9      Splits and Combinations.
      (a) Subject to Section 5.9(d), the Partnership may make a Pro Rata distribution of Partnership Securities to all Record Holders or may effect a subdivision or combination of Partnership Securities so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event, and any amounts calculated on a per Unit basis or stated as a number of Units are proportionately adjusted.
      (b) Whenever such a distribution, subdivision or combination of Partnership Securities is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause a firm of independent public accountants selected by it to calculate the number of Partnership Securities to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.
      (c) Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Securities as of the applicable Record Date representing the new number of Partnership Securities held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Securities Outstanding, the Partnership shall require, as a condition to the delivery to a Record Holder of such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.
      (d) The Partnership shall not issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of this Section 5.9(d), each fractional Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit).
Section  5.10      Fully Paid and Non-Assessable Nature of Limited Partner Interests.
      All Limited Partner Interests issued pursuant to, and in accordance with the requirements of, this Article V shall be fully paid and non-assessable Limited Partner Interests in the Partnership, except as such non-assessability may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI
Allocations and Distributions
Section  6.1      Allocations for Capital Account Purposes.
      For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership’s items of income, gain, loss, deduction, Simulated Gain, Simulated Loss and Simulated Depletion (computed in accordance with Section 5.5(b)) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below.

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      (a)  Net Income and Net Loss.
        (i) Net Income. After giving effect to the special allocations set forth in Section 6.1(c), Net Income for each taxable year and all items of income, gain, loss and deduction taken into account in computing Net Income for each taxable year shall be allocated to the Partners as follows:
        (A) first, to the General Partner until the General Partner has been allocated cumulative Net Income for the current and all prior taxable periods equal to the cumulative Net Loss previously allocated to the General Partner pursuant to Section 6.1(a)(ii)(C);
 
        (B) second, to the Partners, in accordance with the proportions that Net Losses were previously allocated to the Partners pursuant to Section 6.1(a)(ii)(B), until the Partners have been allocated cumulative Net Income for the current and all prior taxable periods equal to the cumulative Net Loss previously allocated to the Partners pursuant to Section 6.1(a)(ii)(B); and
 
        (C) thereafter, to the Partners in accordance with their respective Percentage Interests.
        (ii)  Net Losses. After giving effect to the special allocations set forth in Section 6.1(c), Net Losses for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Losses for such taxable period shall be allocated to the Partners as follows:
        (A) first, to the Partners in accordance with their respective Percentage Interests; provided that Net Losses shall not be allocated pursuant to this Section 6.1(c)(ii)(A) to the extent that such allocation would cause any Limited Partner to have a deficit balance in its Adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account);
 
        (B) instead, any such Net Losses shall be allocated to Partners with positive Adjusted Capital Accounts in accordance with their Percentage Interests until such positive Adjusted Capital Accounts of the Limited Partners are reduced to zero; and
 
        (C) thereafter, to the General Partner.
      (b)  Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 6.1(c), all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Termination Gain or Net Termination Loss for such taxable period shall be allocated in the same manner as such Net Termination Gain or Net Termination Loss is allocated hereunder. All allocations under this Section 6.1(b) shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 6.1 and after all distributions of Available Cash provided under Section 6.3 have been made; provided, however, that solely for purposes of this Section 6.1(b), Capital Accounts shall not be adjusted for distributions made pursuant to Section 12.4(c).
        (i) If a Net Termination Gain is recognized (or deemed recognized pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated among the Partners in the following manner (and the Capital Accounts of the Partners shall be increased by the amount so allocated in each of the following subclauses, in the order listed, before an allocation is made pursuant to the next succeeding subclause):
        (A) first, to each Partner having a deficit balance in its Capital Account, in the proportion that such deficit balance bears to the total deficit balances in the Capital Accounts of all Partners, until each such Partner has been allocated Net Termination Gain equal to any such deficit balance in its Capital Account; and
 
        (B) second, 100% to the Partners in accordance with their respective Percentage Interests.

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        (ii) If a Net Termination Loss is recognized (or deemed recognized pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated among the Partners in the following manner:
        (A) first, to the Partners in accordance with their relative Percentage Interests, until the Capital Account of each Limited Partner has been reduced to zero; and
 
        (B) thereafter, the balance, if any, 100% to the General Partner.
      (c)  Special Allocations. Notwithstanding any other provision of this Section 6.1, the following special allocations shall be made for such taxable period:
        (i)  Partnership Minimum Gain Chargeback. Notwithstanding any other provision of this Section 6.1, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections  1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 6.1(c), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(c) with respect to such taxable period (other than an allocation pursuant to Section 6.1(c)(v) and Section 6.1(c)(vi)). This Section 6.1(c)(i) is intended to comply with the Partnership Minimum Gain chargeback requirement in Treasury Regulation Section  1.704-2(f) and shall be interpreted consistently therewith.
 
        (ii)  Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 6.1 (other than Section 6.1(c)(i)), except as provided in Treasury Regulation Section  1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections  1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section 6.1(c), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(c), other than Section 6.1(c)(i) and other than an allocation pursuant to Section 6.1(c)(v) and Section 6.1(c)(vi), with respect to such taxable period. This Section 6.1(c)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section  1.704-2(i)(4) and shall be interpreted consistently therewith.
 
        (iii)  Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections  1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii).
 
        (iv)  Gross Income Allocations. In the event any Partner has a deficit balance in its Capital Account at the end of any Partnership taxable period in excess of the sum of (A) the amount such Partner is required to restore pursuant to the provisions of this Agreement and (B) the amount such Partner is deemed obligated to restore pursuant to Treasury Regulation Sections  1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 6.1(c)(iv) shall be made only if and to the extent that such Partner would have a deficit balance in its Capital Account as adjusted after all other allocations provided for in this Section 6.1 have been tentatively made as if this Section 6.1(c)(iv) were not in this Agreement.
 
        (v)  Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines

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  that the Partnership’s Nonrecourse Deductions should be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the other Partners, to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements.
 
        (vi)  Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section  1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss.
 
        (vii)  Nonrecourse Liabilities. For purposes of Treasury Regulation Section  1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among the Partners in accordance with their respective Percentage Interests.
 
        (viii)  Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section  1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.
 
        (ix)  Curative Allocation.
 
        (A) Notwithstanding any other provision of this Section 6.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of income, gain, loss and deduction allocated to each Partner pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Partner under the Agreed Allocations had the Required Allocations and the related Curative Allocation not otherwise been provided in this Section 6.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partner Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section 6.1(c)(ix)(A) shall only be made with respect to Required Allocations to the extent the General Partner determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 6.1(c)(ix)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the General Partner determines that such allocations are likely to be offset by subsequent Required Allocations.
 
        (B) The General Partner shall, with respect to each taxable period, (1) apply the provisions of Section 6.1(c)(ix)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 6.1(c)(ix)(A) among the Partners in a manner that is likely to minimize such economic distortions.

Section  6.2      Allocations for Tax Purposes.
      (a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1.

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      (b) The deduction for depletion with respect to each separate oil and gas property (as defined in Section 614 of the Code) shall be computed for federal income tax purposes separately by the Partners rather than by the Company in accordance with section 613A(c)(7)(D) of the Code. Except as provided in Section 6.2(c)(iii), for purposes of such computation (before taking into account any adjustments resulting from an election made by the Partnership under Section 754 of the Code), the adjusted tax basis of each oil and gas property (as defined in Section 614 of the Code) shall be allocated among the Partners in accordance with their respective Percentage Interests.
      Each Partner shall separately keep records of his share of the adjusted tax basis in each oil and gas property, allocated as provided above, adjust such share of the adjusted tax basis for any cost or percentage depletion allowable with respect to such property, and use such adjusted tax basis in the computation of its cost depletion or in the computation of his gain or loss on the disposition of such property by the Partnership.
      (c) Except as provided in Section 6.2(c)(iii), for the purposes of the separate computation of gain or loss by each partner on the sale or disposition of each separate oil and gas property (as defined in Section 614 of the Code), the Partnership’s allocable share of “amount realized” (as such term is defined in Section 1001(b) of the Code) from such sale or disposition shall be allocated for federal income tax purposes among the Partners as follows:
        (i) first, to the extent such amount realized constitutes a recovery of the Simulated Basis of the property, to the Partners in the same proportion as the depletable basis of such property was allocated to the Partners pursuant to Section 6.2(b) (without regard to any special allocation of basis under Section 6.2(c)(iii));
 
        (ii) second, the remainder of such amount realized, if any, to the Partners so that, to the maximum extent possible, the amount realized allocated to each Partner under this Section 6.2(c)(ii) will equal such Partner’s share of the Simulated Gain recognized by the Partnership from such sale or disposition.
 
        (iii) The Partners recognize that with respect to Contributed Property and Adjusted Property there will be a difference between the Carrying Value of such property at the time of contribution or revaluation, as the case may be, and the adjusted tax basis of such property at that time. All items of tax depreciation, cost recovery, amortization, adjusted tax basis of depletable properties, amount realized and gain or loss with respect to such Contributed Property and Adjusted Property shall be allocated among the Partners to take into account the disparities between the Carrying Values and the adjusted tax basis with respect to such properties in accordance with the principles of Treasury Regulation Section  1.704-3(d).
 
        (iv) Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of the Agreement.
      (d) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, other than an oil and gas property (as defined in Section 614 of the Code), items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows:
        (i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.
 
        (ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 5.5(d)(i) or Section 5.5(d)(ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 6.2(d)(i)(A);

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  and (B) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.
 
        (iii) The General Partner shall apply the principles of Treasury Regulation Section  1.704-3(d) to eliminate Book-Tax Disparities.

      (e) For the proper administration of the Partnership and for the preservation of uniformity of the Limited Partner Interests (or any class or classes thereof), the General Partner shall (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal income tax purposes of income (including, without limitation, gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate (A) to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (B) otherwise to preserve or achieve uniformity of the Limited Partner Interests (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 6.2(e) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of Limited Partner Interests issued and Outstanding or the Partnership, and if such allocations are consistent with the principles of Section 704 of the Code.
      (f) The General Partner may determine to depreciate or amortize the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation or amortization method and useful life applied to the Partnership’s common basis of such property, despite any inconsistency of such approach with Treasury Regulation Section  1.167(c)-l(a)(6) or any successor regulations thereto. If the General Partner determines that such reporting position cannot reasonably be taken, the General Partner may adopt depreciation and amortization conventions under which all purchasers acquiring Limited Partner Interests in the same month would receive depreciation and amortization deductions, based upon the same applicable rate as if they had purchased a direct interest in the Partnership’s property. If the General Partner chooses not to utilize such aggregate method, the General Partner may use any other depreciation and amortization conventions to preserve the uniformity of the intrinsic tax characteristics of any Limited Partner Interests, so long as such conventions would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of Limited Partner Interests.
      (g) Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 6.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.
      (h) All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code that may be made by the Partnership; provided, however , that such allocations, once made, shall be adjusted (in the manner determined by the General Partner) to take into account those adjustments permitted or required by Sections 734 and 743 of the Code.
      (i) Each item of Partnership income, gain, loss and deduction attributable to a transferred Partnership Interest shall, for federal income tax purposes, be determined on an annual basis and prorated on a monthly basis and (i) prior to the time that the Units are traded on a National Securities Exchange shall be allocated to the Partners on the first Business Day of each month; provided, however, such items for the period beginning on the Closing Date and ending on the last day of the month in which the Option Closing Date or the expiration of the Over-Allotment Option occurs shall be allocated to the Partners as of the first Business Day of the next succeeding month and (ii) after the time that the Units are traded on a National Securities Exchange, shall be allocated to the Partners on the first Business Day of each month as of the opening of the principal National Securities Exchange on which the Units are then traded. Notwithstanding

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the foregoing, gain or loss on a sale or other disposition of any assets of the Partnership or any other extraordinary item of income or loss realized and recognized other than in the ordinary course of business, as determined by the General Partner, shall be allocated to the Partners on the first Business Day of each month or, after the time that the Units are traded on a National Securities Exchange, on the first Business Day of each month as of the opening of the principal National Securities Exchange on which the Units are then traded, in which such gain or loss is recognized for federal income tax purposes. The General Partner may revise, alter or otherwise modify such methods of allocation to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder.
      (j) Allocations that would otherwise be made to a Limited Partner under the provisions of this Article VI shall instead be made to the beneficial owner of Limited Partner Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method determined by the General Partner.
Section  6.3      Requirement and Characterization of Distributions; Distributions to Record Holders.
      (a) Within 45 days following the end of each Quarter commencing with the Quarter ending on June 30, 2006, an amount equal to 100% of Available Cash with respect to such Quarter shall, subject to Section  17-607 of the Delaware Act, be distributed in accordance with this Article VI by the Partnership to the Partners in accordance with their respective Percentage Interest as of the Record Date selected by the General Partner. All distributions required to be made under this Agreement shall be made subject to Section  17-607 of the Delaware Act.
      (b) Notwithstanding Section 6.3(a), in the event of the dissolution and liquidation of the Partnership, all receipts received during or after the Quarter in which the Liquidation Date occurs, other than from borrowings described in (a)(ii) of the definition of Available Cash, shall be applied and distributed solely in accordance with, and subject to the terms and conditions of, Section 12.4.
      (c) The General Partner may treat taxes paid by the Partnership on behalf of, or amounts withheld with respect to, all or less than all of the Partners, as a distribution of Available Cash to such Partners.
      (d) Each distribution in respect of a Partnership Interest shall be paid by the Partnership, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holder of such Partnership Interest as of the Record Date set for such distribution. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise.
ARTICLE VII
Management and Operation of Business
Section  7.1      Management.
      (a) The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner shall have any management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3, shall have full power and authority to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Partnership, to exercise all powers set forth in Section 2.5 and to effectuate the purposes set forth in Section 2.4, including the following:
        (i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible into Partnership Securities, and the incurring of any other obligations;

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        (ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;
 
        (iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (iii) being subject, however, to any prior approval that may be required by Section 7.3 and Article XIV);
 
        (iv) the use of the assets of the Partnership (including cash on hand) for any purpose consistent with the terms of this Agreement, including the financing of the conduct of the operations of the Partnership Group; subject to Section 7.6(a), the lending of funds to other Persons (including other Group Members); the repayment or guarantee of obligations of any Group Member; and the making of capital contributions to any Group Member;
 
        (v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including instruments that limit the liability of the Partnership under contractual arrangements to all or particular assets of the Partnership, with the other party to the contract to have no recourse against the General Partner or its assets other than its interest in the Partnership, even if doing that results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case);
 
        (vi) the distribution of Partnership cash;
 
        (vii) the selection and dismissal of employees (including employees having titles such as “president,” “vice president,” “secretary” and “treasurer”) and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;
 
        (viii) the maintenance of insurance for the benefit of the Partnership Group and the Partners;
 
        (ix) the formation of, or acquisition of an interest in, and the contribution of cash or property and the making of loans to, any further limited or general partnerships, joint ventures, corporations, limited liability companies or other relationships (including the acquisition of interests in, and the contributions of cash or property to, any Group Member from time to time) subject to the restrictions set forth in Section 2.4;
 
        (x) the control of any matters affecting the rights and obligations of the Partnership, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expenses and the settlement of claims and litigation;
 
        (xi) the indemnification of any Person against liabilities and contingencies to the extent permitted by law;
 
        (xii) the entering into of listing agreements with any National Securities Exchange and the delisting of some or all of the Limited Partner Interests from, or requesting that trading be suspended on, any such exchange (subject to any prior approval that may be required under Section 4.8);
 
        (xiii) the purchase, sale or other acquisition or disposition of Partnership Securities, or the issuance of additional options, rights, warrants and appreciation rights relating to Partnership Securities;
 
        (xiv) the undertaking of any action in connection with the Partnership’s participation in any Group Member; and
 
        (xv) the entering into of agreements with any of its Affiliates to render services to a Group Member or to itself in the discharge of its duties as General Partner of the Partnership.
      (b) Notwithstanding any other provision of this Agreement, any Group Member Agreement, the Delaware Act or any applicable law, rule or regulation, each of the Partners and each other Person who may acquire an interest in Partnership Securities hereby (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of this Agreement, the Underwriting Agreement, the Omnibus Agreement, the Contribution Agreement, the Founders Registration Rights Agreement, any Group Member

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Agreement of any other Group Member and the other agreements described in the Offering Memorandum that are related to the transactions contemplated by the Offering Memorandum; (ii) agrees that the General Partner (on its own or through any officer of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence and the other agreements, acts, transactions and matters described in or contemplated by the Offering Memorandum on behalf of the Partnership without any further act, approval or vote of the Partners or the other Persons who may acquire an interest in Partnership Securities; and (iii) agrees that the execution, delivery or performance by the General Partner, any Group Member or any Affiliate of any of them of this Agreement or any agreement authorized or permitted under this Agreement (including the exercise by the General Partner or any Affiliate of the General Partner of the rights accorded pursuant to Article XV) shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement (or any other agreements) or of any duty stated or implied by law or equity.
Section  7.2      Certificate of Limited Partnership.
      The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents that the General Partner determines to be necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent the General Partner determines such action to be necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership or other entity in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 3.4(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to any Limited Partner.
Section  7.3      Restrictions on the General Partner’s Authority.
      (a) Except as otherwise provided in this Agreement, the General Partner may not, without written approval of the specific act by holders of all of the Outstanding Limited Partner Interests or by other written instrument executed and delivered by holders of all of the Outstanding Limited Partner Interests subsequent to the date of this Agreement, take any action in contravention of this Agreement, including, (i) committing any act that would make it impossible to carry on the ordinary business of the Partnership; (ii) possessing Partnership property, or assigning any rights in specific Partnership property, for other than a Partnership purpose; (iii) admitting a Person as a Partner; (iv) amending this Agreement in any manner; or (v) transferring its interest as a general partner of the Partnership.
      (b) Except as provided in Article XII and Article XIV, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions (including by way of merger, consolidation or other combination or sale of ownership interests of the Partnership’s Subsidiaries) without the approval of holders of a Unit Majority; provided, however , that this provision shall not preclude or limit the General Partner’s ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Partnership Group and shall not apply to any forced sale of any or all of the assets of the Partnership Group pursuant to the foreclosure of, or other realization upon, any such encumbrance. Without the approval of holders of a Unit Majority, the General Partner shall not, on behalf of the Partnership, (i) except as permitted under Section 4.6, Section 11.1 and Section 11.2, elect or cause the Partnership to elect a successor general partner of the Partnership, or (ii) consent to any amendment to the Operating Partnership Agreement or the Operating Partnership GP Agreement or, except as expressly permitted by Section 7.9(f), take any action permitted to be taken by a member of the Operating Partnership GP or any partner of the Operating Partnership, in either case, that would adversely affect the Limited Partners (including any particular class of Partnership Interests as compared to any other class of Partnership Interests) in any material respect.

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Section  7.4      Reimbursement of the General Partner.
      (a) Except as provided in this Section 7.4 and elsewhere in this Agreement, the General Partner shall not be compensated for its services as a general partner or managing member of any Group Member.
      (b) The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership Group (including salary, bonus, incentive compensation and other amounts paid to any Person including Affiliates of the General Partner to perform services for the Partnership Group or for the General Partner in the discharge of its duties to the Partnership Group) and (ii) all other expenses allocable to the Partnership Group or otherwise incurred by the General Partner in connection with operating the Partnership Group’s business (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the expenses that are allocable to the Partnership Group. Reimbursements pursuant to this Section 7.4 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7.
      (c) The General Partner, without the approval of the Limited Partners (who shall have no right to vote in respect thereof), may propose and adopt on behalf of the Partnership employee benefit plans, employee programs and employee practices (including plans, programs and practices involving the issuance of Partnership Securities or options to purchase or rights, warrants or appreciation rights relating to Partnership Securities), or cause the Partnership to issue Partnership Securities in connection with, or pursuant to, any employee benefit plan, employee program or employee practice maintained or sponsored by the General Partner or any of its Affiliates, in each case for the benefit of employees of the General Partner, any Group Member or any Affiliate, or any of them, in respect of services performed, directly or indirectly, for the benefit of the Partnership Group. The Partnership agrees to issue and sell to the General Partner or any of its Affiliates any Partnership Securities that the General Partner or such Affiliates are obligated to provide to any employees pursuant to any such employee benefit plans, employee programs or employee practices. Expenses incurred by the General Partner in connection with any such plans, programs and practices (including the net cost to the General Partner or such Affiliates of Partnership Securities purchased by the General Partner or such Affiliates from the Partnership to fulfill options or awards under such plans, programs and practices) shall be reimbursed in accordance with Section 7.4(b). Any and all obligations of the General Partner under any employee benefit plans, employee programs or employee practices adopted by the General Partner as permitted by this Section 7.4(c) shall constitute obligations of the General Partner hereunder and shall be assumed by any successor General Partner approved pursuant to Section 11.1 or Section 11.2 or the transferee of or successor to all of the General Partner’s General Partner Interest pursuant to Section 4.6.
Section  7.5      Outside Activities.
      (a) After the Closing Date, the General Partner, for so long as it is the general partner of the Partnership (i) agrees that its sole business will be to act as a general partner or managing member, as the case may be, of the Partnership and any other partnership or limited liability company of which the Partnership is, directly or indirectly, a partner or member and to undertake activities that are ancillary or related thereto (including being a limited partner in the Partnership) and (ii) shall not engage or allow any of its subsidiaries to engage in any business or activity or incur any debts or liabilities except in connection with or incidental to (A) its performance as general partner or managing member, if any, of one or more Group Members or as described in or contemplated by the Registration Statement or (B) the acquiring, owning or disposing of debt or equity securities in any Group Member.
      (b) Except as may otherwise be provided in an agreement entered into by an Indemnitee, each Indemnitee (other than the General Partner and any of its subsidiaries) shall have the right to engage in businesses of every type and description and other activities for profit and to engage in and possess an interest in other business ventures of any and every type or description, whether in businesses engaged in or anticipated to be engaged in by any Group Member, independently or with others, including business interests and activities in direct competition with the business and activities of any Group Member, and none of the same shall constitute a breach of this Agreement or any duty expressed or implied by law to any Group Member or any Partner. Except as may otherwise be provided in an agreement entered into by an Indemnitee,

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but notwithstanding anything to the contrary in this Agreement, (i) the engaging in competitive activities by any Indemnitees (other than the General Partner and any of its subsidiaries) in accordance with the provisions of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii) it shall be deemed not to be a breach of any fiduciary duty or any other obligation of any type whatsoever of the General Partner or of any Indemnitee for the Indemnitees (other than the General Partner and any of its subsidiaries) to engage in such business interests and activities in preference to or to the exclusion of the Partnership.
      (c) Notwithstanding anything to the contrary in this Agreement, the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to any Indemnitee (including the General Partner and any of its subsidiaries). No Indemnitee (including the General Partner and any of its subsidiaries) who acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Partnership shall have any duty to communicate or offer such opportunity to the Partnership, and such Indemnitee (including the General Partner and any of its subsidiaries) shall not be liable to the Partnership, to any Limited Partner or any other Person for breach of any fiduciary or other duty by reason of the fact that such Indemnitee (including the General Partner and any of its subsidiaries) pursues or acquires for itself, directs such opportunity to another Person or does not communicate such opportunity or information to the Partnership.
      (d) Except as otherwise provided by this Agreement, none of the Group Members, any Limited Partner or any other Person shall have any rights by virtue of this Agreement, any Group Member Agreement, or the partnership relationship established hereby in any business ventures of any Indemnitee.
      (e) The General Partner and each of its Affiliates may acquire Units or other Partnership Securities in addition to those acquired on the Closing Date and, except as otherwise provided in this Agreement, shall be entitled to exercise, at their option, all rights relating to all Units or other Partnership Securities acquired by them. For purposes of this Section 7.5(d), the term “Affiliates,” when used with respect to the General Partner, shall not include any Group Member.
Section  7.6      Loans from the General Partner; Loans or Contributions from the Partnership or Group Members.
      (a) The General Partner or any of its Affiliates may lend to any Group Member, and any Group Member may borrow from the General Partner or any of its Affiliates, funds needed or desired by the Group Member for such periods of time and in such amounts as the General Partner may determine; provided, however, that in any such case the lending party may not charge the borrowing party interest at a rate greater than the rate that would be charged the borrowing party or impose terms less favorable to the borrowing party than would be charged or imposed on the borrowing party by unrelated lenders on comparable loans made on an arm’s-length basis (without reference to the lending party’s financial abilities or guarantees), all as determined by the General Partner. The borrowing party shall reimburse the lending party for any costs (other than any additional interest costs) incurred by the lending party in connection with the borrowing of such funds. For purposes of this Section 7.6(a) and Section 7.6(b), the term “Group Member” shall include any Affiliate of a Group Member that is controlled by the Group Member.
      (b) The Partnership may lend or contribute to any Group Member, and any Group Member may borrow from the Partnership, funds on terms and conditions determined by the General Partner. No Group Member may lend funds to the General Partner or any of its Affiliates (other than another Group Member).
Section  7.7      Indemnification.
      (a) To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, all Indemnitees shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as an Indemnitee; provided, that the Indemnitee shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the

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matter for which the Indemnitee is seeking indemnification pursuant to this Section 7.7, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was unlawful; provided, further, no indemnification pursuant to this Section 7.7 shall be available to the General Partner or its Affiliates (other than a Group Member) with respect to its or their obligations incurred pursuant to the Purchase Agreement, the Omnibus Agreement or the Contribution Agreement (other than obligations incurred by the General Partner on behalf of the Partnership). Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, it being agreed that the General Partner shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate such indemnification.
      (b) To the fullest extent permitted by law, expenses (including legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Section 7.7(a) in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to a determination that the Indemnitee is not entitled to be indemnified upon receipt by the Partnership of any undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 7.7.
      (c) The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the holders of Outstanding Limited Partner Interests entitled to vote on such matter, as a matter of law or otherwise, both as to actions in the Indemnitee’s capacity as an Indemnitee and as to actions in any other capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee.
      (d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of the General Partner, its Affiliates and such other Persons as the General Partner shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Person in connection with the Partnership’s activities or such Person’s activities on behalf of the Partnership, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.
      (e) For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Section 7.7(a); and action taken or omitted by the Indemnitee with respect to any employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the best interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in the best interest of the Partnership.
      (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.
      (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
      (h) The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.
      (i) No amendment, modification or repeal of this Section 7.7 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligations of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be

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asserted, and provided such Person became an Indemnitee hereunder prior to such amendment, modification or repeal.
Section  7.8      Liability of Indemnitees.
      (a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Limited Partners or any other Persons who have acquired interests in the Partnership Securities, for losses sustained or liabilities incurred as a result of any act or omission of an Indemnitee unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter in question, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was criminal.
      (b) Subject to its obligations and duties as General Partner set forth in Section 7.1(a), the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith.
      (c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, the General Partner and any other Indemnitee acting in connection with the Partnership’s business or affairs shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement.
      (d) Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnitees under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.
Section  7.9      Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties.
      (a) Unless otherwise expressly provided in this Agreement or any Group Member Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, on the other hand, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and, to the fullest extent permitted by law, deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Units (excluding Units owned by the General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of such resolution, and the General Partner may also adopt a resolution or course of action that has not received Special Approval. If Special Approval is not sought and the Board of Directors of the General Partner determines that the resolution or course of action taken with respect to a conflict of interest satisfies either of the standards set forth in clauses (iii) or (iv) above, then it shall be presumed that, in making its decision, the Board of Directors of the General Partner acted in good faith, and in any proceeding brought by any Limited Partner or by or on behalf of such Limited Partner or any other Limited Partner or the Partnership challenging such approval, the Person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption. Notwithstanding anything to the contrary in this Agreement or any duty otherwise existing at law or equity, the existence of the conflicts of interest described in the Offering Memorandum are hereby approved by all Partners and shall not constitute a breach of this Agreement.

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      (b) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its capacity as the general partner of the Partnership as opposed to in its individual capacity, whether under this Agreement, any Group Member Agreement or any other agreement contemplated hereby or otherwise, then, unless another express standard is provided for in this Agreement, the General Partner, or such Affiliates causing it to do so, shall make such determination or take or decline to take such other action in good faith and shall not be subject to any other or different standards imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. In order for a determination or other action to be in “good faith” for purposes of this Agreement, the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership, unless the context otherwise requires.
      (c) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its individual capacity as opposed to in its capacity as the general partner of the Partnership, whether under this Agreement, any Group Member Agreement or any other agreement contemplated hereby or otherwise, then the General Partner, or such Affiliates causing it to do so, are entitled, to the fullest extent permitted by law, to make such determination or to take or decline to take such other action free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner, and the General Partner, or such Affiliates causing it to do so, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. By way of illustration and not of limitation, whenever the phrase, “at the option of the General Partner,” or some variation of that phrase, is used in this Agreement, it indicates that the General Partner is acting in its individual capacity. For the avoidance of doubt, whenever the General Partner votes or transfers its Partnership Interests, or refrains from voting or transferring its Partnership Interests, it shall be acting in its individual capacity.
      (d) Notwithstanding anything to the contrary in this Agreement, the General Partner and its Affiliates shall have no duty or obligation, express or implied, to (i) sell or otherwise dispose of any asset of the Partnership Group other than in the ordinary course of business or (ii) permit any Group Member to use any facilities or assets of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use. Any determination by the General Partner or any of its Affiliates to enter into such contracts shall be at its option.
      (e) Except as expressly set forth in this Agreement or required by law, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner and the provisions of this Agreement, to the extent that they restrict, eliminate or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.
      (f) The Unitholders hereby authorize the General Partner, on behalf of the Partnership as a partner or member of a Group Member, to approve of actions by the general partner or managing member of such Group Member similar to those actions permitted to be taken by the General Partner pursuant to this Section 7.9.
      (g) Whenever a particular transaction, arrangement or resolution of a conflict of interest is required under this Agreement to be “fair and reasonable” to any Person, the fair and reasonable nature of such transaction, arrangement or resolution shall be considered in the context of all similar or related transactions.
Section  7.10      Other Matters Concerning the General Partner.
      (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

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      (b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.
      (c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers, a duly appointed attorney or attorneys-in -fact or the duly authorized officers of the Partnership. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder.
      (d) Any standard of care and duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited, to the extent permitted by law, as required to permit the General Partner to act under this Agreement and to make any decision pursuant to the authority prescribed in this Agreement, so long as such action is reasonably believed by the General Partner to be in, or not inconsistent with, the best interests of the Partnership.
Section 7.11      Purchase or Sale of Partnership Securities.
      The General Partner may cause the Partnership to purchase or otherwise acquire Partnership Securities, such Partnership Securities shall be held by the Partnership as treasury securities unless they are expressly cancelled by action of an appropriate officer of the General Partner. As long as Partnership Securities are held by any Group Member, such Partnership Securities shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Partnership Securities for its own account, subject to the provisions of Article IV and Article X.
Section 7.12      [Reserved].
Section 7.13      Reliance by Third Parties.
      Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner and any officer of the General Partner authorized by the General Partner to act on behalf of and in the name of the Partnership has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any authorized contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner or any such officer as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives, to the fullest extent permitted by law, any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner or any such officer in connection with any such dealing. In no event shall any Person dealing with the General Partner or any such officer or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or any such officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

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ARTICLE VIII
Books, Records, Accounting and Reports
Section 8.1      Records and Accounting.
      The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including all books and records necessary to provide to the Limited Partners any information required to be provided pursuant to Section 3.4(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including the record of the Record Holders and assignees of Units or other Partnership Securities, books of account and records of Partnership proceedings, may be kept on, or be in the form of, computer disks, hard drives, punch cards, magnetic tape, photographs, micrographics or any other information storage device; provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with U.S. GAAP.
Section 8.2      Fiscal Year.
      The fiscal year of the Partnership shall be a fiscal year ending December 31.
Section 8.3      Reports.
      (a) As soon as practicable, but in no event later than 120 days after the close of each fiscal year of the Partnership, the General Partner shall cause to be mailed or made available to each Record Holder of a Unit as of a date selected by the General Partner, an annual report containing financial statements of the Partnership for such fiscal year of the Partnership, presented in accordance with U.S. GAAP, including a balance sheet and statements of operations, Partnership equity and cash flows, such statements to be audited by a firm of independent public accountants selected by the General Partner.
      (b) As soon as practicable, but in no event later than 90 days after the close of each Quarter except the last Quarter of each fiscal year, the General Partner shall cause to be mailed or made available to each Record Holder of a Unit, as of a date selected by the General Partner, a report containing unaudited financial statements of the Partnership and such other information as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed or admitted to trading, or as the General Partner determines to be necessary or appropriate.
ARTICLE IX
Tax Matters
Section 9.1      Tax Returns and Information.
      The Partnership shall timely file all returns of the Partnership that are required for federal, state and local income tax purposes on the basis of the accrual method and a taxable year ending on December 31. The tax information reasonably required by Record Holders for federal and state income tax reporting purposes with respect to a taxable year shall be furnished to them within 90 days of the close of the calendar year in which the Partnership’s taxable year ends. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes.
Section 9.2      Tax Elections.
      (a) The Partnership shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder, subject to the reservation of the right to seek to revoke any such election upon the General Partner’s determination that such revocation is in the best interests of the Limited Partners. Notwithstanding any other provision herein contained, for the purposes of computing the adjustments under Section 743(b) of the Code if any of the Limited Partner Interests are listed on a National Securities Exchange, the General Partner shall be authorized (but not required) to adopt a convention whereby the price

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paid by a transferee of a Limited Partner Interest will be deemed to be the lowest quoted Closing Price of such Limited Partner Interests on any National Securities Exchange on which such Limited Partner Interests are listed or admitted for trading during the calendar month in which such transfer is deemed to occur pursuant to Section 6.2(i) without regard to the actual price paid by such transferee.
      (b) Except as otherwise provided herein, the General Partner shall determine whether the Partnership should make any other elections permitted by the Code.
Section 9.3      Tax Controversies.
      Subject to the provisions hereof, the General Partner is designated as the Tax Matters Partner (as defined in the Code) and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.
Section 9.4      Withholding.
      Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that may be required to cause the Partnership and other Group Members to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is required or elects to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner (including, without limitation, by reason of Section 1446 of the Code), the General Partner may treat the amount withheld as a distribution of cash pursuant to Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
Admission of Partners
Section 10.1      Admission of Founding Investors and Initial Limited Partners.
      Upon the issuance by the Partnership of Units to the Founding Investors, the Initial Purchaser and the Accredited Investors as described in Section 5.3, the General Partner shall admit such parties to the Partnership as Initial Limited Partners in respect of the Units issued to them.
Section 10.2      Admission of Limited Partners.
      (a) By acceptance of the transfer of any Limited Partner Interests in accordance with Article IV or the acceptance of any Limited Partner Interests issued pursuant to Article V or pursuant to a merger or consolidation pursuant to Article XIV, and except as provided in Section 4.9, each transferee of, or other such Person acquiring, a Limited Partner Interest (including any nominee holder or an agent or representative acquiring such Limited Partner Interests for the account of another Person) (i) shall be admitted to the Partnership as a Limited Partner with respect to the Limited Partner Interests so transferred or issued to such Person when any such transfer, issuance or admission is reflected in the books and records of the Partnership and such Limited Partner becomes the Record Holder of the Limited Partner Interests so transferred, (ii) shall become bound by the terms of this Agreement, (iii) represents that the transferee has the capacity, power and authority to enter into this Agreement, (iv) grants the powers of attorney set forth in this Agreement and (v) makes the consents and waivers contained in this Agreement, all with or without execution of this Agreement by such Person. The transfer of any Limited Partner Interests and the admission of any new Limited Partner shall not constitute an amendment to this Agreement. A Person may become a Limited Partner or Record Holder of a Limited Partner Interest without the consent or approval of any of the Partners. A Person may not become a Limited Partner without acquiring a Limited Partner Interest and until such Person is reflected in the books and records of the Partnership as the Record Holder of such Limited Partner

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Interest. The rights and obligations of a Person who is a Non-citizen Assignee shall be determined in accordance with Section 4.9.
      (b) The name and mailing address of each Limited Partner shall be listed on the books and records of the Partnership maintained for such purpose by the Partnership or the Transfer Agent. The General Partner shall update the books and records of the Partnership from time to time as necessary to reflect accurately the information therein (or shall cause the Transfer Agent to do so, as applicable). A Limited Partner Interest may be represented by a Certificate, as provided in Section 4.1.
      (c) Any transfer of a Limited Partner Interest shall not entitle the transferee to share in the profits and losses, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a Limited Partner pursuant to Section 10.2(a).
Section 10.3      Admission of Successor General Partner.
      A successor General Partner approved pursuant to Section 11.1 or Section 11.2 or the transferee of or successor to all of the General Partner Interest pursuant to Section 4.6 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to the withdrawal or removal of the predecessor or transferring General Partner, pursuant to Section 11.1 or Section 11.2 or the transfer of the General Partner Interest pursuant to Section 4.6, provided, however, that no such successor shall be admitted to the Partnership until compliance with the terms of Section 4.6 has occurred and such successor has executed and delivered such other documents or instruments as may be required to effect such admission. Any such successor shall, subject to the terms hereof, carry on the business of the members of the Partnership Group without dissolution.
Section 10.4      Amendment of Agreement and Certificate of Limited Partnership.
      To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary or appropriate under the Delaware Act to amend the records of the Partnership to reflect such admission and, if necessary, to prepare as soon as practicable an amendment to this Agreement and, if required by law, the General Partner shall prepare and file an amendment to the Certificate of Limited Partnership, and the General Partner may for this purpose, among others, exercise the power of attorney granted pursuant to Section 2.6.
ARTICLE XI
Withdrawal or Removal of Partners
Section 11.1      Withdrawal of the General Partner.
      (a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal” );
        (i) The General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners;
 
        (ii) The General Partner transfers all of its rights as General Partner pursuant to Section 4.6;
 
        (iii) The General Partner is removed pursuant to Section 11.2;
 
        (iv) The General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition for relief under Chapter 7 of the United States Bankruptcy Code; (C) files a petition or answer seeking for itself a liquidation, dissolution or similar relief (but not a reorganization) under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment of a trustee (but not a debtor-in -possession), receiver or liquidator of the General Partner or of all or any substantial part of its properties;

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        (v) A final and non-appealable order of relief under Chapter 7 of the United States Bankruptcy Code is entered by a court with appropriate jurisdiction pursuant to a voluntary or involuntary petition by or against the General Partner; or
 
        (vi) (A) in the event the General Partner is a corporation, a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation; (B) in the event the General Partner is a partnership or a limited liability company, the dissolution and commencement of winding up of the General Partner; (C) in the event the General Partner is acting in such capacity by virtue of being a trustee of a trust, the termination of the trust; (D) in the event the General Partner is a natural person, his death or adjudication of incompetency; and (E) otherwise in the event of the termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A), (B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 11.1 shall result in the withdrawal of the General Partner from the Partnership.
      (b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) at any time during the period beginning on the Closing Date and ending at 12:00 midnight, Central Time, on March 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners; provided, that prior to the effective date of such withdrawal, the withdrawal is approved by Unitholders holding at least a majority of the Outstanding Units (excluding Units held by the General Partner and its Affiliates) and the General Partner delivers to the Partnership an Opinion of Counsel ( “Withdrawal Opinion of Counsel” ) that such withdrawal (following the selection of the successor General Partner) would not result in the loss of the limited liability of any Limited Partner or any Group Member or cause any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed); (ii) at any time after 12:00 midnight, Central Time, on March 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Unitholders, such withdrawal to take effect on the date specified in such notice; (iii) at any time that the General Partner ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time that the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners, such withdrawal to take effect on the date specified in the notice, if at the time such notice is given one Person and its Affiliates (other than the General Partner and its Affiliates) own beneficially or of record or control at least 50% of the Outstanding Units. The withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall also constitute the withdrawal of the General Partner as general partner or managing member, if any, to the extent applicable, of the other Group Members. If the General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of such withdrawal, elect a successor General Partner. The Person so elected as successor General Partner shall automatically become the successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If, prior to the effective date of the General Partner’s withdrawal, a successor is not selected by the Unitholders as provided in this Agreement or the Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance with Section 12.1. Any successor General Partner elected in accordance with the terms of this Section 11.1 shall be subject to the provisions of Section 10.3.
Section 11.2      Removal of the General Partner.
      The General Partner may be removed if such removal is approved by the Unitholders holding at least 66 2 / 3 % of the Outstanding Units (including Units held by the General Partner and its Affiliates) voting as a single class. Any such action by such holders for removal of the General Partner must also provide for the election of a successor General Partner by the Unitholders holding a majority of the outstanding Units voting

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as a single class (including Units held by the General Partner and its Affiliates). Such removal shall be effective immediately following the admission of a successor General Partner pursuant to Section 10.3. The removal of the General Partner shall also automatically constitute the removal of the General Partner as general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If a Person is elected as a successor General Partner in accordance with the terms of this Section 11.2, such Person shall, upon admission pursuant to Section 10.3, automatically become a successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. The right of the holders of Outstanding Units to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion opining as to the matters covered by a Withdrawal Opinion of Counsel. Any successor General Partner elected in accordance with the terms of this Section 11.2 shall be subject to the provisions of Section 10.3.
Section 11.3      Interest of Departing General Partner and Successor General Partner.
      (a) In the event of (i) withdrawal of the General Partner under circumstances where such withdrawal does not violate this Agreement or (ii) removal of the General Partner by the holders of Outstanding Units under circumstances where Cause does not exist, if the successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2, the Departing General Partner shall have the option, exercisable prior to the effective date of the departure of such Departing General Partner, to require its successor to purchase its General Partner Interest and its general partner interest (or equivalent interest), if any, in the other Group Members (collectively, the “Combined Interest” ) in exchange for an amount in cash equal to the fair market value of such Combined Interest, such amount to be determined and payable as of the effective date of its departure. If the General Partner is removed by the Unitholders under circumstances where Cause exists or if the General Partner withdraws under circumstances where such withdrawal violates this Agreement, and if a successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner), such successor shall have the option, exercisable prior to the effective date of the departure of such Departing General Partner (or, in the event the business of the Partnership is continued, prior to the date the business of the Partnership is continued), to purchase the Combined Interest for such fair market value of such Combined Interest of the Departing General Partner. In either event, the Departing Partner shall be entitled to receive all reimbursements due such Departing General Partner pursuant to Section 7.4, including any employee-related liabilities (including severance liabilities), incurred in connection with the termination of any employees employed by the Departing General Partner or its Affiliates (other than any Group Member) for the benefit of the Partnership or the other Group Members.
      For purposes of this Section 11.3(a), the fair market value of the Departing General Partner’s Combined Interest shall be determined by agreement between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing Partner’s departure, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts, and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which third independent investment banking firm or other independent expert shall determine the fair market value of the Combined Interest of the Departing General Partner. In making its determination, such third independent investment banking firm or other independent expert may consider the then current trading price of Units on any National Securities Exchange on which Units are then listed or admitted to trading, the value of the Partnership’s assets, the rights and obligations of the Departing General Partner and other factors it may deem relevant.
      (b) If the Combined Interest is not purchased in the manner set forth in Section 11.3(a), the Departing General Partner (or its transferee) shall become a Limited Partner and its Combined Interest shall be

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converted into Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 11.3(a), without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of its successor). Any successor General Partner shall indemnify the Departing General Partner (or its transferee) as to all debts and liabilities of the Partnership arising on or after the date on which the Departing General Partner (or its transferee) becomes a Limited Partner. For purposes of this Agreement, conversion of the Combined Interest of the Departing General Partner to Units will be characterized as if the Departing General Partner (or its transferee) contributed its Combined Interest to the Partnership in exchange for the newly issued Units.
      (c) If a successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner) and the option described in Section 11.3(a) is not exercised by the party entitled to do so, the successor General Partner shall, at the effective date of its admission to the Partnership, contribute to the Partnership cash in the amount equal to the product of the Percentage Interest of the Departing Partner and the Net Agreed Value of the Partnership’s assets on such date. In such event, such successor General Partner shall, subject to the following sentence, be entitled to its Percentage Interest of all Partnership allocations and distributions to which the Departing Partner was entitled. In addition, the successor General Partner shall cause this Agreement to be amended to reflect that, from and after the date of such successor General Partner’s admission, the successor General Partner’s interest in all Partnership distributions and allocations shall be its Percentage Interest.
Section 11.4      [Reserved].
Section 11.5      Withdrawal of Limited Partners.
      No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Limited Partner Interest becomes a Record Holder of the Limited Partner Interest so transferred, such transferring Limited Partner shall cease to be a Limited Partner with respect to the Limited Partner Interest so transferred.
ARTICLE XII
Dissolution and Liquidation
Section 12.1      Dissolution.
      The Partnership shall not be dissolved by the admission of additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner, if a successor General Partner is elected pursuant to Section 11.1 or Section 11.2, the Partnership shall not be dissolved and such successor General Partner shall continue the business of the Partnership. Subject to Section 12.2, the Partnership shall dissolve, and its affairs shall be wound up, upon:
        (a) an election to dissolve the Partnership by the Board of Directors of the General Partner that is approved by the holders of a Unit Majority;
 
        (b) the entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Delaware Act;
 
        (c) an Event of Withdrawal of the General Partner as provided in Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and an Opinion of Counsel is received as provided in Section 11.1(b) or Section 11.2 and such successor is admitted to the Partnership pursuant to Section 10.3; or
 
        (d) at any time there are no Limited Partners, unless the Partnership is continued without dissolution in accordance with the Delaware Act.

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Section 12.2      Continuation of the Business of the Partnership After Dissolution.
      Upon (a) an Event of Withdrawal caused by the withdrawal or removal of the General Partner as provided in Section 11.1(a)(i) or (iii) and the failure of the Partners to select a successor to such Departing General Partner pursuant to Section 11.1 or Section 11.2, then within 90 days thereafter or (b) an event constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or (vi), then, in either case, to the maximum extent permitted by law, within 180 days thereafter, the holders of a Unit Majority may elect to continue the business without dissolution of the Partnership on the same terms and conditions set forth in this Agreement by appointing as a successor General Partner a Person approved by the holders of a Unit Majority. Unless such an election is made within the applicable time period as set forth above, the Partnership shall dissolve and conduct only activities necessary to wind up its affairs. If such an election is so made, then:
        (i) the Partnership shall continue without dissolution unless earlier dissolved in accordance with this Article XII;
 
        (ii) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be treated in the manner provided in Section 11.3; and
 
        (iii) the successor General Partner shall be admitted to the Partnership as General Partner, effective as of the Event of Withdrawal, by agreeing in writing to be bound by this Agreement; provided, that the right of the holders of a Unit Majority to approve a successor General Partner and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability of any Limited Partner and (y) neither the Partnership nor any Group Member would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of such right to continue (to the extent not already so treated or taxed).
Section 12.3      Liquidator.
      Upon dissolution of the Partnership, unless the Partnership is continued pursuant to Section 12.2, the General Partner shall select one or more Persons to act as Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by the holders of at least a majority of the Outstanding Units voting as a single class. The Liquidator (if other than the General Partner) shall agree not to resign at any time without 15 days’ prior notice and may be removed at any time, with or without cause, by notice of removal approved by the holders of at least a majority of the Outstanding Units voting as a single class. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by the holders of at least a majority of the Outstanding Units voting as a single class. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XII, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 7.3) necessary or appropriate to carry out the duties and functions of the Liquidator hereunder for and during the period of time required to complete the winding up and liquidation of the Partnership as provided for herein.
Section 12.4      Liquidation.
      The Liquidator shall proceed to dispose of the assets of the Partnership, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as determined by the Liquidator, subject to Section 17-804 of the Delaware Act and the following:
        (a)  Disposition of Assets. The assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidator and such Partner or Partners may agree. If any property is distributed in kind, the Partners receiving the property shall be deemed for

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  purposes of Section 12.4(c) to have received cash equal to the fair market value of the property distributed; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners. The Liquidator may defer liquidation or distribution of the Partnership’s assets for a reasonable time if it determines that an immediate sale or distribution of all or some of the Partnership’s assets would be impractical or would cause undue loss to the Partners. The Liquidator may distribute the Partnership’s assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners.
 
        (b)  Discharge of Liabilities. Liabilities of the Partnership include amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 12.3) and amounts to Partners otherwise than in respect of their distribution rights under Article VI. With respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment. When paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds.
 
        (c)  Liquidation Distributions. All property and all cash in excess of that required to discharge liabilities as provided in Section 12.4(b) shall be distributed to the Partners in accordance with, and to the extent of, the positive balances in their respective Capital Accounts, as determined after taking into account all Capital Account adjustments (other than those made by reason of distributions pursuant to this Section 12.4(c)) for the taxable year of the Partnership during which the liquidation of the Partnership occurs (with such date of occurrence being determined pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such taxable year (or, if later, within 90 days after said date of such occurrence).

Section 12.5      Cancellation of Certificate of Limited Partnership.
      Upon the completion of the distribution of Partnership cash and property as provided in Section 12.4 in connection with the liquidation of the Partnership, the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.
Section 12.6      Return of Contributions.
      The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners or Unitholders, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets.
Section 12.7      Waiver of Partition.
      To the maximum extent permitted by law, each Partner hereby waives any right to partition of the Partnership property.
Section 12.8      Capital Account Restoration.
      No Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership.

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ARTICLE XIII
Amendment of Partnership
Agreement; Meetings; Record Date
Section 13.1      Amendments to be Adopted Solely by the General Partner.
      Each Partner agrees that the General Partner, without the approval of any Partner may amend any provision of this Agreement and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:
        (a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership;
 
        (b) the admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;
 
        (c) a change that the General Partner determines to be necessary or appropriate to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the Limited Partners have limited liability under the laws of any state or to ensure that the Group Members will not be treated as associations taxable as corporations or otherwise taxed as entities for federal income tax purposes;
 
        (d) a change that the General Partner determines, (i) does not adversely affect the Limited Partners (including any particular class of Partnership Interests as compared to other classes of Partnership Interests) in any material respect, (ii) to be necessary or appropriate to (A) satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute (including the Delaware Act) or (B) facilitate the trading of the Units (including the division of any class or classes of Outstanding Units into different classes to facilitate uniformity of tax consequences within such classes of Units) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are or will be listed or admitted to trading, (iii) to be necessary or advisable in connection with action taken by the General Partner pursuant to Section 5.9 or (iv) is required to effect the intent expressed in the Registration Statement or the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement;
 
        (e) a change in the fiscal year or taxable year of the Partnership and any other changes that the General Partner determines to be necessary or appropriate as a result of a change in the fiscal year or taxable year of the Partnership including, if the General Partner shall so determine, a change in the definition of “Quarter” and the dates on which distributions are to be made by the Partnership;
 
        (f) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership, or the General Partner or its directors, officers, trustees or agents from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, regardless of whether such are substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor;
 
        (g) an amendment that the General Partner determines to be necessary or appropriate in connection with the authorization of issuance of any class or series of Partnership Securities pursuant to Section 5.6;
 
        (h) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;
 
        (i) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 14.3;
 
        (j) an amendment that the General Partner determines to be necessary or appropriate to reflect and account for the formation by the Partnership of, or investment by the Partnership in, any corporation,

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  partnership, joint venture, limited liability company or other entity, in connection with the conduct by the Partnership of activities permitted by the terms of Section 2.4;
 
        (k) a merger or conveyance pursuant to Section 14.3(d); or
 
        (l) any other amendments substantially similar to the foregoing.

Section 13.2      Amendment Procedures.
      Except as provided in Section 13.1 and Section 13.3, all amendments to this Agreement shall be made in accordance with the following requirements. Amendments to this Agreement may be proposed only by the General Partner; provided, however , that the General Partner shall have no duty or obligation to propose any amendment to this Agreement and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to propose an amendment, to the fullest extent permitted by law shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. A proposed amendment shall be effective upon its approval by the General Partner and the holders of a Unit Majority, unless a greater or different percentage is required under this Agreement or by Delaware law. Each proposed amendment that requires the approval of the holders of a specified percentage of Outstanding Units shall be set forth in a writing that contains the text of the proposed amendment. If such an amendment is proposed, the General Partner shall seek the written approval of the requisite percentage of Outstanding Units or call a meeting of the Unitholders to consider and vote on such proposed amendment. The General Partner shall notify all Record Holders upon final adoption of any such proposed amendments.
Section 13.3      Amendment Requirements.
      (a) Notwithstanding the provisions of Section 13.1 and Section 13.2, no provision of this Agreement that establishes a percentage of Outstanding Units (including Units deemed owned by the General Partner) required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting percentage unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding Units whose aggregate Outstanding Units constitute not less than the voting requirement sought to be reduced.
      (b) Notwithstanding the provisions of Section 13.1 and Section 13.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent, unless such shall be deemed to have occurred as a result of an amendment approved pursuant to Section 13.3(c), or (ii) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable to, the General Partner or any of its Affiliates without its consent, which consent may be given or withheld at its option.
      (c) Except as provided in Section 14.3, and without limitation of the General Partner’s authority to adopt amendments to this Agreement without the approval of any Partners as contemplated in Section 13.1, any amendment that would have a material adverse effect on the rights or preferences of any class of Partnership Interests in relation to other classes of Partnership Interests must be approved by the holders of not less than a majority of the Outstanding Partnership Interests of the class affected.
      (d) Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 13.1 and except as otherwise provided by Section 14.3(b), no amendments shall become effective without the approval of the holders of at least 90% of the Outstanding Units voting as a single class unless the Partnership obtains an Opinion of Counsel to the effect that such amendment will not affect the limited liability of any Limited Partner under applicable law.
      (e) Except as provided in Section 13.1, this Section 13.3 shall only be amended with the approval of the holders of at least 90% of the Outstanding Units.

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Section 13.4      Meetings.
      (a) All acts of Limited Partners to be taken pursuant to this Agreement shall be taken in the manner provided in this Article XIII.
      (b) Special meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning 20% or more of the Outstanding Limited Partner Interests of the class or classes for which a meeting is proposed. Limited Partners shall call a special meeting by delivering to the General Partner one or more requests in writing stating that the signing Limited Partners wish to call a special meeting and indicating the general or specific purposes for which the special meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Transfer Agent. A special meeting shall be held at a time and place determined by the General Partner on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote at any special meeting for the election of directors to the Board of Directors of the General Partner or on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business.
      (c) (i) An annual meeting of Limited Partners for the election of directors to the Board of Directors of the General Partner and such other matters as the Board of Directors of the General Partner shall submit to a vote of the Limited Partners shall be held, following the first to occur of (A) the Founding Investors ceasing to own in the aggregate 50% or more of the Outstanding Units or (B) the closing of an Initial Public Offering, in either case on the second Wednesday in May of each year if a Business Day, and if not a Business Day, then on the next Business Day following, at 10 a.m., or at such other date and time as may be fixed from time to time by the General Partner at such place within or without the State of Delaware as may be fixed from time to time by the General Partner and all as stated in the notice of the meeting. Notice of the annual meeting shall be given in accordance with Section 13.5 not less than 10 days nor more than 60 days prior to the date of such meeting.
      (ii) The Limited Partners entitled to vote at the annual meeting shall vote together as a single class. The Limited Partners entitled to vote shall elect by a plurality of the votes cast at such meeting persons to serve on the Board of Directors of the General Partner who are nominated in accordance with the provisions of this Section 13.4(c). The exercise by a Limited Partner of the right to elect the Directors and any other rights afforded to such Limited Partner under this Section 13.4(c) shall be in such Limited Partner’s capacity as a limited partner of the Partnership and shall not cause a Limited Partner to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize such Limited Partner’s limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business.
      (iii) Each Limited Partner entitled to vote shall be entitled to one vote for each Outstanding Unit that is registered in the name of such Limited Partner on the Record Date for such meeting; provided, however that, prior to the closing of an Initial Public Offering, the Limited Partners will be entitled to elect only: (A) three persons to serve on the Board of Directors of the General Partner who are nominated in accordance with the provisions of this Section 13.4(c) following the time and for so long as the Founding Investors own less than 50% but greater than or equal to 35% of the Outstanding Units, (B) five persons to serve on the Board of Directors of the General Partner who are nominated in accordance with the provisions of this Section 13.4(c) following the time and for so long as the Founding Investors own is less than 35% but greater than or equal to 20% of the Outstanding Units; and (C) all persons to serve on the Board of Directors of the General Partner who are nominated in accordance with the provisions of this Section 13.4(c) following the time and for so long as the Founding Investors own less than 20% of the Outstanding Units. All directors not elected

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by the Limited Partners in accordance with this Section 13.4(c)(iii) shall be appointed by the GP Members in accordance with the limited liability company agreement of the General Partner.
      (iv) Immediately following the Closing and prior to an Initial Public Offering, the number of Directors that shall constitute the whole Board of Directors of the General Partner shall initially be four but shall be increased to equal seven with the vacancies to be filled by the existing Directors as follows: (A) one Independent Director will be added promptly following the Closing Date; (B) one Independent Director will be added on or before sixty (60) days following the Closing Date; and (C) one Independent Director will be added on or before the first anniversary of the Closing Date. Following an Initial Public Offering, the number of Directors shall not be less than seven nor more than nine as shall be established from time to time by a resolution adopted by a majority of the Directors then in office, provided that no decrease shall shorten the term of the any incumbent Director.
      (v) Each Director shall hold office for the term for which such Director is elected and thereafter until such Director’s successor shall have been duly elected and qualified, or until such Director’s earlier death, resignation or removal. Any vacancies may be filled, until the next annual meeting at which the term of such class expires, by a majority of the remaining Directors then in office. A Director may be removed only for cause and only upon a vote of the majority of the remaining Directors then in office.
      (vi) Nominations of persons for election to the Board of Directors of the General Partner may be made at an annual meeting only (A) by or at the direction of the General Partner or the Board of Directors of the General Partner or (B) by any Limited Partner who was a Record Holder of Outstanding Units at the time of giving notice provided for in this Agreement, who is entitled to vote at the meeting and who complies with the notice procedures set forth below; provided, however , that following the Initial Public Offering such nominations shall be subject to the requirement that the Board of Directors of the General Partner have and maintain at least three Directors meeting the independence and experience requirements as set forth most recently by any National Securities Exchange on which any Units or other Partnership Securities are or may be listed or quoted; and provided, further that nominations by any Limited Partner may only be made for that number of Directors for which the Limited Partners are entitled to vote as provided in this Section 13.4(c). For nominations by a Limited Partner pursuant to clause (B) above, the Limited Partner must have given timely notice thereof in writing to the General Partner. To be timely, a Limited Partner’s notice shall be delivered to the General Partner at the principal executive offices of the General Partner not later than the close of business on the 120th calendar day, nor earlier than the close of business on the 135th calendar day, prior to the first anniversary of the preceding year’s annual meeting. The adjournment of an annual meeting shall not commence a new time period for the giving of a Limited Partner’s notice as described above. Such Limited Partner’s notice shall set forth (Y) as to each person whom the Limited Partner proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors in an election contest, or is otherwise required, in each case, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (Z) as to the Limited Partner giving the notice (1) the name and address of such Limited Partner, and (2) the class and number of Units which are owned by such Limited Partner. Other than as provided in Section 13.4(c)(v), only such persons who are nominated in accordance with the procedures set forth in this provision shall be eligible to serve as Directors. The chairman of the meeting shall have the power and duty to determine whether a nomination was made in accordance with the procedures set forth above and to declare that such defective nomination shall be disregarded.
      (vii) This Section 13.4(c) shall not be deemed in any way to limit or impair the ability of the General Partner, or the Board of Directors of the General Partner on behalf of the General Partner, to adopt a “poison pill” or unitholder or other similar rights plan with respect to the Partnership, whether such poison pill or plan contains “dead hand” provisions, “no hand” provisions or other provisions relating to the redemption of the poison pill or plan, in each case as such terms are used under Delaware common law.
      (viii) Notwithstanding any other provision of this Agreement, a majority of the Board of Directors of the General Partner may be nominated and elected to the extent provided in the Registration Rights Agreement.

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      (ix) The General Partner shall use its commercially reasonable best efforts to take such action as shall be necessary or appropriate to give effect to and implement the provisions of this Section 13.4(c), including, without limitation, amending the limited liability company agreement of the General Partner.
      (x) This Section 13.4(c) may not be amended except upon the prior approval of Limited Partners that hold three-fourths of the Outstanding Units.
      (xi) If the General Partner delegates to an existing or newly formed wholly-owned subsidiary the power and authority to manage and control the business and affairs of the Partnership Group, the foregoing provisions of this Section 13.4(c) shall be applicable with respect to the board of directors or other governing body of such subsidiary.
Section 13.5      Notice of a Meeting.
      Notice of a meeting called pursuant to Section 13.4 shall be given to the Record Holders of the class or classes of Units for which a meeting is proposed in writing by mail or other means of written communication in accordance with Section 16.1. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication.
Section 13.6      Record Date.
      For purposes of determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners or to give approvals without a meeting as provided in Section 13.11 the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern) or (b) in the event that approvals are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to give such approvals. If the General Partner does not set a Record Date, then (a) the Record Date for determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners shall be the close of business on the day next preceding the day on which notice is given, and (b) the Record Date for determining the Limited Partners entitled to give approvals without a meeting shall be the date the first written approval is deposited with the Partnership in care of the General Partner in accordance with Section 13.11.
Section 13.7      Adjournment.
      When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article XIII.
Section 13.8      Waiver of Notice; Approval of Meeting; Approval of Minutes.
      The transactions of any meeting of Limited Partners, however called and noticed, and whenever held, shall be as valid as if it had occurred at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to disapprove the consideration of matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting.
Section 13.9      Quorum and Voting.
      The holders of a majority of the Outstanding Units of the class or classes for which a meeting has been called (including Outstanding Units deemed owned by the General Partner) represented in person or by proxy

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shall constitute a quorum at a meeting of Limited Partners of such class or classes unless any such action by the Limited Partners requires approval by holders of a greater percentage of such Units, in which case the quorum shall be such greater percentage. At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Units that in the aggregate represent a majority of the Outstanding Units entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Units that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Outstanding Units specified in this Agreement (including Outstanding Units deemed owned by the General Partner). In the absence of a quorum any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of holders of at least a majority of the Outstanding Units entitled to vote at such meeting (including Outstanding Units deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 13.7.
Section 13.10      Conduct of a Meeting.
      The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 13.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of approvals in writing.
Section 13.11      Action Without a Meeting.
      If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting, without prior notice and without a vote if an approval in writing setting forth the action so taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Units (including Units deemed owned by the General Partner) that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted (unless such provision conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern). Prompt notice of the taking of action without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot submitted to Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partners, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted. If approval of the taking of any action by the Limited Partners is solicited by any Person other than by or on behalf of the General Partner, the written approvals shall have no force and effect unless and until (a) they are deposited with the Partnership in care of the General Partner, (b) approvals sufficient to take the action proposed are dated as of a date not more than 90 days prior to the date sufficient approvals are deposited with the Partnership and (c) an Opinion of Counsel is delivered to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (i) will not cause the Limited Partners to be deemed to be taking part in the management and control of the

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business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability and (ii) is otherwise permissible under the state statutes then governing the rights, duties and liabilities of the Partnership and the Partners.
Section 13.12      Right to Vote and Related Matters.
      (a) Only those Record Holders of the Units on the Record Date set pursuant to Section 13.6 (and also subject to the limitations contained in the definition of “Outstanding” ) shall be entitled to notice of, and to vote at, a meeting of Limited Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes or acts of the Record Holders of such Outstanding Units.
      (b) With respect to Units that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Units are registered, such other Person shall, in exercising the voting rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 13.12(b) (as well as all other provisions of this Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
Merger
Section 14.1      Authority.
      The Partnership may merge or consolidate with or into one or more corporations, limited liability companies, statutory trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including a partnership (whether general or limited and including a limited liability partnership), formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written agreement of merger or consolidation (“Merger Agreement”) in accordance with this Article XIV.
Section 14.2      Procedure for Merger or Consolidation.
      Merger or consolidation of the Partnership pursuant to this Article XIV requires the prior consent of the General Partner; provided, however, that, to the fullest extent permitted by law, the General Partner shall have no duty or obligation to consent to any merger or consolidation of the Partnership and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner and, in declining to consent to a merger or consolidation, to the fullest extent permitted by law, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. If the General Partner shall determine to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth:
        (a) the names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate;
 
        (b) the name and jurisdiction of formation or organization of the business entity that is to survive the proposed merger or consolidation (the “Surviving Business Entity” );
 
        (c) the terms and conditions of the proposed merger or consolidation;
 
        (d) the manner and basis of exchanging or converting the equity securities of each constituent business entity for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity; and (i) if any general or limited partner interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or interests,

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  rights, securities or obligations of the Surviving Business Entity, the cash, property or interests, rights, securities or obligations of any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity) which the holders of such interests, securities or rights are to receive in exchange for, or upon conversion of their interests, securities or rights and (ii) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or general or limited partner interests, rights, securities or obligations of the Surviving Business Entity or any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered;
 
        (e) a statement of any changes in the constituent documents or the adoption of new constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership or other similar charter or governing document) of the Surviving Business Entity to be effected by such merger or consolidation;
 
        (f) the effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 14.4 or a later date specified in or determinable in accordance with the Merger Agreement ( provided, that if the effective time of the merger is to be later than the date of the filing of such certificate of merger, the effective time shall be fixed at a date or time certain at or prior to the time of the filing of such certificate of merger and stated therein); and
 
        (g) such other provisions with respect to the proposed merger or consolidation that the General Partner determines to be necessary or appropriate.

Section 14.3      Approval by Limited Partners of Merger or Consolidation.
      (a) Except as provided in Section 14.3(d) or Section 14.3(e), the General Partner, upon its approval of the Merger Agreement, shall direct that the Merger Agreement be submitted to a vote of Limited Partners, whether at a special meeting or by written consent, in either case in accordance with the requirements of Article XIII. A copy or a summary of the Merger Agreement shall be included in or enclosed with the notice of a special meeting or the written consent.
      (b) Except as provided in Section 14.3(d) or Section 14.3(e), the Merger Agreement shall be approved upon receiving the affirmative vote or consent of the holders of a Unit Majority.
      (c) Except as provided in Section 14.3(d) or Section 14.3(e), after such approval by vote or consent of the Limited Partners, and at any time prior to the filing of the certificate of merger pursuant to Section 14.4, the merger or consolidation may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement.
      (d) Notwithstanding anything else contained in this Agreement, the General Partner is permitted, without Limited Partner approval, to convert the Partnership or any Group Member into a new limited liability entity, to merge the Partnership or any Group Member into, or convey all of the Partnership’s assets to, another limited liability entity which shall be newly formed and shall have no assets, liabilities or operations at the time of such conversion, merger or conveyance other than those it receives from the Partnership or other Group Member if (i) the General Partner has received an Opinion of Counsel that the conversion, merger or conveyance, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated as such), (ii) the sole purpose of such conversion, merger or conveyance is to effect a mere change in the legal form of the Partnership into another limited liability entity and (iii) the governing instruments of the new entity provide the Limited Partners and the General Partner with rights and obligations that are, in all material respects, the same rights and obligations as are herein contained.
      (e) Additionally, notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to merge or consolidate the Partnership with or into another entity if (A) the General Partner has received an Opinion of Counsel that the merger or

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consolidation, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated as such), (B) the merger or consolidation would not result in an amendment to the Partnership Agreement, other than any amendments that could be adopted pursuant to Section 13.1, (C) the Partnership is the Surviving Business Entity in such merger or consolidation, (D) each Unit outstanding immediately prior to the effective date of the merger or consolidation is to be an identical Unit of the Partnership after the effective date of the merger or consolidation, and (E) the number of Partnership Securities to be issued by the Partnership in such merger or consolidation do not exceed 20% of the Partnership Securities Outstanding immediately prior to the effective date of such merger or consolidation.
Section 14.4      Certificate of Merger.
      Upon the required approval by the General Partner and the Unitholders of a Merger Agreement, a certificate of merger shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act.
Section 14.5      Amendment of Partnership Agreement.
      Pursuant to Section 17-211(g) of the Delaware Act, an agreement of merger or consolidation approved in accordance with this Article XIV may (a) effect any amendment to this Agreement or (b) effect the adoption of a new partnership agreement for the Partnership if it is the Surviving Business Entity. Any such amendment or adoption made pursuant to this Section 14.5 shall be effective at the effective time or date of the merger or consolidation.
Section 14.6      Effect of Merger.
      (a) At the effective time of the certificate of merger:
        (i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities, shall be vested in the Surviving Business Entity and after the merger or consolidation shall be the property of the Surviving Business Entity to the extent they were of each constituent business entity;
 
        (ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and is not in any way impaired because of the merger or consolidation;
 
        (iii) all rights of creditors and all liens on or security interests in property of any of those constituent business entities shall be preserved unimpaired; and
 
        (iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it.
      (b) A merger or consolidation effected pursuant to this Article XIV shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another.
ARTICLE XV
Right to Acquire Limited Partner Interests
Section 15.1      Right to Acquire Limited Partner Interests.
      (a) Notwithstanding any other provision of this Agreement, if at any time the General Partner and its Affiliates hold more than 85% of the total Limited Partner Interests of any class then Outstanding, the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option, to purchase all, but not less than all, of such Limited Partner Interests of such class then Outstanding held by Persons other than the General

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Partner and its Affiliates, at the greater of (x) the Current Market Price as of the date three days prior to the date that the notice described in Section 15.1(b) is mailed and (y) the highest price paid by the General Partner or any of its Affiliates for any such Limited Partner Interest of such class purchased during the 90-day period preceding the date that the notice described in Section 15.1(b) is mailed. As used in this Agreement, (i)  “Current Market Price” as of any date of any class of Limited Partner Interests listed or admitted to trading on any National Securities Exchange means the average of the daily Closing Prices (as hereinafter defined) per Limited Partner Interest of such class for the 20 consecutive Trading Days (as hereinafter defined) immediately prior to such date; (ii)  “Closing Price” for any day means the last sale price on such day, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices on such day, regular way, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal National Securities Exchange (other than The Nasdaq Stock Market) on which such Limited Partner Interests are listed or admitted to trading or, if such Limited Partner Interests of such class are not listed or admitted to trading on any National Securities Exchange (other than The Nasdaq Stock Market), the last quoted price on such day or, if not so quoted, the average of the high bid and low asked prices on such day in the over-the -counter market, as reported by The Nasdaq Stock Market or such other system then in use, or, if on any such day such Limited Partner Interests of such class are not quoted by any such organization, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in such Limited Partner Interests of such class selected by the General Partner, or if on any such day no market maker is making a market in such Limited Partner Interests of such class, the fair value of such Limited Partner Interests on such day as determined by the General Partner; and (iii)  “Trading Day” means a day on which the principal National Securities Exchange on which such Limited Partner Interests of any class are listed or admitted to trading is open for the transaction of business or, if Limited Partner Interests of a class are not listed or admitted to trading on any National Securities Exchange, a day on which banking institutions in New York City generally are open.
      (b) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the “Notice of Election to Purchase” ) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published for a period of at least three consecutive days in at least two daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York. The Notice of Election to Purchase shall specify the Purchase Date and the price (determined in accordance with Section 15.1(a)) at which Limited Partner Interests will be purchased and state that the General Partner, its Affiliate or the Partnership, as the case may be, elects to purchase such Limited Partner Interests, upon surrender of Certificates representing such Limited Partner Interests in exchange for payment, at such office or offices of the Transfer Agent as the Transfer Agent may specify, or as may be required by any National Securities Exchange on which such Limited Partner Interests are listed or admitted to trading. Any such Notice of Election to Purchase mailed to a Record Holder of Limited Partner Interests at his address as reflected in the records of the Transfer Agent shall be conclusively presumed to have been given regardless of whether the owner receives such notice. On or prior to the Purchase Date, the General Partner, its Affiliate or the Partnership, as the case may be, shall deposit with the Transfer Agent cash in an amount sufficient to pay the aggregate purchase price of all of such Limited Partner Interests to be purchased in accordance with this Section 15.1. If the Notice of Election to Purchase shall have been duly given as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to the Purchase Date the deposit described in the preceding sentence has been made for the benefit of the holders of Limited Partner Interests subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Certificate shall not have been surrendered for purchase, all rights of the holders of such Limited Partner Interests (including any rights pursuant to Article IV, Article  V, Article VI and Article XII) shall thereupon cease, except the right to receive the purchase price (determined in accordance with Section 15.1(a)) for Limited Partner Interests therefor, without interest, upon surrender to the Transfer Agent of the Certificates representing such Limited

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Partner Interests, and such Limited Partner Interests shall thereupon be deemed to be transferred to the General Partner, its Affiliate or the Partnership, as the case may be, on the record books of the Transfer Agent and the Partnership, and the General Partner or any Affiliate of the General Partner, or the Partnership, as the case may be, shall be deemed to be the owner of all such Limited Partner Interests from and after the Purchase Date and shall have all rights as the owner of such Limited Partner Interests (including all rights as owner of such Limited Partner Interests pursuant to Article IV, Article V, Article VI and Article XII).
      (c) At any time from and after the Purchase Date, a holder of an Outstanding Limited Partner Interest subject to purchase as provided in this Section 15.1 may surrender his Certificate evidencing such Limited Partner Interest to the Transfer Agent in exchange for payment of the amount described in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
General Provisions
Section  16.1      Addresses and Notices.
      Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Partner under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner at the address described below. Any notice, payment or report to be given or made to a Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Partnership Securities at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Partnership Securities by reason of any assignment or otherwise. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 16.1 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, payment or report. If any notice, payment or report addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Partnership is returned by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver it, such notice, payment or report and any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) if they are available for the Partner at the principal office of the Partnership for a period of one year from the date of the giving or making of such notice, payment or report to the other Partners. Any notice to the Partnership shall be deemed given if received by the General Partner at the principal office of the Partnership designated pursuant to Section 2.3. The General Partner may rely and shall be protected in relying on any notice or other document from a Partner or other Person if believed by it to be genuine.
Section  16.2      Further Action.
      The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.
Section  16.3      Binding Effect.
      This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
Section  16.4      Integration.
      This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

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Section  16.5      Creditors.
      None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.
Section  16.6      Waiver.
      No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach of any other covenant, duty, agreement or condition.
Section  16.7      Third-Party Beneficiaries
      Each Partner agrees that any Indemnitee shall be entitled to assert rights and remedies hereunder as a third-party beneficiary hereto with respect to those provisions of this Agreement affording a right, benefit or privilege to such Indemnitee.
Section  16.8      Counterparts.
      This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Limited Partner Interest pursuant to Section 10.2(a) without execution of this Agreement.
Section  16.9      Applicable Law.
      This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.
Section  16.10      Invalidity of Provisions.
      If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
Section  16.11      Consent of Partners.
      Each Partner hereby expressly consents and agrees that, whenever in this Agreement it is specified that an action may be taken upon the affirmative vote or consent of less than all of the Partners, such action may be so taken upon the concurrence of less than all of the Partners and each Partner shall be bound by the results of such action.
Section  16.12      Facsimile Signatures.
      The use of facsimile signatures affixed in the name and on behalf of the transfer agent and registrar of the Partnership on certificates representing Units is expressly permitted by this Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

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      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
  GENERAL PARTNER:
 
  LEGACY RESERVES GP, LLC
 
  By: /s/ Steven H. Pruett
 
 
  Name: Steven H. Pruett
 
 
  Title: President, Chief Financial Officer and Secretary
 
 
 
  LIMITED PARTNERS
 
  All Limited Partners now and hereafter admitted as Limited Partners of the Partnership, pursuant to powers of attorney now and hereafter executed in favor of, and granted and delivered to the General Partner or without execution hereof pursuant to Section 10.2(a) hereof.
 
  LEGACY RESERVES GP, LLC
 
  By: /s/ Steven H. Pruett
 
 
  Name: Steven H. Pruett
 
 
  Title: President, Chief Financial Officer and Secretary
 
 
 
  ORGANIZATIONAL LIMITED PARTNER:
 
  MORIAH PROPERTIES, LTD.
  By: Moriah Resources, Inc., its general partner
 
  By: /s/ Dale A. Brown
 
 
  Name: Dale A. Brown
 
 
  Title: President
 
 

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EXHIBIT A
to the Amended and Restated
Agreement of Limited Partnership of
Legacy Reserves LP
Certificate Evidencing Units
Representing Limited Partner Interests in
Legacy Reserves LP
             
No. 
 
 
     
Units
             
      CUSIP  
 
      In accordance with Section 4.1 of the Amended and Restated Agreement of Limited Partnership of Legacy Reserves LP, as amended, supplemented or restated from time to time (the “Partnership Agreement” ), Legacy Reserves LP, a Delaware limited partnership (the “Partnership” ), hereby certifies that                     (the “Holder” ) is the registered owner of                      Units representing limited partner interests in the Partnership (the “Units” ) transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. The rights, preferences and limitations of the Units are set forth in, and this Certificate and the Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Partnership Agreement. Copies of the Partnership Agreement are on file at, and will be furnished without charge on delivery of written request to the Partnership at, the principal office of the Partnership located at 303 W. Wall Street, Ste. 1600, Midland, Texas 79701. Capitalized terms used herein but not defined shall have the meanings given them in the Partnership Agreement.
      THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF LEGACY RESERVES LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF LEGACY RESERVES LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR (C) CAUSE LEGACY RESERVES LP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). LEGACY RESERVES GP, LLC, THE GENERAL PARTNER OF LEGACY RESERVES LP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK OF LEGACY RESERVES LP BECOMING TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.
      The Holder, by accepting this Certificate, is deemed to have (i) requested admission as, and agreed to become, a Limited Partner and to have agreed to comply with and be bound by and to have executed the Partnership Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (iii) granted the powers of attorney provided for in the Partnership Agreement and (iv) made the waivers and given the consents and approvals contained in the Partnership Agreement.

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      This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar.
      This Certificate shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws thereof.
     
Dated: 
  Legacy Reserves LP
     
 
Countersigned and Registered by:
  By:  Legacy Reserves GP, LLC,
its General Partner
 
    By: 
     
as Transfer Agent and Registrar
 
Name: 
     
 
By: 
 
Authorized Signature
  By: 
 
Secretary
[Reverse of Certificate]
ABBREVIATIONS
      The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations:
TEN COM – as tenants in common
TEN ENT – as tenants by the entireties
JT TEN – as joint tenants with right of
survivorship and not as
tenants in common
UNIF GIFT/TRANSFERS MIN ACT
                            Custodian                            
(Cust)                                               (Minor)
under Uniform Gifts/Transfers to CD
Minors Act (State)
      Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF UNITS
in
LEGACY RESERVES LP
      FOR VALUE RECEIVED,                     hereby assigns, conveys, sells and transfers unto
 
(Please print or typewrite name and address of assignee)
 
(Please insert Social Security or other identifying number of assignee)
                    Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint                     as its attorney-in -fact with full power of substitution to transfer the same on the books of Legacy Reserves LP
Date: 
 
NOTE:  The signature to any endorsement hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change.

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THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17d-15
 
 
 
(Signature)



 
(Signature)
Signature(s) Guaranteed
      No transfer of the Units evidenced hereby will be registered on the books of the Partnership, unless the Certificate evidencing the Units to be transferred is surrendered for registration or transfer.

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(LEGACY RESERVES LOGO)
Legacy Reserves LP
4,209,954 Units
Representing Limited Partner Interests
 
PROSPECTUS
 
                        , 2006
       Until                     , 2006 (25 days after the commencement of this offering), all dealers that effect transactions in our units, whether or not participating in this offering, may be required to deliver a prospectus.

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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
      Set forth below are the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the sale of the securities registered hereby. The selling unitholders will not bear any portion of such expenses. With the exception of the Securities and Exchange Commission registration fee, the amounts set forth below are estimates.
           
SEC registration fee
  $ 7,658  
NASD filing fee
    *  
Printing and engraving expenses
    *  
Accounting fees and expenses
    *  
Legal fees and expenses
    *  
Transfer agent fees
    *  
Blue sky fees and expenses
    *  
Miscellaneous
    *  
 
Total
  $ *  
 
*  To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
      The section of the prospectus entitled “The Partnership Agreement — Indemnification” discloses that we will generally indemnify officers, directors and affiliates of our general partner to the fullest extent permitted by the law against all losses, claims, damages or similar events and is incorporated herein by this reference. Reference is also made to Section 6 of the Registration Rights Agreement to be filed as an exhibit to this registration statement in which we have agreed to indemnify the selling unitholders against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments that may be required to be made in respect of these liabilities. Subject to any terms, conditions or restrictions set forth in the partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other persons from and against all claims and demands whatsoever.
      We have obtained directors’ and officers’ insurance to cover our director, officers and some of our employees for certain liabilities.
      To the extent that the indemnification provisions of our partnership agreement purport to include indemnification for liabilities arising under the Securities Act of 1933, in the opinion of the SEC, such indemnification is contrary to public policy and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
      1. In October 2005, in connection with the formation of Legacy Reserves LP, we issued to Moriah Resources, Ltd. the 99.9% limited partner interest in Legacy Reserves LP for $999.00. The issuance was exempt from registration under Section 4(2) of the Securities Act because the transaction did not involve a public offering.
      2. In connection with our formation transactions, on March 15, 2006, we issued units to our Founding Investors contributing oil and natural gas properties and related assets to us. The issuances of the units described below was exempt from registration under Section 4(2) of the Securities Act because the issuances

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did not involve a public offering. The following table summarizes the issuance of our units in the formation transactions:
           
    Units
     
Moriah Group:
       
 
Moriah Properties, Ltd. 
    7,334,070  
 
DAB Resources, Ltd. 
    859,703  
Brothers Group:
       
 
Brothers Production Properties, Ltd
    4,968,945  
 
Brothers Production Company, Inc. 
    264,305  
 
Brothers Operating Company, Inc. 
    52,861  
 
J&W McGraw Properties, Ltd. 
    914,246  
MBN Properties LP
    3,162,438  
H2K Holdings, Ltd. 
    83,499  
      3. On March 15, 2006, we issued 52,616 restricted units in the aggregate to certain members of management pursuant to the Legacy Reserves LP Long-term Incentive Plan. The issuances of these units was exempt from the registration requirements of the Securities Act pursuant to Rule 701.
      4. On March 15, 2006, we issued 5,000,000 units in consideration of $85,000,000 before the initial purchaser’s discount, placement agent’s fees and expense to qualified institutional investors and accredited investors in transactions exempt from registration under Section 4(2) of the Securities Act. We paid Friedman, Billings, Ramsey & Co., Inc., who acted as placement agent and initial purchaser in this transaction $5,950,000 in initial purchaser’s discount and placement agent’s fees.
      5. On May 1, 2006, we issued 8,750 units in the aggregate to certain of the directors of our general partner. The issuances of these units was exempt from the registration requirements of the Securities Act pursuant to Rule 701.
      6. On May 5, 2006, we issued 12,500 units and 40,000 options to purchase units to an employee pursuant to the Legacy Reserves LP Long-term Incentive Plan. The issuances of these units and options were exempt from the registration requirements of the Securities Act pursuant to Rule 701.
Item 16. Exhibits and Financial Statement Schedules.
      (a) The following documents are filed as exhibits to this registration statement:
             
Exhibit        
Number       Description
         
  3 .1   —   Certificate of Limited Partnership of Legacy Reserves LP
  3 .2   —   Amended and Restated Limited Partnership Agreement of Legacy Reserves LP (included as Appendix A to the Prospectus and including specimen unit certificate for the units)
  3 .3   —   Certificate of Formation of Legacy Reserves GP, LLC
  3 .4   —   Amended and Restated Limited Liability Company Agreement of Legacy Reserves GP, LLC
  4 .1   —   Registration Rights Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and Friedman, Billings, Ransey & Co.
  5 .1*   —   Opinion of Andrews Kurth LLP as to the legality of the securities being registered
  8 .1*   —   Opinion of Andrews Kurth LLP relating to tax matters
  10 .1   —   Credit Agreement dated as of March 15, 2006, among Legacy Reserves LP, the lenders from time to time party thereto, and BNP Paribas, as administrative agent
  10 .2   —   Contribution, Conveyance and Assumption Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto
  10 .3   —   Omnibus Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto

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Exhibit        
Number       Description
         
  10 .4   —   Purchase/Placement Agreement dated as of March 6, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto
  10 .5   —   Legacy Reserves, LP Long-Term Incentive Plan
  10 .6   —   Form of Legacy Reserves LP Long-Term Incentive Plan Restricted Unit Grant Agreement
  10 .7*   —   Form of Legacy Reserves LP Long-Term Incentive Plan Option Grant Agreement
  10 .8*   —   Form of Legacy Reserves LP Long-Term Incentive Plan Unit Grant Agreement
  10 .9   —   Employment Agreement dated as of March 15, 2006 between Carey D. Brown and Legacy Reserves Services, Inc.
  10 .10   —   Employment Agreement dated as of March 15, 2006 between Steven H. Pruett and Legacy Reserves Services, Inc.
  10 .11   —   Employment Agreement dated as of March 15, 2006 between Kyle A. McGraw and Legacy Reserves Services, Inc.
  10 .12   —   Employment Agreement dated as of March 15, 2006 between Paul T. Horne and Legacy Reserves Services, Inc.
  10 .13   —   Employment Agreement dated as of March 15, 2006 between William M. Morris and Legacy Reserves Services, Inc.
  21 .1   —   List of subsidiaries of Legacy Reserves LP
  23 .1   —   Consent of BDO Seidman, LLP
  23 .2   —   Consent of Johnson, Miller & Co.
  23 .3   —   Consent of LaRoche Petroleum Consultants, Ltd.
  23 .4*   —   Consent of Andrews Kurth LLP (contained in Exhibit 5.1)
  23 .5*   —   Consent of Andrews Kurth LLP (contained in Exhibit 8.1)
  24 .1   —   Powers of Attorney (contained on Page II-5)
 
*  To be filed by amendment.
Item 17. Undertakings.
      (a) The undersigned registrant hereby undertakes:
        (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
        (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended;
 
        (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and
 
        (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
        (2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
        (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

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      (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction of the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
      The undersigned registrant hereby undertakes that:
        (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
 
        (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
      The registrant undertakes to send to each limited partner at least on an annual basis a detailed statement of any transactions with our general partner or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to our general partner or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.
      The registrant undertakes to provide to the limited partners the financial statements required by Form  10-K for the first full fiscal year of operations of the registrant.

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SIGNATURES
      Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on May 12, 2006.
  LEGACY RESERVES LP
  By: LEGACY RESERVES GP, LLC,
  its general partner
  By:  /s/ Steven H. Pruett
 
 
  Name:  Steven H. Pruett
  Title: President, Chief Financial Officer
  and Secretary
POWER OF ATTORNEY
      Each person whose signature appears below appoints Cary D. Brown and Steven H. Pruett, and each of them, any of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments thereto) to this Registration Statement and any Registration Statement (including any amendment thereto) for this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them of their or his substitute and substitutes, may lawfully do or cause to be done by virtue hereof.
      Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
             
Signature   Title   Date
         
 
/s/ Cary D. Brown
 
Cary D. Brown 		  Chief Executive Officer
and Director (Principal
Executive Officer) 		  May 12, 2006
 
/s/ Steven H. Pruett
 
Steven H. Pruett 		  President, Chief
Financial Officer and Secretary
(Principal Financial Officer) 		  May 12, 2006
 
/s/ William M. Morris
 
William M. Morris 		  Vice President, Chief Accounting
Officer and Controller (Principal
Accounting Officer) 		  May 12, 2006
 
/s/ Kyle A. McGraw
 
Kyle A. McGraw 		  Executive Vice President and Director   May 12, 2006

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Signature   Title   Date
         
 
/s/ Dale A. Brown
 
Dale A. Brown 		  Director   May 12, 2006
 
/s/ G. Larry Lawrence
 
G. Larry Lawrence 		  Director   May 12, 2006
 
/s/ William D. Sullivan
 
William D. Sullivan 		  Director   May 12, 2006
 
/s/ S. Wil VanLoh, Jr.
 
S. Wil VanLoh, Jr. 		  Director   May 12, 2006
 
/s/ Kyle D. Vann
 
Kyle D. Vann 		  Director   May 12, 2006

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EXHIBIT INDEX
             
Exhibit        
Number       Description
         
  3 .1   —   Certificate of Limited Partnership of Legacy Reserves LP
  3 .2   —   Amended and Restated Limited Partnership Agreement of Legacy Reserves LP (included as Appendix A to the Prospectus and including specimen unit certificate for the units)
  3 .3   —   Certificate of Formation of Legacy Reserves GP, LLC
  3 .4   —   Amended and Restated Limited Liability Company Agreement of Legacy Reserves GP, LLC
  4 .1   —   Registration Rights Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and Friedman, Billings, Ransey & Co.
  5 .1*   —   Opinion of Andrews Kurth LLP as to the legality of the securities being registered
  8 .1*   —   Opinion of Andrews Kurth LLP relating to tax matters
  10 .1   —   Credit Agreement dated as of March 15, 2006, among Legacy Reserves LP, the lenders from time to time party thereto, and BNP Paribas, as administrative agent
  10 .2   —   Contribution, Conveyance and Assumption Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto
  10 .3   —   Omnibus Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto
  10 .4   —   Purchase/Placement Agreement dated as of March 6, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto
  10 .5   —   Legacy Reserves, LP Long-Term Incentive Plan
  10 .6   —   Form of Legacy Reserves LP Long-Term Incentive Plan Restricted Unit Grant Agreement
  10 .7*   —   Form of Legacy Reserves LP Long-Term Incentive Plan Option Grant Agreement
  10 .8*   —   Form of Legacy Reserves LP Long-Term Incentive Plan Unit Grant Agreement
  10 .9   —   Employment Agreement dated as of March 15, 2006 between Carey D. Brown and Legacy Reserves Services, Inc.
  10 .10   —   Employment Agreement dated as of March 15, 2006 between Steven H. Pruett and Legacy Reserves Services, Inc.
  10 .11   —   Employment Agreement dated as of March 15, 2006 between Kyle A. McGraw and Legacy Reserves Services, Inc.
  10 .12   —   Employment Agreement dated as of March 15, 2006 between Paul T. Horne and Legacy Reserves Services, Inc.
  10 .13   —   Employment Agreement dated as of March 15, 2006 between William M. Morris and Legacy Reserves Services, Inc.
  21 .1   —   List of subsidiaries of Legacy Reserves LP
  23 .1   —   Consent of BDO Seidman, LLP
  23 .2   —   Consent of Johnson, Miller & Co.
  23 .3   —   Consent of LaRoche Petroleum Consultants, Ltd.
  23 .4*   —   Consent of Andrews Kurth LLP (contained in Exhibit 5.1)
  23 .5*   —   Consent of Andrews Kurth LLP (contained in Exhibit 8.1)
  24 .1   —   Powers of Attorney (contained on Page II-5)
 
*  To be filed by amendment.

EXHIBIT 3.1

CERTIFICATE OF LIMITED PARTNERSHIP

OF

LEGACY RESERVES LP

This Certificate of Limited Partnership of Legacy Reserves LP (the "Partnership") is executed and filed pursuant to the provisions of Section 17-201 of the Delaware Revised Uniform Limited Partnership Act (the "Act"), by Legacy Reserves GP, LLC, a Delaware limited liability company (the "General Partner"), as general partner of the Partnership. The General Partner DOES HEREBY CERTIFY as follows:

1. The name of the limited partnership is Legacy Reserves LP.

2. The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent of the Partnership required to be maintained by Section 17-104 of the Act at such address are as follows: 

NAME AND ADDRESS OF REGISTERED AGENT     ADDRESS OF REGISTERED OFFICE
------------------------------------     ----------------------------
Capitol Services, Inc.                  615 South Dupont Highway
615 South Dupont Highway                Dover, Delaware 19901
Dover, Delaware 19901

3. The name and business address of the General Partner are as follows:

Legacy Reserves GP, LLC
303 West Wall Street, Suite 1500
Midland, Texas 79701

IN WITNESS WHEREOF, the General Partner has executed this Certificate of Limited Partnership as of the 26th day of October, 2005.

GENERAL PARTNER

LEGACY RESERVES GP, LLC 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President and CEO

Exhibit 3.3

CERTIFICATE OF FORMATION
OF
LEGACY RESERVES GP, LLC

This Certificate of Formation of Legacy Reserves GP, LLC (the "Company") is being executed by the undersigned for the purpose of forming a limited liability company pursuant to the Delaware Limited Liability Company Act.

1. The name of the Company is Legacy Reserves GP, LLC.

2. The name and address of the registered agent of the Company shall be Capitol Services, Inc., 615 South Dupont Highway, Dover, Delaware 19901.

3. The address of the registered office of the Company in Delaware is 615 South Dupont Highway, Dover, Delaware 19901.

IN WITNESS WHEREOF, the undersigned, an authorized person or agent or attorney-in-fact of the Company, has caused this Certificate of Formation to be duly executed as of the 26th day of October, 2005. 

/s/ Steven H. Pruett
----------------------------------------
Steven H. Pruett
Authorized Person

EXHIBIT 3.4

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

LEGACY RESERVES GP, LLC

DATED MARCH 15, 2006

TABLE OF CONTENTS 

                                                                            Page
                                                                            ----
                                    ARTICLE 1
                                   DEFINITIONS

Section 1.1   Definitions................................................     1
Section 1.2   Construction...............................................     9

                                    ARTICLE 2
                           ORGANIZATION OF THE COMPANY

Section 2.1   Formation..................................................     9
Section 2.2   Name.......................................................     9
Section 2.3   Term.......................................................     9
Section 2.4   Registered Office and Agent................................     9
Section 2.5   Purposes and Permitted Activities..........................    10
Section 2.6   No State Law Partnership...................................    10
Section 2.7   Certain Undertakings Relating to the Separateness of the
              Company and the Partnership................................    11

                                    ARTICLE 3
                                     MEMBERS

Section 3.1   Membership Interests; Additional Members...................    12
Section 3.2   Access to Information......................................    12
Section 3.3   Liability..................................................    12
Section 3.4   Withdrawal.................................................    13

                                    ARTICLE 4
                       DISPOSITION OF MEMBERSHIP INTERESTS

Section 4.1   General Restriction........................................    13
Section 4.2   Admission of Assignee as a Member..........................    13
Section 4.3   Requirements Applicable to All Dispositions and
              Admissions.................................................    13

                                    ARTICLE 5
                              CAPITAL CONTRIBUTIONS

Section 5.1   Initial Capital Contributions..............................    14
Section 5.2   Loans......................................................    14
Section 5.3   Return of Contributions....................................    14
Section 5.4   Capital Accounts...........................................    14

                                    ARTICLE 6
                          ALLOCATIONS AND DISTRIBUTIONS

Section 6.1   Allocations for Capital Account Purposes...................    16
Section 6.2   Allocations for Tax Purposes...............................    20
Section 6.3   Distributions..............................................    22
Section 6.4   Distributions on Dissolution and Winding Up................    23
Section 6.5   Withheld Taxes.............................................    23
Section 6.6   Limitations on Distributions...............................    23

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                                    ARTICLE 7
                                   MANAGEMENT

Section 7.1   Management by Directors....................................    23
Section 7.2   Board of Directors.........................................    24
Section 7.3   Adoption of Section 13.4(c) of the Partnership Agreement...    25
Section 7.4   Regular Meetings...........................................    26
Section 7.5   Special Meetings...........................................    26
Section 7.6   Notice.....................................................    26
Section 7.7   Action by Consent of Board.................................    27
Section 7.8   Conference Telephone Meetings..............................    27
Section 7.9   Vacancies; Increases in the Number of Directors............    27
Section 7.10  Committees.................................................    27

                                    ARTICLE 8
                                    OFFICERS

Section 8.1   Elected Officers...........................................    29
Section 8.2   Election and Term of Office................................    29
Section 8.3   Chairman of the Board; Chief Executive Officer.............    29
Section 8.4   President; Chief Operating Officer.........................    29
Section 8.5   Vice Presidents............................................    29
Section 8.6   Treasurer..................................................    30
Section 8.7   Secretary..................................................    30
Section 8.8   Removal....................................................    30
Section 8.9   Vacancies..................................................    31

                                    ARTICLE 9
                          INDEMNIFICATION OF DIRECTORS,
                         OFFICERS, EMPLOYEES AND AGENTS

Section 9.1   Indemnification............................................    31
Section 9.2   Exculpation of Liability of Indemnitees....................    34
Section 9.3   Resolution of Conflicts of Interest; Standards of Conduct
              and Modification of Duties.................................    35
Section 9.4   Duties of Officers and Directors...........................    36
Section 9.5   Reliance by Third Parties..................................    36

                                   ARTICLE 10
                                      TAXES

Section 10.1  Tax Returns................................................    36
Section 10.2  Tax Elections..............................................    37
Section 10.3  Tax Matters Member.........................................    37

                                   ARTICLE 11
                   BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS

Section 11.1  Maintenance of Books.......................................    38
Section 11.2  Reports....................................................    38
Section 11.3  Bank Accounts..............................................    39

                                   ARTICLE 12
               DISSOLUTION, WINDING-UP, TERMINATION AND CONVERSION

Section 12.1  Dissolution................................................    39
Section 12.2  Winding-Up and Termination.................................    39

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Section 12.3  Deficit Capital Accounts...................................    40
Section 12.4  Certificate of Cancellation................................    40

                                   ARTICLE 13
                               GENERAL PROVISIONS

Section 13.1  Offset.....................................................    41
Section 13.2  Notices....................................................    41
Section 13.3  Entire Agreement; Superseding Effect.......................    41
Section 13.4  Effect of Waiver or Consent................................    41
Section 13.5  Amendment or Restatement...................................    42
Section 13.6  Binding Effect.............................................    42
Section 13.7  Governing Law; Severability................................    42
Section 13.8  Further Assurances.........................................    42
Section 13.9  Waiver of Certain Rights...................................    42
Section 13.10 Counterparts...............................................    43
Section 13.11 Jurisdiction...............................................    43

                                   ARTICLE 14
                                 MEMBER MEETINGS

Section 14.1  Meetings of the Members....................................    43
Section 14.2  Additional Provisions Applicable to Meetings of Members....    44

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AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
LEGACY RESERVES GP, LLC

This Amended and Restated Limited Liability Company Agreement (this "Agreement") of Legacy Reserves GP, LLC (the "Company") is entered into by MORIAH PROPERTIES, LTD., a Texas limited partnership ("Moriah"), DAB RESOURCES, LTD., a Texas limited partnership ("DAB Resources"), BROTHERS PRODUCTION PROPERTIES, LTD., a Texas limited partnership ("Brothers"), BROTHERS PRODUCTION COMPANY, INC., a Texas corporation ("Brothers Production"), BROTHERS OPERATING COMPANY, INC., a Texas corporation ("Brothers Operating"), J&W MCGRAW PROPERTIES, LTD., a Texas limited partnership ("J&W Properties"), MBN PROPERTIES LP, a Delaware limited partnership ("MBN Properties"), and H2K HOLDINGS, LTD., a Texas limited partnership ("H2K," and with Moriah, DAB, Brothers, Brothers Production, Brothers Operating, J&W Properties and MBN Properties, the "Initial Members"),

PREAMBLE

WHEREAS, the Company was formed pursuant to a Certificate of Formation filed with the Secretary of State of the State of Delaware on October 26, 2005 (the "Certificate") and certain of the Initial Members entered into a Limited Liability Company Agreement (the "Original LLC Agreement");

WHEREAS, the Company is the sole general partner of Legacy Reserves LP, a Delaware limited partnership (the "Partnership"); and

WHEREAS, in connection with the closing of the issuance of units representing limited partner interests in the Partnership to the Initial Members and other Persons as described in that certain Offering Memorandum dated March 6, 2006, the Initial Members desire to enter into this Agreement to set forth their agreement as to the conduct of the business of the Company, including its governance, as set forth herein;

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Initial Members hereby amend the Original Agreement, and as so amended restate it in its entirety to read as follows:

ARTICLE 1
DEFINITIONS

SECTION 1.1 DEFINITIONS.

"Additional Member" means a Member admitted as a Member of the Company pursuant to Section 3.1 and who is shown as such on the books and records of the Company.

"Adjusted Capital Account" means the Capital Account maintained for each Member as of the end of each fiscal year of the Company, (a) increased by any amounts that such Member is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all deductions in respect of depletion

that, as of the end of such fiscal year are expected to be made to such Member's Capital Account in respect of the oil and gas properties of the Company, (ii) the amount of all losses and deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Member in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (iii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Member in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Member's Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i) or Section 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The "Adjusted Capital Account" of a Member in respect of an Interest shall be the amount that such Adjusted Capital Account would be if such Interest were the only interest in the Company held by such Member from and after the date on which such Interest was first issued.

"Adjusted Property" means any property the Carrying Value of which has been adjusted pursuant to Section 5.4(d)(i) or Section 5.4(d)(ii).

"Affiliate" means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

"Agreed Allocation" means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if appropriate to the context in which the term "Agreed Allocation" is used).

"Agreed Value" of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the Board. The Board shall use such method as it determines to be appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Company in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property.

"Agreement" means this Amended and Restated Limited Liability Company Agreement of Legacy Reserves GP, LLC, as it may be amended, supplemented or restated from time to time.

"Assignee" means any Person that acquires a Member's share of the income, gain, loss, deduction and credits of, and the right to receive distributions from, the Company or any portion thereof through a Disposition; provided, however, that, an Assignee shall have no right to be admitted to the Company as a Member except in accordance with Section 4.2. The Assignee of a dissolved Member is the shareholder, partner, member or other equity owner or owners of the dissolved Member to whom such Member's Interest is assigned by the Person conducting the liquidation or winding up of such Member.

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"Bankruptcy" or "Bankrupt" means, with respect to any Person, that (a) such Person (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes the subject of an order for relief or is declared insolvent in any federal or state bankruptcy or insolvency proceedings; (iv) files a petition or answer seeking for such Person a reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any applicable law; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Person in a proceeding of the type described in subclauses (i) through (iv) of this clause (a); or (vi) seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of such Person or of all or any substantial part of such Person's properties; or (b) a proceeding seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any applicable law has been commenced against such Person and 120 days have expired without dismissal thereof or with respect to which, without such Person's consent or acquiescence, a trustee, receiver, or liquidator of such Person or of all or any substantial part of such Person's properties has been appointed and 90 days have expired without the appointment's having been vacated or stayed, or 90 days have expired after the date of expiration of a stay, if the appointment has not previously been vacated. The foregoing definition of "Bankruptcy" is intended to replace and shall supersede and replace the definition of "Bankruptcy" set forth in Sections 18-101(1) and 18-304 of the Delaware Act.

"Board" has the meaning given such term in Section 7.1.

"Book-Tax Disparity" means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Member's share of the Company's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Member's Capital Account balance as maintained pursuant to Section 5.4 and the hypothetical balance of such Member's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

"Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States of America or the State of Texas shall not be regarded as a Business Day.

"Capital Account" means the capital account maintained for a Member pursuant to Section 5.4. The "Capital Account" of a Member in respect of an Interest shall be the amount that such Capital Account would be if such Interest were the only interest in the Company held by such Member from and after the date on which such Interest was first issued.

"Capital Contribution" means any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Member contributes to the Company pursuant to this Agreement.

"Carrying Value" means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, depletion (including Simulated Depletion), amortization and cost recovery deductions charged to the Members' Capital Accounts in respect of such Contributed Property, and (b) with respect to any other Company property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Section 5.4(d)(i) and Section 5.4(d)(ii) and to reflect changes, additions or

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other adjustments to the Carrying Value for dispositions and acquisitions of Company properties, as deemed appropriate by the Board.

"Certificate" means the Certificate of Formation of the Company filed with the Secretary of State of the State of Delaware as referenced in the Preamble, as such Certificate of Formation may be amended, supplemented or restated from time to time.

"Closing Date" means the first date on which the Units are sold by the Partnership and the Selling Unitholders (as defined in the Purchase Agreement) to the Initial Purchaser (as defined in the Purchase Agreement) pursuant to the provisions of the Purchase Agreement.

"Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any successor law.

"Commission" means the United States Securities and Exchange Commission.

"Company Minimum Gain" means that amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(d).

"Conflicts Committee" has the meaning assigned to such term in Section 7.10(c).

"Contributed Property" means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Company. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 5.4(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property.

"Curative Allocation" means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 6.1(d)(x).

"Delaware Act" means the Delaware Limited Liability Company Act, 6 Del C.
Section 18-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.

"DGCL" means the Delaware General Corporation Law, as amended, supplemented or restated from time to time, and any successor to such statute.

"Director" means a member of the Board.

"Dispose" or "Disposition" means a sale, assignment, transfer, exchange, mortgage, pledge, grant of security interest or other disposition or encumbrance (excluding, however, dispositions by operation of law through a merger or consolidation or by share exchange or conversion involving a Member).

"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).

"Final Adjudication" has the meaning assigned to such term in Section 9.1(e).

"Group Member" means a member of the Partnership Group.

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"Group Member Agreement" means the partnership agreement of any Group Member, other than the Partnership, that is a limited or general partnership, the limited liability company agreement of any Group Member that is a limited liability company, the certificate of incorporation and bylaws or similar organizational documents of any Group Member that is a corporation, the joint venture agreement or similar governing document of any Group Member that is a joint venture and the governing or organizational or similar documents of any other Group Member that is a Person other than a limited or general partnership, limited liability company, corporation or joint venture, as such may be amended, supplemented or restated from time to time.

"Indemnitee" has the meaning assigned to such term in Section 9.1(a).

"Independent Director" has the meaning assigned to such term in Section 7.10(b).

"Interest" means the ownership interest of a Member in the Company and includes any and all benefits to which such Member is entitled as provided in this Agreement, together with all obligations of such Member to comply with the terms and provisions of this Agreement.

"Limited Partner" has the meaning assigned to such term in the Partnership Agreement.

"Liquidation Date" means the date on which an event giving rise to the dissolution of the Company occurs.

"Member" means, unless the context otherwise requires, each Initial Member and each Additional Member, each in its capacity as a member of the Company.

"Member Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).

"Member Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury Regulation Section 1.704-2(i)(2).

"Member Nonrecourse Deductions" means any and all items of loss, deduction, expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code), Simulated Depletion or Simulated Loss that, in accordance with the principles of Treasury Regulation Section 1.704-2(i), are attributable to a Member Nonrecourse Debt.

"National Securities Exchange" means an exchange registered with the Commission under Section 6(a) of the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time, and any successor to such statute, or The Nasdaq Stock Market or any successor thereto.

"Net Agreed Value" means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Company upon such contribution or to which such property is subject when contributed, and (b) in the case of any property distributed to a Member by the Company, the Company's Carrying Value of such property (as adjusted pursuant to
Section 5.4(d)(ii)) at the time such property is distributed, reduced by any indebtedness either assumed by such Member upon such distribution or to which such property is subject at the time of distribution, in either case, as determined under Section 752 of the Code.

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"Net Income" means, for any taxable year, the excess, if any, of the Company's items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Company's items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Income shall be determined in accordance with Section 5.4(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(d).

"Net Loss" means, for any taxable year, the excess, if any, of the Company's items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Company's items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Loss shall be determined in accordance with Section 5.4(b) and shall include Simulated Gains, Simulated Losses, and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(d).

"Net Termination Gain" means, for any taxable year, the sum, if positive, of all items of income, gain, loss or deduction recognized by the Company after the Liquidation Date. The items included in the determination of Net Termination Gain shall be determined in accordance with Section 5.4(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

"Net Termination Loss" means, for any taxable year, the sum, if negative, of all items of income, gain, loss or deduction recognized by the Company after the Liquidation Date. The items included in the determination of Net Termination Loss shall be determined in accordance with Section 5.4(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

"Nonrecourse Built-in Gain" means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Members pursuant to Section 6.2(c)(iii), Section 6.2(d)(i)(A),
Section 6.2(d)(ii)(A) and Section 6.2(d)(iii) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

"Nonrecourse Deductions" means any and all items of loss, deduction, expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code), Simulated Depletion or Simulated Loss that, in accordance with the principles of Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability.

"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).

"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing Date, among the Company, the Partnership, the Operating Partnership GP, the Operating Partnership and the other parties thereto.

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"Operating Partnership" means Legacy Reserves Operating LP, a Delaware limited partnership, and any successors thereto.

"Operating Partnership GP" means Legacy Reserves Operating GP LLC, a Delaware limited liability company, and any successors thereto.

"Opinion of Counsel" means a written opinion of counsel (who may be regular counsel to the Partnership or the Company or any of its Affiliates) acceptable to the Company.

"Partnership" means Legacy Reserves LP, a Delaware limited partnership, and any successors thereto.

"Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership of the Partnership, as it may be amended, supplemented or restated from time to time.

"Partnership Group" means the Partnership and its Subsidiaries treated as a single consolidated entity.

"Partnership Interest" means an ownership interest in the Partnership, which shall include the General Partner Interest and Limited Partner Interests (each as defined in the Partnership Agreement).

"Partnership Security" means any class or series of equity interest in the Partnership (but excluding any options, rights, warrants and appreciation rights relating to any equity interest in the Partnership), including Units.

"Percentage Interest" means, as of any date of determination as to any Member, the percentage of the total Interests in the Company held by such Member.

"Person" means an individual or a corporation, firm, limited liability company, partnership, joint venture, trust, unincorporated organization or other enterprise (including an employee benefit plan), association, governmental agency or political subdivision thereof or other entity.

"Pro Rata" means (a) when modifying Interests or any class thereof, apportioned equally among all designated Interests in accordance with their relative Percentage Interests and (b) when modifying Members, apportioned among all Members in accordance with their relative Percentage Interests.

"Purchase Agreement" has the meaning assigned to such term in the Partnership Agreement.

"Recapture Income" means any gain recognized by the Company (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

"Required Allocations" means (a) any limitation imposed on any allocation of Net Losses under Section 6.1(b) and (b) any allocation of an item of income, gain, loss, deduction,

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Simulated Gain, Simulated Depletion or Simulated Loss pursuant to Section 6.1(d)(i), Section 6.1(d)(ii), Section 6.1(d)(iv), Section 6.1(d)(vii) or
Section 6.1(d)(ix).

"Residual Gain" or "Residual Loss" means any item of gain or loss or Simulated Gain or Simulated Loss, as the case may be, of the Company recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss or Simulated Gain or Simulated Loss is not allocated pursuant to Section 6.2(d)(i)(A), Section 6.1(d)(ii)(A) or Section 6.2(d)(ii)(B), respectively, to eliminate Book-Tax Disparities.

"Securities Act" means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute.

"Simulated Basis" means the Carrying Value of any oil and gas property (as defined in Section 614 of the Code).

"Simulated Depletion" means, with respect to an oil and gas property (as defined in Section 614 of the Code), a depletion allowance computed in accordance with federal income tax principles (as if the Simulated Basis of the property were its adjusted tax basis) and in the manner specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(k)(2). For purposes of computing Simulated Depletion with respect to any property, the Simulated Basis of such property shall be deemed to be the Carrying Value of such property, and in no event shall such allowance for Simulated Depletion, in the aggregate, exceed such Simulated Basis.

"Simulated Gain" means the excess of the amount realized from the sale or other disposition of an oil or gas property over the Carrying Value of such property.

"Simulated Loss" means the excess of the Carrying Value of an oil or gas property over the amount realized from the sale or other disposition of such property.

"Special Approval" means approval by a majority of the members of the Conflicts Committee.

"Subsidiary" means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if more than 50% of the partnership interests of such partnership (considering all of the partnership interests of the partnership as a single class) is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person, or a combination thereof, or (c) any other Person (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.

"Tax Matters Member" has the meaning assigned to such term in Section 10.3(a).

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"Unit" means a Partnership Security representing a fractional part of the Partnership Interests of all Limited Partners, and having the rights and obligations specified with respect to Units in this Agreement.

"Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.4(d) as of such date).

"Unrealized Loss" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.4(d) as of such date) over (b) the fair market value of such property as of such date.

SECTION 1.2 CONSTRUCTION.

Unless the context requires otherwise: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (b) references to Articles and Sections refer to Articles and Sections of this Agreement; and (c) the term "include" or "includes" means includes, without limitation, and "including" means including, without limitation.

ARTICLE 2
ORGANIZATION OF THE COMPANY

SECTION 2.1 FORMATION.

The Company is a limited liability company formed under the provisions of the Delaware Act. Steven H. Pruett is hereby designated as an "authorized person" of the Company within the meaning of the Act, and has executed, delivered and filed (such filing being hereby ratified and confirmed in all respects) the Certificate of Formation of the Company with the Secretary of State of the State of Delaware. Upon the filing of the Certificate of Formation with the Secretary of State of the State of Delaware, his powers as an "authorized person" of the Company ceased, and the Member thereupon became the designated "authorized person" of the Company and shall continue as the designated "authorized person" of the Company within the meaning of the Act.

SECTION 2.2 NAME.

The name of the Company is, and the business of the Company shall be conducted under the name of, "Legacy Reserves GP, LLC."

SECTION 2.3 TERM.

The Company's term commenced on the effective date of the filing of the Certificate and shall continue until the Company is dissolved pursuant to
Section 12.1.

SECTION 2.4 REGISTERED OFFICE AND AGENT.

The registered office of the Company required by the Delaware Act to be maintained in the State of Delaware shall be the office of the initial registered agent named in the Certificate,

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or such other place as the Members may designate in the manner provided by law. The registered agent for service of process at such address shall be the initial registered agent named in the Certificate, or such other person as the Members may designate in the manner provided by law.

SECTION 2.5 PURPOSES AND PERMITTED ACTIVITIES.

(a) The Company may (i) act as the general partner of the Partnership (and acquire, hold and dispose of Partnership Interests and related rights in the Partnership) and only undertake activities that are ancillary or related thereto and (ii) in connection with acting in such capacity, carry on any lawful business or activity permitted by the Delaware Act.

(b) Subject to the limitations expressly set forth in this Agreement, the Company shall have the power and authority to do any and all acts and things deemed necessary or desirable by the Board to further the Company's purposes and carry on its business, including, without limitation, the following:

(i) acting as the general partner of the Partnership;

(ii) entering into any kind of activity and performing contracts of any kind necessary or desirable for the accomplishment of its business (including the business of the Partnership and the Operating Partnership);

(iii) acquiring any property, real or personal, in fee or under lease or license, or any rights therein or appurtenant thereto, necessary or desirable for the accomplishment of its business;

(iv) borrowing money and issuing evidences of indebtedness and securing any such indebtedness by mortgage or pledge of, or other lien on, the assets of the Company;

(v) entering into any such instruments and agreements as the Board may deem necessary or desirable for the ownership, management, operation, leasing and sale of the Company's property; and

(vi) negotiating and concluding agreements for the sale, exchange or other disposition of all or substantially all of the properties of the Company, or for the refinancing of any loan or payment obtained by the Company.

The purposes of the Company are to transact any and all lawful business for which a limited liability company may be formed under the laws of the State of Delaware and any activity necessary, convenient or incidental to the foregoing purpose. Subject to the provisions of this Agreement, the Company, by and through the Board (as defined in Section 7.1 herein) on behalf of the Company,
(i) shall have and exercise all powers necessary, convenient or incidental to accomplish its purposes and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Delaware Act.

SECTION 2.6 NO STATE LAW PARTNERSHIP.

The Members intend that the Company not be a partnership (including a limited partnership) or joint venture, and that no Member be a partner or joint venturer of any other

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Member, for any purposes other than (if the Company has more than one Member) federal and state income tax purposes, and this Agreement may not be construed to suggest otherwise.

SECTION 2.7 CERTAIN UNDERTAKINGS RELATING TO THE SEPARATENESS OF THE COMPANY AND THE PARTNERSHIP.

(a) Separate Records. The Company shall, and shall cause the Partnership to, maintain (i) its books and records, (ii) its accounts, and (iii) its financial statements, separate from those of any other Person, except its consolidated Subsidiaries.

(b) Separate Assets. The Company shall not, and shall not permit the Partnership to, commingle or pool its funds or other assets with those of any other Person, except its consolidated Subsidiaries, and shall, and shall cause the Partnership to, maintain its assets in a manner that is not costly or difficult to segregate, ascertain or otherwise identify as separate from those of any other Person.

(c) Separate Name. The Company shall, and shall cause the Partnership to,
(i) conduct its business in its own name, (ii) use separate stationery, invoices, and checks, (iii) correct any known misunderstanding regarding its separate identity, and (iv) generally hold itself out as a separate entity.

(d) Separate Credit. The Company shall not, and shall not permit the Partnership to, (i) pay its own liabilities from a source other than its own funds, (ii) guarantee or become obligated for the debts of any other Person, except its Subsidiaries and, in the case of the Company, the Partnership, (iii) hold out its credit as being available to satisfy the obligations of any other Person, except its Subsidiaries and, in the case of the Company, the Partnership, (iv) acquire obligations or debt securities of any Group Member, or
(v) pledge its assets for the benefit of any Person or make loans or advances to any Person, except its Subsidiaries and, in the case of the Company, the Partnership; provided that the Company or the Partnership may engage in any transaction described in clauses (ii)-(v) of this Section 2.7(d) if prior Special Approval has been obtained for such transaction and either (A) in the case of transactions described in clauses (ii) and (iii), the Conflicts Committee has determined, or has obtained reasonable written assurance from a nationally recognized firm of independent public accounts or a nationally recognized investment banking or valuation firm, that the borrower or recipient of the credit extension is not then insolvent and will not be rendered insolvent as a result of such transaction or (B) in the case of transactions described in clause (iv), such transaction is completed through a public auction or a nationally recognized exchange.

(e) Separate Formalities. The Company shall, and shall cause the Partnership to, (i) observe all limited liability company or partnership formalities, as the case may be, and other formalities required by its organizational documents, the laws of the jurisdiction of its formation, or other laws, rules, regulations and orders of governmental authorities exercising jurisdiction over it, (ii) engage in transactions with any Group Member in conformity with the requirements of Section 7.10(c), and (iii) subject to the terms of the Omnibus Agreement, promptly pay, from its own funds, and on a current basis, its allocable share of general and administrative expenses, capital expenditures, and costs for shared services performed by any Group Member. Each material contract between the Company or the Partnership, on the one hand, and any other Group Member, on the other hand, shall be in writing.

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ARTICLE 3
MEMBERS

SECTION 3.1 MEMBERSHIP INTERESTS; ADDITIONAL MEMBERS.

The Members and the Interests in the Company owned by each Member on the date hereof are as reflected in Exhibit A attached hereto. Exhibit A attached hereto may be updated from time to time to reflect changes in the information set forth therein accomplished in accordance with the terms of this Agreement. Persons may be admitted to the Company as Members, on such terms and conditions as the Members, without any approval of the Board, determine at the time of admission. The terms of admission or issuance must specify the Percentage Interest applicable thereto and may provide for the creation of different classes or groups of Members having different rights, powers, and duties. The Members may reflect the creation of any new class or group in an amendment to this Agreement indicating the different rights, powers, and duties, and such an amendment shall be approved and executed by the Members. Any such admission is effective only after such new Member has executed and delivered to the Members and the Company an instrument containing the notice address of the new Member, the new Member's ratification of this Agreement and agreement to be bound by it.

SECTION 3.2 ACCESS TO INFORMATION.

Each Member shall be entitled to receive any information that it may request concerning the Company; provided, however, that this Section 3.2 shall not obligate the Company to create any information that does not already exist at the time of such request (other than to convert existing information from one medium to another, such as providing a printout of information that is stored in a computer database). Each Member shall also have the right, upon reasonable notice, and at all reasonable times during usual business hours to inspect the properties of the Company and to audit, examine and make copies of the books of account and other records of the Company. Such right may be exercised through any agent or employee of such Member designated in writing by it or by an independent public accountant, engineer, attorney or other consultant so designated. All costs and expenses incurred in any inspection, examination or audit made on such Member's behalf shall be borne by such Member.

SECTION 3.3 LIABILITY.

(a) Except as otherwise provided in the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member or Director shall be obligated personally for the debts, obligations or liabilities of the Company solely by reason of being a member or manager of the Company.

(b) The Company and the Members agree that, to the fullest extent permitted by law, the rights, duties and obligations of the Members in their capacities as members of the Company are only as set forth in this Agreement and as otherwise arise under the Delaware Act. Furthermore, the Members agree that the existence of any rights of a Member, or the exercise or forbearance from exercise of any such rights shall not, to the fullest extent permitted by law, create any duties or obligations of the Member in their capacities as members of the Company, nor shall such rights be construed to enlarge or otherwise alter in any manner the duties and obligations of the Members.

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SECTION 3.4 WITHDRAWAL.

A Member does not have the right or power to resign as a member of the Company.

ARTICLE 4
DISPOSITION OF MEMBERSHIP INTERESTS

SECTION 4.1 GENERAL RESTRICTION.

A Member may not Dispose of all or any portion of its Interest except in strict accordance with this Article 4. References in this Article 4 to Dispositions of an Interest shall also refer to Dispositions of a portion of an Interest. To the fullest extent permitted by law, any attempted Disposition of an Interest, other than in strict accordance with this Article 4, shall be, and is hereby declared, null and void ab initio. The Members agree that a breach of the provisions of this Article 4 may cause irreparable injury to the Company and to the other Members for which monetary damages (or other remedy at law) are inadequate in view of (a) the complexities and uncertainties in measuring the actual damages that would be sustained by reason of the failure of a Member to comply with such provision and (b) the uniqueness of the business of the Company and the relationship among the Members. Accordingly, the Members agree that the provisions of this Article 4 may be enforced by specific performance.

SECTION 4.2 ADMISSION OF ASSIGNEE AS A MEMBER.

An Assignee has the right to be admitted to the Company as a Member, with the Interest (and attendant Percentage Interest) so transferred to such Assignee, only if (a) the Member making the Disposition (a "Disposing Member") has granted the Assignee either (i) all, but not less than all, of such Disposing Member's Interest or (ii) the express right to be so admitted; and (b) such Disposition is effected in strict compliance with this Article 4.

SECTION 4.3 REQUIREMENTS APPLICABLE TO ALL DISPOSITIONS AND ADMISSIONS.

Any Disposition of an Interest and any admission of an Assignee as a Member shall also be subject to the following requirements, and such Disposition (and admission, if applicable) shall not be effective unless such requirements are complied with:

(a) Payment of Expenses. The Disposing Member and its Assignee shall pay, or reimburse the Company for, all reasonable costs and expenses incurred by the Company in connection with the Disposition and admission of the Assignee as a Member.

(b) No Release. No Disposition of an Interest shall effect a release of the Disposing Member from any liabilities to the Company or the other Members arising from events occurring prior to the Disposition, except as otherwise may be provided in any instrument or agreement pursuant to which a Disposition of an Interest is effected.

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ARTICLE 5
CAPITAL CONTRIBUTIONS

SECTION 5.1 INITIAL CAPITAL CONTRIBUTIONS.

At the time of the formation of the Company or contemporaneously with the adoption by the Members of this Agreement, as appropriate, each Member shall be deemed to have made Capital Contributions as set forth next to the Member's name on Exhibit A.

SECTION 5.2 LOANS.

If the Company does not have sufficient cash to pay its obligations, any Member(s) that may agree to do so with the consent of the Board may advance all or part of the needed funds to or on behalf of the Company. An advance described in this Section 5.2 constitutes a loan from the Member to the Company, bears interest at a rate determined by the Board from the date of the advance until the date of payment, and is not a Capital Contribution. The provisions of this
Section 5.2 are intended to benefit the Members and shall not be construed as conferring any benefit upon any creditor of the Company, and the Members shall not have any duty or obligation to any creditor of the Company to make any contribution or loan to the Company.

SECTION 5.3 RETURN OF CONTRIBUTIONS.

Except as expressly provided herein, no Member is entitled to the return of any part of its Capital Contributions or to be paid interest in respect of either its Capital Account or its Capital Contributions. An unrepaid Capital Contribution is not a liability of the Company or of any Member. A Member is not required to contribute or to lend any cash or property to the Company to enable the Company to return any Member's Capital Contributions.

SECTION 5.4 CAPITAL ACCOUNTS.

(a) The Company shall maintain for each Member owning an Interest a separate Capital Account with respect to such Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions made to the Company with respect to such Interest pursuant to this Agreement and (ii) all items of Company income and gain (including, without limitation, Simulated Gain and income and gain exempt from tax) computed in accordance with Section 5.4(b) and allocated with respect to such Interest pursuant to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to such Interest pursuant to this Agreement and (y) all items of Company deduction and loss (including Simulated Depletion and Simulated Loss) computed in accordance with Section 5.4(b) and allocated with respect to such Interest pursuant to Section 6.1.

(b) For purposes of computing the amount of any item of income, gain, loss or deduction, Simulated Depletion, Simulated Gain or Simulated Loss which is to be allocated pursuant to Article 6 and is to be reflected in the Members' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes (including, without limitation, any method of depreciation, cost recovery or amortization used for that purpose), provided, that:

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(i) Solely for purposes of this Section 5.4, the Company shall be treated as owning directly its proportionate share (as determined by the Board based upon the provisions of the applicable Group Member Agreement) of all property owned by any other Group Member that is classified as a partnership (or otherwise ignored) for federal income tax purposes.

(ii) All fees and other expenses incurred by the Company to promote the sale of (or to sell) an Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Members pursuant to Section 6.1.

(iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss shall be made without regard to any election under Section 754 of the Code which may be made by the Company and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment in the Capital Accounts shall be treated as an item of gain or loss.

(iv) Any income, gain, loss, Simulated Gain or Simulated Loss attributable to the taxable disposition of any Company property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Company's Carrying Value with respect to such property as of such date.

(v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery, amortization or Simulated Depletion attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Company were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 5.4(d) to the Carrying Value of any Company property subject to depreciation, cost recovery or amortization, any further deductions for such depreciation, cost recovery, amortization or Simulated Depletion attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery, amortization or Simulated Depletion derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however, that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery, amortization or Simulated Depletion deductions shall be determined using any method that the Board may adopt.

(vi) If the Company's adjusted basis in a depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Members pursuant to Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code

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shall, to the extent possible, be allocated in the same manner to the Members to whom such deemed deduction was allocated.

(c) A transferee of an Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Interest so transferred.

(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Interests for cash or Contributed Property and the issuance of Interests as consideration for the provision of services, the Capital Account of all Members and the Carrying Value of each Company property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Members at such time pursuant to Section 6.1 in the same manner as any item of gain, loss, Simulated Gain or Simulated Loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Company assets (including, without limitation, cash or cash equivalents) immediately prior to the issuance of additional Interests shall be determined by the Board using such method of valuation as it may adopt; provided, however, that the Board, in arriving at such valuation, must take fully into account the fair market value of the Interests of all Members at such time. The Board shall allocate such aggregate value among the assets of the Company (in such manner as it determines) to arrive at a fair market value for individual properties.

(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Member of any Company property (other than a distribution of cash that is not in redemption or retirement of an Interest), the Capital Accounts of all Members and the Carrying Value of all Company property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Members, at such time, pursuant to Section 6.1 in the same manner as any item of gain, loss, Simulated Gain or Simulated Loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss the aggregate cash amount and fair market value of all Company assets (including, without limitation, cash or cash equivalents) immediately prior to a distribution shall (A) in the case of an actual distribution that is not made pursuant to Section 10.3 or in the case of a deemed distribution, be determined and allocated in the same manner as that provided in Section 5.4(d)(i) or (B) in the case of a liquidating distribution pursuant to Section 10.3, be determined and allocated by the liquidator using such method of valuation as it may adopt.

ARTICLE 6
ALLOCATIONS AND DISTRIBUTIONS

SECTION 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES.

For purposes of maintaining the Capital Accounts and in determining the rights of the Members among themselves, the Company's items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss (computed in accordance with Section 5.4(b)) shall be allocated among the Members in each taxable year (or portion thereof) as provided herein below.

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(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Income for such taxable year shall be allocated to the Members in accordance with their respective Percentage Interests.

(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Losses for such taxable period shall be allocated to the Members in accordance with their respective Percentage Interests; provided that Net Losses shall not be allocated to any Member pursuant to this Section 6.1(b) to the extent that such allocation would cause any Member to have a deficit balance in its Adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account).

(c) Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 6.1(d), all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Termination Gain or Net Termination Loss for such taxable period shall be allocated in the same manner as such Net Termination Gain or Net Termination Loss is allocated hereunder. All allocations under this
Section 6.1(c) shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 6.1 and after all distributions provided under Section 6.3 have been made; provided, however, that solely for purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for distributions made pursuant to Section 6.4.

(i) If a Net Termination Gain is recognized (or deemed recognized pursuant to Section 5.4(d)), such Net Termination Gain shall be allocated among the Members in the following manner (and the Capital Accounts of the Members shall be increased by the amount so allocated in each of the following subclauses, in the order listed, before an allocation is made pursuant to the next succeeding subclause):

(A) First, to each Member having a deficit balance in its Capital Account, in the proportion that such deficit balance bears to the total deficit balances in the Capital Accounts of all Members, until each such Member has been allocated Net Termination Gain equal to any such deficit balance in its Capital Account; and

(B) Second, 100% to all Members in accordance with their respective Percentage Interests.

(ii) If a Net Termination Loss is recognized (or deemed recognized pursuant to Section 5.4(d)), such Net Termination Loss shall be allocated among the Members in the following manner:

(A) First, to the Members, Pro Rata, until the Capital Account in respect of each Unit then Outstanding has been reduced to zero; and

(B) Second, the balance, if any, 100% to all Members in accordance with their respective percentage Interests.

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(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable period:

(i) Company Minimum Gain Chargeback. Notwithstanding any other provision of this Section 6.1, if there is a net decrease in Company Minimum Gain during any Company taxable period, each Member shall be allocated items of Company income, gain and Simulated Gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 6.1(d), each Member's Adjusted Capital Account balance shall be determined, and the allocation of income, gain and Simulated Gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d) with respect to such taxable period (other than an allocation pursuant to Section 6.1(d)(vi) and Section 6.1(d)(vii)). This Section 6.1(d)(i) is intended to comply with the Company Minimum Gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.

(ii) Chargeback of Member Nonrecourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Member Nonrecourse Debt Minimum Gain during any Company taxable period, any Member with a share of Member Nonrecourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Company income, gain and Simulated Gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Member's Adjusted Capital Account balance shall be determined, and the allocation of income, gain and Simulated Gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d), other than Section 6.1(d)(i) and other than an allocation pursuant to Section 6.1(d)(vi) and Section 6.1(d)(vii), with respect to such taxable period. This Section 6.1(d)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(iii) Intentionally left blank.

(iv) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Company income, gain and Simulated Gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i) or Section 6.1(d)(ii).

(v) Gross Income Allocations. In the event any Member has a deficit balance in its Capital Account at the end of any Company taxable period in excess of the sum of (A) the amount such Member is required to restore pursuant to the provisions of this Agreement and (B) the amount such Member is deemed obligated to restore pursuant to Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Member shall be

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specially allocated items of Company gross income, gain and Simulated Gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 6.1(d)(v) shall be made only if and to the extent that such Member would have a deficit balance in its Capital Account as adjusted after all other allocations provided for in this
Section 6.1 have been tentatively made as if this Section 6.1(d)(v) were not in this Agreement.

(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Members in accordance with their respective Percentage Interests. If the Board determines that the Company's Nonrecourse Deductions should be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under
Section 704(b) of the Code, the Board is authorized, upon notice to the other Members, to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements.

(vii) Member Nonrecourse Deductions. Member Nonrecourse Deductions for any taxable period shall be allocated 100% to the Member that bears the Economic Risk of Loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Member bears the Economic Risk of Loss with respect to a Member Nonrecourse Debt, such Member Nonrecourse Deductions attributable thereto shall be allocated between or among such Members in accordance with the ratios in which they share such Economic Risk of Loss.

(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Members agree that Nonrecourse Liabilities of the Company in excess of the sum of (A) the amount of Company Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among the Members in accordance with their respective Percentage Interests.

(ix) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain or Simulated Gain (if the adjustment increases the basis of the asset) or loss or Simulated Loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.

(x) Curative Allocation.

(A) Notwithstanding any other provision of this Section 6.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain or Simulated Loss allocated to each Member pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Member under the Agreed Allocations had the Required Allocations and the related Curative Allocation not otherwise

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been provided in this Section 6.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Company Minimum Gain and (2) Member Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Member Nonrecourse Debt Minimum Gain. Allocations pursuant to this
Section 6.1(d)(x)(A) shall only be made with respect to Required Allocations to the extent the Board reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the Members. Further, allocations pursuant to this Section 6.1(d)(x)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the Board determines that such allocations are likely to be offset by subsequent Required Allocations.

(B) The Board shall, with respect to each taxable period,
(1) apply the provisions of Section 6.1(d)(x)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 6.1(d)(x)(A) among the Members in a manner that is likely to minimize such economic distortions.

SECTION 6.2 ALLOCATIONS FOR TAX PURPOSES.

(a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Members in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1.

(b) The deduction for depletion with respect to each separate oil and gas property (as defined in Section 614 of the Code) shall be computed for federal income tax purposes separately by the Members rather than by the Company in accordance with Section 613A(c)(7)(D) of the Code. Except as provided in Section 6.2(c)(iii), for purposes of such computation (before taking into account any adjustments resulting from an election made by the Company under Section 754 of the Code), the adjusted tax basis of each oil and gas property (as defined in
Section 614 of the Code) shall be allocated among the Members in accordance with their respective Percentage Interests.

Each Member shall separately keep records of his share of the adjusted tax basis in each oil and gas property, allocated as provided above, adjust such share of the adjusted tax basis for any cost or percentage depletion allowable with respect to such property, and use such adjusted tax basis in the computation of its cost depletion or in the computation of his gain or loss on the disposition of such property by the Company.

(c) Except as provided in Section 6.2(c)(iii), for the purposes of the separate computation of gain or loss by each Member on the sale or disposition of each separate oil and gas property (as defined in Section 614 of the Code), the Company's allocable share of the "amount realized" (as such term is defined in Section 1001(b) of the Code) from such sale or disposition shall be allocated for federal income tax purposes among the Members as follows:

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(i) first, to the extent such amount realized constitutes a recovery of the Simulated Basis of the property, to the Members in the same proportion as the depletable basis of such property was allocated to the Members pursuant to Section 6.2(b) (without regard to any special allocation of basis under Section 6.2(c)(iii));

(ii) second, the remainder of such amount realized, if any, to the Members so that, to the maximum extent possible, the amount realized allocated to each Member under this Section 6.2(c)(ii) will equal such Member's share of the Simulated Gain recognized by the Company from such sale or disposition.

(iii) The Members recognize that with respect to Contributed Property and Adjusted Property there will be a difference between the Carrying Value of such property at the time of contribution or revaluation, as the case may be, and the adjusted tax basis of such property at that time. All items of tax depreciation, cost recovery, amortization, adjusted tax basis of depletable properties, amount realized and gain or loss with respect to such Contributed Property and Adjusted Property shall be allocated among the Members to take into account the disparities between the Carrying Values and the adjusted tax basis with respect to such properties in accordance with the principles of Treasury Regulation Section 1.704-3(d).

(iv) Any elections or other decisions relating to such allocations shall be made by the Board in any manner that reasonably reflects the purpose and intention of the Agreement.

(d) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, other than an oil and gas property pursuant to Section 6.2(c), items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Members as follows:

(i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Members in the manner provided under
Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Members in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1.

(ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Members in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 5.4(d)(i) or Section 5.4(d)(ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Members in a manner consistent with
Section 6.2(d)(i)(A); and (B) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Members in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1.

(iii) The Board shall apply the principles of Treasury Regulation
Section 1.704-3(d) to eliminate Book-Tax Disparities.

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(e) For the proper administration of the Company, the Board shall (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal income tax purposes of income (including, without limitation, gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code. The Board may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 6.2(e) only if such conventions, allocations or amendments would not have a material adverse effect on the Members, and if such allocations are consistent with the principles of Section 704 of the Code.

(f) The Board may determine to depreciate or amortize the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation or amortization method and useful life applied to the Company's common basis of such property, despite any inconsistency of such approach with Treasury Regulation Section 1.167(c)-l(a)(6) or any successor regulations thereto. If the Board determines that such reporting position cannot be taken, the Board may adopt depreciation and amortization conventions under which all purchasers acquiring Units in the same month would receive depreciation and amortization deductions, based upon the same applicable rate as if they had purchased a direct interest in the Company's property. If the Board chooses not to utilize such aggregate method, the Board may use any other depreciation and amortization conventions to preserve the uniformity of the intrinsic tax characteristics of any Interests, so long as such conventions would not have a material adverse effect on the Members.

(g) Any gain allocated to the Members upon the sale or other taxable disposition of any Company asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 6.2, be characterized as Recapture Income in the same proportions and to the same extent as such Members (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.

(h) All items of income, gain, loss, deduction and credit recognized by the Company for federal income tax purposes and allocated to the Members in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code that may be made by the Company; provided, however, that such allocations, once made, shall be adjusted (in the manner determined by the Board) to take into account those adjustments permitted or required by Sections 734 and 743 of the Code.

SECTION 6.3 DISTRIBUTIONS.

Except as otherwise provided in Section 6.4, distributions to the Members shall be made only to all Members simultaneously in proportion to their respective Percentage Interests (at the time the amounts of such distributions are determined) and in such aggregate amounts and at such times as shall be determined by the Board; provided, however, that any loans from Members pursuant to Section 5.2 shall be repaid prior to any distributions to Members pursuant to this Section 6.3.

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SECTION 6.4 DISTRIBUTIONS ON DISSOLUTION AND WINDING UP.

Upon the dissolution and winding up of the Company, after adjusting the Capital Accounts, if any, for all distributions made under Section 6.3 and all allocations under Article 6, all available proceeds distributable to the Members as determined under Section 12.2 shall be distributed to all of the Members in amounts equal to the Members' positive Capital Account balances.

SECTION 6.5 WITHHELD TAXES.

All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution or allocation to the Company or the Members shall be treated as amounts distributed to the Members pursuant to this Article 6 for all purposes of this Agreement. The Board is authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any federal, state or local government any amounts required to be so withheld pursuant to the Code or any provision of any other federal, state or local law and shall allocate such amounts to those Members with respect to which such amounts were withheld.

SECTION 6.6 LIMITATIONS ON DISTRIBUTIONS.

Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a distribution to any Member on account of its interest in the Company if such distribution would violate Section 18-607 of the Delaware Act or other applicable law.

ARTICLE 7
MANAGEMENT

SECTION 7.1 MANAGEMENT BY DIRECTORS.

The Company shall be managed by a board of Directors (the "Board") who shall be "managers" (as such term is defined in the Delaware Act) according to this Article 7 and, except with respect to certain consent or approval requirements provided in this Agreement, no Member, by virtue of having the status of a Member, shall have any management power over the business and affairs of the Company or actual or apparent authority to enter into contracts on behalf of, or to otherwise bind, the Company. Except as described in the preceding sentence, the business and affairs of the Company shall be managed by the Directors elected in accordance with Section 7.2 acting exclusively through the Board in accordance with this Agreement. Under the direction of the Board, the day-to-day activities of the Company shall be conducted on the Company's behalf by the executive officers, who shall be agents of the Company. In addition to the powers that now or hereafter can be granted under the Delaware Act and to all other powers granted under any other provision of this Agreement, the Board and the executive officers (subject to Article 8 and the direction of the Board) shall have full power and authority to do all things on such terms as they may deem necessary or appropriate to conduct, or cause to be conducted, the business and affairs of the Company, including, without limitation, (i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness and the incurring of any other obligations; (ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Company; (iii) the merger or other combination or conversion of the Company with or into another person; (iv) the use of

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the assets of the Company (including cash on hand) for any purpose consistent with the terms of this Agreement and the repayment of obligations of the Company; (v) the negotiation, execution and performance of any contracts, conveyances or other instruments; (vi) the distribution of Company cash; (vii) the selection, engagement and dismissal of executive officers, employees and agents, outside attorneys, accountants, engineers, consultants and contractors and the determination of their compensation and other terms of employment or hiring; (viii) the maintenance of such insurance for the benefit of the Company as it deems necessary or appropriate; (ix) the acquisition or disposition of assets; (x) the formation of, or acquisition of assets of or an interest in, or the contribution of property to, any person; (xi) the control of any matters affecting the rights and obligations of the Company, including the commencement, prosecution and defense of actions at law or in equity and otherwise engaging in the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation; (xii) the indemnification of any person against liabilities and contingencies to the extent permitted by law and this Agreement and (xiii) issue additional Interests, as provided herein.

SECTION 7.2 BOARD OF DIRECTORS.

(a) Composition; Initial Directors. The Board shall initially consist of four (4) natural persons who need not be Members. The initial Board shall consist of the persons listed on Schedule I. Following the Closing Date, the Board will be increased to up to seven (7) natural persons with the vacancies to be filled by the existing Directors as follows:

(i) one Independent Director will be appointed promptly following the Closing Date;

(ii) one Independent Director will be appointed on or before ninety
(90) days following the Closing Date; and

(iii) one Independent Director will be appointed on or before the first anniversary of the Closing Date.

(b) Subject to any limitations specified by law or in this Agreement, prior to the closing of an Initial Public Offering (as defined in the Partnership Agreement) the number of Directors may be increased to up to nine (9) Directors or decreased to as few as seven (7) Directors by resolution adopted by a majority in interest of the Members. No decrease in the number of Directors shall have the effect of shortening the term of any incumbent Director.

(c) Election and Term of Office. Except as provided in this Section 7.2 or
Section 7.3, the Directors shall be elected by a majority in interest of the Members. The Directors shall be elected at the annual or any special meeting of the Members (except as otherwise provided in this Agreement). Each Director elected shall hold office until his successor shall be elected and shall qualify, or until his death, resignation or removal in the manner hereinafter provided.

(d) Quorum; Required Vote for Board Action. At all meetings of the Directors, the participation, either in person or telephonically, of all of the Directors fixed by or in accordance with this Agreement shall be necessary and sufficient to constitute a quorum for the transaction of business. Except as provided in Section 9.1, the act of a majority of the Directors will be the act of the Board. If a quorum shall not be present at any meeting of Directors, the Directors present may adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present.

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(e) No Compensation; Reimbursement. Directors, in their capacity as such, shall not receive any compensation from the Company for their services; provided that Independent Directors may be compensated. The Directors may be reimbursed by the Company for their respective reasonable out-of-pocket costs and expenses incurred in the course of their services as the Members shall determine.

The business and affairs of the Company shall be fully vested in, and managed by, the Board and any executive officers elected pursuant to Article 8 hereof. The Directors and executive officers shall collectively constitute "managers" of the Company within the meaning of the Delaware Act. Except as otherwise specifically provided in this Agreement, the authority and functions of the Board, on the one hand, and the executive officers, on the other hand, shall be identical to the authority and functions of the board of directors and officers, respectively, of a corporation organized under the General Corporation Law of the State of Delaware. The executive officers shall be vested with such powers and duties as are set forth in Article 8 hereof and as are specified by the Board. Accordingly, except as otherwise specifically provided in this Agreement, the business and affairs of the Company shall be managed under the direction of the Board, and the day-to-day activities of the Company shall be conducted on the Company's behalf by the executive officers who shall be agents of the Company.

In addition to the powers and authorities expressly conferred on the Board by this Agreement, the Board may exercise all such powers of the Company and do all such acts and things as are not restricted by this Agreement, the Delaware Act or other applicable law.

Notwithstanding anything above seeming to the contrary, the Board will not take any action, without approval of the Members with respect to an extraordinary matter that would have, or would reasonably be expected to have, a material effect, directly or indirectly, on the Members' interests in the Company. The type of extraordinary matter referred to in the prior sentence which requires approval of the Members shall include, but not be limited to the following: (i) commencement of any action relating to bankruptcy, insolvency, reorganization or relief of debtors by the Company, the Partnership or a material subsidiary of either; (ii) a merger, consolidation, recapitalization or similar transaction involving the Company, the Partnership or a material subsidiary of either; (iii) a sale, exchange or other transfer not in the ordinary course of business of a substantial portion of the assets of the Company or the Partnership, viewed in each case on a consolidated basis, in one or a series of related transactions; (iv) to the fullest extent permitted by law, dissolution or liquidation of the Company or the Partnership; (v) a material amendment of this Agreement or the Partnership Agreement; and (vi) a material change in the amount of the quarterly distribution made on the Units of the Partnership or the payment of a material extraordinary distribution. An extraordinary matter will be deemed approved by a Member if the Board receives a written, facsimile or electronic instruction evidencing such approval from the Member or if a majority of the Directors on the Board affiliated with the Member approve such matter. To the fullest extent permitted by law, a Director, acting as such, shall have no duty, responsibility or liability to the Members with respect to any action by the Board approved as required above by the Members.

SECTION 7.3 ADOPTION OF SECTION 13.4(C) OF THE PARTNERSHIP AGREEMENT.

(a) The Members and the Company hereby adopt as part of the terms of this Agreement, and agree to be bound by, Section 13.4(c) of the Partnership Agreement as if such section were set forth in full herein and hereby delegate to the Limited Partners the right to elect the number of Directors constituting the Board in accordance with Section 13.4(c) of the Partnership Agreement. Such delegation shall not cause any Member to cease to be a member

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of the Company and shall not constitute a delegation of any other rights, powers, privileges or duties of the Members with respect to the Company. A Director need not be a Member or a Limited Partner.

(b) The Limited Partners shall not be deemed to be Members or holders of Interests as such terms are defined in this Agreement or to be "members", "managers" or holders of "limited liability company interests" as such terms are defined in the Delaware Act. The exercise by a Limited Partner of the right to elect Directors and any other rights afforded to such Limited Partner hereunder and under Section 13.4(c) of the Partnership Agreement shall be in such Limited Partner's capacity as a limited partner of the Partnership, and no Limited Partner shall be liable for any debts, obligations or liabilities of the Company by reason of the foregoing.

(c) The Members and the Company agree to use their commercially reasonable best efforts to take such action as shall be necessary or appropriate to give effect to and implement the provisions of Section 13.4(c) of the Partnership Agreement as adopted in this Section 7.3.

(d) Notwithstanding anything to the contrary in this Agreement, including
Section 13.5, the foregoing clauses in this Section 7.3 shall not be amended except as expressly provided in Section 7.2(b) or upon the requisite approval of Limited Partners set forth in Section 13.4(c)(x) of the Partnership Agreement.

(e) If the Company delegates to an existing or newly formed wholly-owned subsidiary the power and authority to manage and control the business and affairs of the Partnership Group, the foregoing provisions of this Section 7.3 shall be applicable with respect to the board of directors or other governing body of such Subsidiary and the Members and the Company agree to use their commercially reasonable best efforts to take such action as shall be necessary or appropriate to give effect to and implement such provisions with respect to such subsidiary.

SECTION 7.4 REGULAR MEETINGS.

The Board shall meet at least quarterly, and a regular meeting of the Board shall be held without notice other than this Section 7.4 at such time and place as the Board may determine. The Board may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution.

SECTION 7.5 SPECIAL MEETINGS.

A special meeting of the Board may be called at any time at the request of
(a) the Chairman of the Board or (b) a majority of the Directors then in office.

SECTION 7.6 NOTICE.

Written notice of all regular meetings of the Board, except for regular meetings scheduled by resolution as set forth in Section 7.4, must be given to all Directors at least 5 days prior to the regular meeting of the Board and one Business Day prior to any special meeting of the Board. All notices and other communications to be given to Directors shall be sufficiently given for all purposes hereunder if in writing and delivered by hand, courier or overnight delivery service or three days after being mailed by certified or registered mail, return receipt requested, with appropriate postage prepaid, or when received in the form of a telegram or facsimile, and shall be directed to the address or facsimile number as such Director shall designate by notice

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to the Company. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the notice of such meeting, except for amendments to this Agreement, as provided herein. A meeting may be held at any time without notice if all the Directors are present or if those not present waive notice of the meeting either before or after such meeting.

SECTION 7.7 ACTION BY CONSENT OF BOARD.

To the extent permitted by applicable law, the Board may act without a meeting, without prior notice and without a vote so long as the number of Directors who would be required to take such action at a duly held meeting shall have executed a written consent with respect to any Board action taken in lieu of a meeting.

SECTION 7.8 CONFERENCE TELEPHONE MEETINGS.

Directors or members of any committee of the Board may participate in a meeting of the Board or such committee by means of conference telephone equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

SECTION 7.9 VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS.

Unless otherwise provided in this Agreement, vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or a sole remaining Director; and any Director so chosen shall hold office until the next annual meeting and until his successor shall be duly elected and shall qualify, unless sooner displaced.

SECTION 7.10 COMMITTEES.

(a) The Board may establish committees of the Board and may delegate certain of its responsibilities to such committees.

(b) Following the Closing Date, the Board shall have an audit committee comprised of three Directors, all of whom shall be Independent Directors. Such audit committee shall establish a written audit committee charter in accordance with the rules of the National Securities Exchange on which the Units are traded. "Independent Director" shall mean a Director meeting the independence and experience requirements as set forth in the rules of the National Securities Exchange on which the Units are traded.

(c) Following the Closing Date, the Board shall have a conflicts committee comprised of two or more Directors, all of whom shall be Independent Directors (the "Conflicts Committee"). Any matter approved by the Conflicts Committee in the manner provided for in the Partnership Agreement shall be conclusively deemed to be fair and reasonable to the Partnership, and not a breach by the Company of the Partnership Agreement or any fiduciary or other duties thereunder or at law, in equity or otherwise owed to the Partnership by the Company.

(i) Special Approval of the Conflicts Committee shall be required for the acquisition of any assets or business (including any equity interest in an entity) by the Partnership or any of its subsidiaries from the Company or any member of the

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Partnership Group if the purchase price of such assets or business will exceed 5% of the gross (undepreciated) book value of property, plant and equipment as reflected on the Partnership's consolidated balance sheet as of the end of the calendar three-month or annual period next preceding the date of any such acquisition.

(ii) Special Approval of the Conflicts Committee shall be required for any action to cause the Company, or for the Company to cause the Partnership, to (1) make or consent to a general assignment for the benefit of the Company's or the Partnership's, as applicable, creditors; (2) file or consent to the filing of any bankruptcy, insolvency or reorganization petition for relief under the United States Bankruptcy Code naming the Company or the Partnership, as applicable, as debtor or otherwise institute bankruptcy or insolvency proceedings by or against the Company or the Partnership, as applicable, or otherwise seek, with respect to the Company or the Partnership, as applicable, relief from debts or protection from creditors generally; (3) file or consent to the filing of a petition or answer seeking for the Company or the Partnership, as applicable, a liquidation, dissolution (to the fullest extent permitted by law), arrangement or similar relief under any law; (4) file an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Company or the Partnership, as applicable, in a proceeding of the type described in clauses (1) - (3) of this Section 7.10(c)(ii); (5) seek, consent to or acquiesce in the appointment of a receiver, liquidator, conservator, assignee, trustee, sequestrator, custodian or any similar official for the Company or the Partnership, as applicable, or for all or any substantial portion of its properties; or (6) dissolve (to the fullest extent permitted by law), liquidate, consolidate, merge, or sell all or substantially all of the assets of the Company or the Partnership, as applicable. In acting or otherwise voting on the matters referred to in this Section 7.10(c)(ii), to the fullest extent permitted by law, including Section 18-1101(c) of the Delaware Act and Section 17-1101(d) of the Delaware Revised Uniform Limited Partnership Act, as amended from time to time, the Directors constituting the Conflicts Committee shall consider only the interest of the Company or the Partnership, as applicable, including its respective creditors.

(d) Special Approval of the Conflicts Committee shall be required for any amendment to Section 7.10(c), or this subsection (d), to the definition of "Independent Director" in Section 7.10(b), and to Section 2.7.

(e) Following the Closing Date, the Board shall have a compensation committee comprised of those Directors appointed thereto from time to time by the Board; provided, however, that if no Directors have been so appointed to the compensation committee, then the entire Board shall serve as the compensation committee (the "Compensation Committee"). The Compensation Committee shall be charged with setting compensation for officers of the Company and the Partnership, as well as administering any employee benefit, incentive or similar plans put in place by the Company or the Partnership.

(f) A majority of any committee may determine its action and fix the time and place of its meetings unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 7.6. The Board shall have power at any time to fill vacancies in, or to change the membership of, any committee, or to dissolve any such committee other than the Conflicts Committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not Directors; provided, however, that no such committee shall have or may exercise any authority of the Board.

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ARTICLE 8
OFFICERS

SECTION 8.1 ELECTED OFFICERS.

The executive officers of the Company shall serve at the pleasure of the Board. Such officers shall have the authority and duties delegated to each of them, respectively, by the Board from time to time or hereunder. The elected officers of the Company shall be a Chairman of the Board, a President, a Secretary, a Treasurer, and such other officers (including, without limitation, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents) as the Board from time to time may deem proper. The Chairman of the Board shall be chosen from among the Directors. All officers elected by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article 8. The Board or any committee thereof may from time to time elect such other officers (including one or more Vice Presidents, Controllers, Assistant Secretaries and Assistant Treasurers) as may be necessary or desirable for the conduct of the business of the Company. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in this Agreement or as may be prescribed by the Board or such committee, as the case may be.

SECTION 8.2 ELECTION AND TERM OF OFFICE.

The names and titles of the officers of the Company as of the Closing Date are set forth on Exhibit B hereto. Thereafter, the Officers of the Company shall be elected annually by the Board at the first regular meeting of the Board of a calendar year. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold office until such person's successor shall have been duly elected and shall have qualified or until such person's death or until he shall resign or be removed pursuant to Section 8.8.

SECTION 8.3 CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER.

The Chairman of the Board shall preside at all meetings of the Limited Partners, the Members and the Board and shall be the Chief Executive Officer of the Company. The Chairman of the Board shall be responsible for the general management of the affairs of the Company and shall perform all duties incidental to such person's office which may be required by law and all such other duties as are properly required of him by the Board. He shall make reports to the Board and the Members and shall see that all orders and resolutions of the Board and of any committee thereof are carried into effect.

SECTION 8.4 PRESIDENT; CHIEF OPERATING OFFICER.

The President shall act as the Chief Operating Officer of the Company and shall assist the Chairman of the Board in the administration and operation of the Company's business and general supervision of its policies and affairs.

SECTION 8.5 VICE PRESIDENTS.

Each Executive Vice President and Senior Vice President and any Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Board.

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SECTION 8.6 TREASURER.

(a) The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Company to be deposited in such banks as may be authorized by the Board, or in such banks as may be designated as depositories in the manner provided by resolution of the Board. The Treasurer shall, in general, perform all duties incident to the office of the Treasurer and shall have such further powers and duties and shall be subject to such directions as may be granted or imposed from time to time by the Board.

(b) Assistant Treasurers shall have such of the authority and perform such of the duties of the Treasurer as may be provided in this Agreement or assigned to them by the Board or the Treasurer. Assistant Treasurers shall assist the Treasurer in the performance of the duties assigned to the Treasurer, and in assisting the Treasurer, each Assistant Treasurer shall for such purpose have the powers of the Treasurer. During the Treasurer's absence or inability, the Secretary's authority and duties shall be possessed by such Assistant Treasurer or Assistant Treasurers as the Board may designate.

SECTION 8.7 SECRETARY.

(a) The Secretary shall keep or cause to be kept, in one or more books provided for that purpose, the minutes of all meetings of the Board, the committees of the Board and the Members and of the Limited Partners. The Secretary shall see that all notices are duly given in accordance with the provisions of this Agreement and as required by law; shall be custodian of the records and the seal of the Company and affix and attest the seal to all documents to be executed on behalf of the Company under its seal; and shall see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and in general, shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the Board.

(b) Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in this Agreement or assigned to them by the Board or the Secretary. Assistant Secretaries shall assist the Secretary in the performance of the duties assigned to the Secretary, and in assisting the Secretary, each Assistant Secretary shall for such purpose have the powers of the Secretary. During the Secretary's absence or inability, the Secretary's authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board may designate.

SECTION 8.8 REMOVAL.

Any officer elected, or agent appointed, by the Board may be removed by the affirmative vote of a majority of the Board whenever, in their judgment, the best interests of the Company would be served thereby. No elected officer shall have any contractual rights against the Company for compensation by virtue of such election beyond the date of the election of such person's successor, such person's death, such person's resignation or such person's removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan.

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SECTION 8.9 VACANCIES.

A newly created elected office and a vacancy in any elected office because of death, resignation or removal may be filled by the Board for the unexpired portion of the term at any meeting of the Board.

ARTICLE 9
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS

SECTION 9.1 INDEMNIFICATION.

(a) To the fullest extent permitted by law as it currently exists and to such greater extent as applicable law hereafter may permit, but subject to the limitations expressly provided in this Agreement, the Company shall indemnify any Person who was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that such Person is or was a Director or officer of the Company, or, while serving as a Director or officer of the Company, is or was serving as a Tax Matters Member or, at the request of the Company, as a director, officer, tax matters partner, employee, partner, manager, fiduciary or trustee of any Group Member or any other Person (each an "Indemnitee") or by reason of any action alleged to have been taken or omitted in such capacity, against losses, expenses (including attorneys' fees), judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably incurred by the Person in connection with such action, suit or proceeding if the Person acted in good faith and in a manner the Person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such Person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Person did not act in good faith and in a manner which the Person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the Person's conduct was unlawful.

(b) To the fullest extent permitted by law, but subject to the limitations expressly provided in this Agreement, the Company shall indemnify any Person who was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any threatened, pending or completed action, suit or proceeding, by or in the right of the Company to procure a judgment in its favor by reason of the fact that such Person was serving as an Indemnitee, or by reason of any action alleged to have been taken or omitted in such capacity, against losses, expenses (including attorneys' fees), judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably incurred by the Person in connection with such action, suit or proceeding if the Person acted in good faith and in a manner the Person reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such Person shall have been adjudged to be liable to the Company unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to

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indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

(c) To the extent an Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 9.1(a) or Section 9.1(b), or in the defense of any claim, issue or matter therein, such Person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such Person in connection therewith.

(d) Any indemnification under Section 9.1(a) or Section 9.1(b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the Indemnitee is proper in the circumstances because the Person has met the applicable standard of conduct set forth in such section. Such determination shall be made, with respect to a Person who is a Director or officer at the time of such determination, (i) by a majority vote of the Directors who are not parties to such action, suit or proceeding, even though less than a quorum, (ii) by a committee of such Directors designated by majority vote of such Directors, even though less than a quorum, (iii) if there are no such Directors, or if such Directors so direct, by independent legal counsel in an Opinion of Counsel, or
(iv) by the Members.

(e) Expenses (including reasonable attorneys' fees) incurred by an Indemnitee in defending any action, suit or proceeding referred to in Section 9.1(a) or Section 9.1(b) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding and in advance of any determination that such Indemnitee is not entitled to be indemnified, upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a "Final Adjudication") that such Person is not entitled to be indemnified by the Company as authorized in this
Section 9.1.

(f) The indemnification, advancement of expenses and other provisions of this Section 9.1 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the Members, as a matter of law or otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and as to actions in any other capacity (including any capacity under the Purchase Agreement), and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee.

(g) The Company may purchase and maintain insurance, on behalf of its Directors and officers, and such other Persons as the Board shall determine, against any liability that may be asserted against or expense that may be incurred by such Person in connection with the Company's activities or such Person's activities on behalf of the Company, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement.

(h) For purposes of the definition of Indemnitee in Section 9.1(a), the Company shall be deemed to have requested a Person to serve as fiduciary of an employee benefit plan whenever the performance by such Person of his duties to the Company also imposes duties on, or otherwise involves services by, such Person to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute "fines" within the meaning of Section 9.1(a); and action taken or omitted by such Person with respect to any employee benefit plan in the

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performance of such Person's duties for a purpose reasonably believed by him to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in, or not opposed to, the best interests of the Company.

(i) Any indemnification pursuant to this Section 9.1 shall be made only out of the assets of the Company, it being agreed that the Members shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Company to enable it to effectuate such indemnification.

(j) An Indemnitee shall not be denied indemnification in whole or in part under this Section 9.1 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

(k) If a claim under Section 9.1 of this Agreement is not paid in full by the Company within 60 days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the reasonable expenses of prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such expenses upon a Final Adjudication that, the Indemnitee has not met any applicable standard for indemnification set forth in this Agreement. Neither the failure of the Company (including its Directors who are not parties to such action, a committee of such Directors, independent legal counsel, or its Members) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in this Agreement, nor an actual determination by the Company (including its Directors who are not parties to such action, a committee of such Directors, independent legal counsel, or its Members) that the Indemnitee has not met the applicable standard of conduct shall create a presumption that the Indemnitee has not met the applicable standard of conduct, or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified or to such advancement of expenses, under this Section 9.1 or otherwise shall be on the Company.

(l) The Company may indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (whether or not an action by or in the right of the Company) by reason of the fact that the Person is or was an employee (other than an officer) or agent of the Company, or, while serving as an employee (other than an officer) or agent of the Company is or was serving at the request of the Company as a director, officer, employee, partner, fiduciary, trustee or agent of another Group Member or another Person to the extent (i) permitted by the laws of the State of Delaware as from time to time in effect, and (ii) authorized by the Board. The Company may, to the extent permitted by Delaware law and

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authorized by the Board, pay expenses (including attorneys' fees) reasonably incurred by any such employee or agent in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding, upon such terms and conditions as the Board determine. The provisions of this Section 9.1(l) shall not constitute a contract right for any such employee or agent.

(m) The indemnification, advancement of expenses and other provisions of this Section 9.1 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.

(n) Except to the extent otherwise provided in Section 9.1(l), the right to be indemnified and to receive advancement of expenses in this Section 9.1 shall be a contract right. No amendment, modification or repeal of this Section 9.1 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Company, nor the obligations of the Company to indemnify any such Indemnitee under and in accordance with the provisions of this Section 9.1 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

SECTION 9.2 EXCULPATION OF LIABILITY OF INDEMNITEES.

(a) Notwithstanding anything to the contrary set forth in this Agreement, no Director shall be liable to the Company or the Members for monetary damages for breach of fiduciary duty as a Director, except

(A) for a breach of the Director's duty of loyalty to the Company or the Members;

(B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or

(C) for any transaction from which the Director derived an improper personal benefit.

If the DGCL is amended after the date of this Agreement to authorize Delaware corporations to further eliminate or limit the personal liability of directors of Delaware corporations beyond that permitted under current Section 102(b)(7) of the DGCL, then the liability of a Director to the Company or the Members, in addition to the personal liability limitation provided herein, shall be further limited to the fullest extent permitted for directors of a Delaware corporation under the DGCL as so amended, to the extent permitted by the Delaware Act.

(b) Subject to its obligations and duties as Board set forth in this Article 9, the Board may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the Board shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the Board in good faith.

(c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Company or to the Members, the Directors

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and any other Indemnitee acting in connection with the Company's business or affairs shall not be liable to the Company or to any Member for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict or eliminate or otherwise modify the duties (including fiduciary duties) and liabilities of an Indemnitee otherwise existing at law or in equity, are agreed by the Members to replace such other duties and liabilities of such Indemnitee.

(d) Any amendment, modification or repeal of this Section 9.2 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of any Indemnitee under this Section 9.2 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

SECTION 9.3 RESOLUTION OF CONFLICTS OF INTEREST; STANDARDS OF CONDUCT AND MODIFICATION OF DUTIES.

(a) Unless otherwise expressly provided in this Agreement or any Group Member Agreement, whenever a potential conflict of interest exists or arises between one or more Directors or their respective Affiliates, on the one hand, and the Company or any Group Member, on the other, any resolution or course of action by the Board or its Affiliates in respect of such conflict of interest shall be permitted and, to the fullest extent permitted by law, deemed approved by all Members, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, including any fiduciary duty, if the resolution or course of action in respect of such conflict of interest is
(i) approved by Special Approval, (ii) approved by the vote of a majority of the Interests held by disinterested parties, (iii) on terms no less favorable to the Company than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to the Company, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Company). The Board shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of such resolution, and the Board may also adopt a resolution or course of action that has not received Special Approval. If Special Approval is not sought and the Board determines that the resolution or course of action taken with respect to a conflict of interest is on terms no less favorable to the Company than those generally being provided to or available from unrelated third parties or that the resolution or course of action taken with respect to a conflict of interest is fair and reasonable to the Company, then such resolution or course of action shall be permitted and, to the fullest extent permitted by law, deemed approved by all the Members, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, including any fiduciary duty. In connection with any such approval by the Board, it shall be presumed that, in making its decision, the Board acted in good faith, and in any proceeding brought by any Member or by or on behalf of such Member or any other Member or the Company challenging such approval, the Person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption.

(b) The Members hereby authorize the Board, on behalf of the Company as a partner of a Group Member, to approve of actions by the Board of such Group Member similar to those actions permitted to be taken by the Board pursuant to this Section 9.3.

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SECTION 9.4 DUTIES OF OFFICERS AND DIRECTORS.

(a) Except as otherwise expressly provided in Section 7.10(c), Section 9.1,
Section 9.2 or Section 9.3 or elsewhere in this Agreement, the duties and obligations owed to the Company and to the Members by the officers and Directors, shall be the same as the respective duties and obligations owed to a corporation organized under DGCL by its officers and directors, respectively.

(b) A Director shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Company and on such information, opinions, reports or statements presented to the Company by any of the Company's officers or employees, or committees of the Board, or by any other Person as to matters the Director reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company.

(c) The Board shall have the right, in respect of any of its powers or obligations hereunder, to act through a duly appointed attorney or attorneys-in-fact or the duly authorized Officers of the Company.

SECTION 9.5 RELIANCE BY THIRD PARTIES.

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Company shall be entitled to assume that the Board and any officer authorized by the Board to act on behalf of and in the name of the Company has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Company and to enter into any authorized contracts on behalf of the Company, and such Person shall be entitled to deal with the Board or any officer as if it were the Company's sole party in interest, both legally and beneficially. Each Member hereby waives, to the fullest extent permitted by law, any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the Board or any officer in connection with any such dealing. In no event shall any Person dealing with the Board or any officer or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the Board or any officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Company by the Board or any officer or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Company and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Company.

ARTICLE 10
TAXES

SECTION 10.1 TAX RETURNS.

The Tax Matters Member of the Company shall prepare and timely file (on behalf of the Company) all federal, state and local tax returns required to be filed by the Company. Each Member shall furnish to the Company all pertinent information in its possession relating to the

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Company's operations that is necessary to enable the Company's tax returns to be timely prepared and filed. The Company shall bear the costs of the preparation and filing of its returns.

SECTION 10.2 TAX ELECTIONS.

(a) The Company shall make the following elections on the appropriate tax returns:

(i) to adopt as the Company's fiscal year the calendar year;

(ii) to adopt the accrual method of accounting;

(iii) if a distribution of the Company's property as described in
Section 734 of the Code occurs or upon a transfer of an Interest as described in Section 743 of the Code occurs, on request by notice from any Member, to elect, pursuant to Section 754 of the Code, to adjust the basis of the Company's properties;

(iv) to elect to amortize or deduct the organizational expenses of the Company as permitted by Section 709(b) of the Code; and

(v) any other election the Board may deem appropriate.

(b) Neither the Company nor any Member shall make an election for the Company to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law and no provision of this Agreement (including Section 2.6) shall be construed to sanction or approve such an election.

SECTION 10.3 TAX MATTERS MEMBER.

(a) The Board shall select the President or the Chief Financial Officer (or, if there are no officers serving under such titles, such other officer in a comparable position), of the Company to act as the "tax matters partner" of the Company pursuant to Section 6231(a)(7) of the Code (the "Tax Matters Member"). The Tax Matters Member shall take such action as may be necessary to cause to the extent possible each Member to become a "notice partner" within the meaning of Section 6223 of the Code. The Tax Matters Member shall inform each Member of all significant matters that may come to its attention in its capacity as Tax Matters Member by giving notice thereof on or before the fifth Business Day after becoming aware thereof and, within that time, shall forward to each Member copies of all significant written communications it may receive in that capacity.

(b) The Tax Matters Member shall take no action without the authorization of the Board, other than such action as may be required by applicable law. Any cost or expense incurred by the Tax Matters Member in connection with its duties, including the preparation for or pursuance of administrative or judicial proceedings, shall be paid by the Company.

(c) The Tax Matters Member shall not enter into any extension of the period of limitations for making assessments on behalf of the Members without first obtaining the consent of the Board. The Tax Matters Member shall not bind any Member to a settlement agreement without obtaining the consent of such Member. Any Member that enters into a settlement agreement with respect to any Company item (as described in Section 6231(a)(3) of the Code) shall notify the other Members of such settlement agreement and its terms within 90 days from the date of the settlement.

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(d) No Member shall file a request pursuant to Section 6227 of the Code for an administrative adjustment of Company items for any taxable year without first notifying the other Members. If the Board consents to the requested adjustment, the Tax Matters Member shall file the request for the administrative adjustment on behalf of the Members. If such consent is not obtained within 30 days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Member may file a request for administrative adjustment on its own behalf. Any Member intending to file a petition under Sections 6226, 6228 or other Section of the Code with respect to any item involving the Company shall notify the other Members of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Member is intending to file such petition on behalf of the Company, such notice shall be given within a reasonable period of time to allow the Members to participate in the choosing of the forum in which such petition will be filed.

(e) If any Member intends to file a notice of inconsistent treatment under
Section 6222(b) of the Code, such Member shall give reasonable notice under the circumstances to the other Members of such intent and the manner in which the Member's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Members.

ARTICLE 11
BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS

SECTION 11.1 MAINTENANCE OF BOOKS.

(a) The Board shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board and of the Members and of the Limited Partners, appropriate registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Company.

(b) The books of account of the Company shall be (i) maintained on the basis of a fiscal year that is the calendar year, (ii) maintained on an accrual basis in accordance with GAAP, consistently applied and (iii) audited by the certified public accountants of the Company at the end of each calendar year.

SECTION 11.2 REPORTS.

With respect to each calendar year, the Board shall prepare, or cause to be prepared, and deliver, or cause to be delivered, to each Member:

(a) Within 120 days after the end of such calendar year, a profit and loss statement and a statement of cash flows for such year, a balance sheet and a statement of each Member's Capital Account as of the end of such year, together with a report thereon of the certified public accountants of the Company; and

(b) Such federal, state and local income tax returns and such other accounting, tax information and schedules as shall be necessary for the preparation by each Member on or before June 15 following the end of each calendar year of its income tax return with respect to such year.

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SECTION 11.3 BANK ACCOUNTS.

Funds of the Company shall be deposited in such banks or other depositories as shall be designated from time to time by the Board. All withdrawals from any such depository shall be made only as authorized by the Board and shall be made only by check, wire transfer, debit memorandum or other written instruction.

ARTICLE 12
DISSOLUTION, WINDING-UP, TERMINATION AND CONVERSION

SECTION 12.1 DISSOLUTION.

(a) The Company shall dissolve and its affairs shall be wound up on the first to occur of the following events (each a "Dissolution Event"):

(i) the unanimous consent of the Members; or

(ii) entry of a decree of judicial dissolution of the Company under
Section 18-802 of the Delaware Act; or

(iii) at any time there are no Members of the Company, unless the Company is continued in accordance with the Delaware Act or this Agreement.

(b) No other event shall cause a dissolution of the Company.

(c) Upon the occurrence of any event that causes there to be no Members of the Company, to the fullest extent permitted by law, the personal representative of the last remaining Member is hereby authorized to, and shall, within 90 days after the occurrence of the event that terminated the continued membership of such Member in the Company, agree in writing (i) to continue the Company and
(ii) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute Member of the Company, effective as of the occurrence of the event that terminated the continued membership of such Member in the Company.

(d) Notwithstanding any other provision of this Agreement, the Bankruptcy of a Member shall not cause such Member to cease to be a member of the Company and, upon the occurrence of such an event, the Company shall continue without dissolution.

SECTION 12.2 WINDING-UP AND TERMINATION.

(a) On the occurrence of a Dissolution Event, the Board shall act as liquidator. The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Delaware Act. The costs of winding up shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company properties with all of the power and authority of the Members. The steps to be accomplished by the liquidator are as follows:

(i) as promptly as possible after dissolution and again after final winding up, the liquidator shall cause a proper accounting to be made by a recognized firm of certified public accountants of the Company's assets, liabilities, and operations through

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the last Day of the month in which the dissolution occurs or the final winding up is completed, as applicable;

(ii) the liquidator shall discharge from Company funds all of the debts, liabilities and obligations of the Company (including all expenses incurred in winding up or otherwise make adequate provision for payment and discharge thereof (including the establishment of a cash escrow fund for contingent, conditional and unmatured liabilities in such amount and for such term as the liquidator may reasonably determine)); and

(iii) all remaining assets of the Company shall be distributed to the Members as follows:

(A) the liquidator may sell any or all Company property, including to Members, and any resulting gain or loss from each sale shall be computed and allocated to the Capital Accounts of the Members in accordance with the provisions of Article 6;

(B) with respect to all Company property that has not been sold, the fair market value of that property shall be determined and the Capital Accounts of the Members shall be adjusted to reflect the manner in which the unrealized income, gain, loss, and deduction inherent in property that has not been reflected in the Capital Accounts previously would be allocated among the Members if there were a taxable disposition of that property for the fair market value of that property on the date of distribution; and

(C) Company property (including cash) shall be distributed among the Members in accordance with Section 6.4; and, to the extent practicable, those distributions shall be made by the end of the taxable year of the Company during which the liquidation of the Company occurs (or, if later, 90 days after the date of the liquidation).

(b) The distribution of cash or property to a Member in accordance with the provisions of this Section 12.2 constitutes a complete return to the Member of its Capital Contributions and a complete distribution to the Member of its Interest and all the Company's property and constitutes a compromise to which all Members have consented pursuant to Section 18-502(b) of the Delaware Act. To the extent that a Member returns funds to the Company, it has no claim against any other Member for those funds.

SECTION 12.3 DEFICIT CAPITAL ACCOUNTS.

No Member will be required to pay to the Company, to any other Member or to any third party any deficit balance that may exist from time to time in the Member's Capital Account.

SECTION 12.4 CERTIFICATE OF CANCELLATION.

On completion of the distribution of Company assets as provided herein, the Members (or such other Person or Persons as the Delaware Act may require or permit) shall file a certificate of cancellation with the Secretary of State of Delaware, cancel any other filings made pursuant to Section 2.5, and take such other actions as may be necessary to terminate the existence of the Company. Upon the filing of such certificate of cancellation, the existence of

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the Company shall terminate, except as may be otherwise provided by the Delaware Act or by applicable law.

ARTICLE 13
GENERAL PROVISIONS

SECTION 13.1 OFFSET.

Whenever the Company is to pay any sum to any Member, any amounts that Member owes the Company may be deducted from that sum before payment.

SECTION 13.2 NOTICES.

Except as otherwise provided herein, all notices, demands, requests, consents, approvals or other communications (collectively, "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally served, delivered by reputable air courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or to such other address as such party shall have specified most recently by written notice. Notice shall be deemed given on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given upon delivery of such notice:

To the Company:

Legacy Reserves GP, LLC
303 W. Wall, Suite 1600
Midland, Texas 79701
Attn: President
Telephone: (432) 682-2516
Fax: (432) 682-4013

SECTION 13.3 ENTIRE AGREEMENT; SUPERSEDING EFFECT.

This Agreement constitutes the entire agreement of the Members relating to the Company and the transactions contemplated hereby, and supersedes all provisions and concepts contained in all prior contracts or agreements between the Members with respect to the Company, whether oral or written.

SECTION 13.4 EFFECT OF WAIVER OR CONSENT.

Except as otherwise provided in this Agreement, a waiver or consent, express or implied, to or of any breach or default by any Member in the performance by that Member of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Member of the same or any other obligations of that Member with respect to the Company. Except as otherwise provided in this Agreement, failure on the part of a Member to complain of any act of any Member or to declare any Member in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that Member of its rights with respect to that default until the applicable statute-of-limitations period has run.

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SECTION 13.5 AMENDMENT OR RESTATEMENT.

Subject to the provisions hereof, this Agreement or the Certificate may be amended or restated only by a written instrument executed (or, in the case of the Certificate, approved) by the Members; provided, however, that, subject to the provisions of Section 7.2(d) and Section 7.10(d), any amendment to the provisions of Article 7 shall be approved by the Board; provided further, that,
Section 7.1 may be amended or restated only by approval of the Board and the Members.

SECTION 13.6 BINDING EFFECT.

Subject to the restrictions on Dispositions set forth in this Agreement, this Agreement is binding on and shall inure to the benefit of the Members and their respective successors and permitted assigns.

SECTION 13.7 GOVERNING LAW; SEVERABILITY.

THIS AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. In the event of a direct conflict between the provisions of this Agreement and any mandatory, non-waivable provision of the Delaware Act, such provision of the Delaware Act shall control. If any provision of the Delaware Act may be varied or superseded in a limited liability company agreement (or otherwise by agreement of the members or managers of a limited liability company), such provision shall be deemed superseded and waived in its entirety if this Agreement contains a provision addressing the same issue or subject matter. If any provision of this Agreement or the application thereof to any Member or circumstance is held invalid or unenforceable to any extent, (a) the remainder of this Agreement and the application of that provision to other Members or circumstances is not affected thereby, and (b) the Members shall negotiate in good faith to replace that provision with a new provision that is valid and enforceable and that puts the Members in substantially the same economic, business and legal position as they would have been in if the original provision had been valid and enforceable.

SECTION 13.8 FURTHER ASSURANCES.

In connection with this Agreement and the transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and those transactions.

SECTION 13.9 WAIVER OF CERTAIN RIGHTS.

Each Member irrevocably waives, to the fullest extent permitted by law, any right it may have to maintain any action for dissolution of the Company or for partition of the property of the Company.

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SECTION 13.10 COUNTERPARTS.

This Agreement may be executed in any number of counterparts with the same effect as if all signing parties had signed the same document. All counterparts shall be construed together and constitute the same instrument.

SECTION 13.11 JURISDICTION.

Any and all claims arising out of, in connection with or in relation to (i) the interpretation, performance or breach of this Agreement, or (ii) any relationship before, at the time of entering into, during the term of, or upon or after expiration or termination of this Agreement, between the parties hereto, shall be brought in any court of competent jurisdiction in the State of Delaware. Each party hereto unconditionally and irrevocably consents to the jurisdiction of any such court over any claims and waives any objection that such party may have to the laying of venue of any claims in any such court.

ARTICLE 14
MEMBER MEETINGS

SECTION 14.1 MEETINGS OF THE MEMBERS.

(a) Place of Meetings. All meetings of the Members shall be held at the principal office of the Company, or at such other place within or without the State of Delaware as shall be specified or fixed in the notices (or waivers of notice) thereof.

(b) Quorum; Required Vote for Member Action; Adjournment of Meetings.

(i) Except as expressly provided otherwise by this Agreement, all Members, present in person or telephonically or represented by proxy, shall constitute a quorum at any such meeting for the transaction of business, and the affirmative vote of all of the Members shall constitute the act of the Members.

(ii) Notwithstanding any other provision in this Agreement to the contrary, the chairman of the meeting of Members, present in person or telephonically or represented by proxy and entitled to vote thereat, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than thirty days, or if subsequent to the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at such meeting. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called.

(c) Annual Meetings. Subject to Section 7.3, an annual meeting of the Members for the election of Directors to succeed those Directors serving on the Board whose terms expire and for the transaction of such other business as may properly be considered at the meeting, shall be held at such place, within or without the State of Delaware, on such date, and at such time as the Board shall fix and set forth in the notice of the meeting, which date shall be within thirteen (13) months subsequent to the later of the date of formation of the Company or the most recent annual meeting of Members. If the Board has not fixed a place for the holding of

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the annual meeting of Members in accordance with this Section 14.1(c), such annual meeting shall be held at the principal place of business of the Company.

(d) Special Meetings.

(i) Special meetings of the Members for any proper purpose or purposes may be called at any time by the Chairman of the Board (if any), the Board, the President or a Member with a Percentage Interest of at least 10%.

(ii) If not otherwise stated in or fixed in accordance with the remaining provisions hereof, the record date for determining Members entitled to call a special meeting shall be the date any Member first signs the notice of that meeting. Only business within the proper purpose or purposes described in the notice (or waiver thereof) required by this Agreement may be conducted at a special meeting of the Members.

SECTION 14.2 ADDITIONAL PROVISIONS APPLICABLE TO MEETINGS OF MEMBERS.

In connection with any meeting of the Members, the following provisions shall apply:

(a) Waiver of Notice Through Attendance. Attendance of a person at such meeting (including pursuant to Section 14.2(d)) shall constitute a waiver of notice of such meeting, except where such person attends the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

(b) Proxies. A person may vote at such meeting by a written proxy executed by that person and delivered to another Member or to the Secretary. A proxy shall be revocable unless it is stated to be irrevocable.

(c) Action by Written Consent. Any action required or permitted to be taken at such a meeting may be taken without a meeting, without a vote and without prior notice if a consent or consents in writing, setting forth the action so taken, is signed by the Members having not fewer than the minimum number of votes that would be necessary to take the action at a meeting at which all Members entitled to vote on the action were present and voted.

(d) Meetings by Telephone. The Members may participate in and hold meetings by means of conference telephone, video conference or similar communications equipment by means of which all persons participating in the meeting can hear each other.

[Signature pages follow]

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IN WITNESS WHEREOF, the Members have executed and delivered this Agreement effective as of the date first written above.

MEMBERS:

BROTHERS PRODUCTION PROPERTIES, LTD

By: Brothers Production Company
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
    Kyle A. McGraw, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

BROTHERS PRODUCTION COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
    Kyle A. McGraw, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

BROTHERS OPERATING COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
    Kyle A. McGraw, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

J&W MCGRAW PROPERTIES, LTD.

BY: Brothers Production Company, Inc.
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
    Kyle A. McGraw, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

-45-

MORIAH PROPERTIES, LTD.

By: Moriah Resources, Inc.
its general partner 

By: /s/ Cary Brown
    ------------------------------------
    Cary Brown, Vice President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

DAB RESOURCES, LTD.

BY: DAB 1999 Corp.
its general partner 

By: /s/ Dale A. Brown
    ------------------------------------
    Dale A. Brown, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

H2K HOLDINGS, LTD.

BY: H2K Management, L.L.C.
its general partner 

By: /s/ Paul T. Horne
    ------------------------------------
    Paul T. Horne, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

-46-

MBN PROPERTIES LP

By: MBN Management, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
    Steven H. Pruett, President

Address for Notice:

303 W. Wall, Suite 1600
Midland, TX 79701

-47-

EXHIBIT A

CAPITAL CONTRIBUTION 

               MEMBER                  PERCENTAGE INTEREST   INITIAL CAPITAL CONTRIBUTION
               ------                  -------------------   ----------------------------
Moriah Properties, Ltd.                       44.5%                   $1,005,385
DAB Resources, Ltd.                            4.0%                   $   90,372
Brothers Production Properties, Ltd.          22.5%                   $  508,341
Brothers Production Company, Inc.              1.2%                   $   27,112
Brothers Operating Company, Inc.               0.2%                   $    4,518
J&W McGraw Properties, Ltd.                    4.1%                   $   92,631
MBN Properties LP                             23.1%                   $  521,896
H2K Holdings, Ltd.                             0.4%                   $    9,037

EXHIBIT B

OFFICERS 

Officer             Title
-------             -----
Cary D. Brown       Chairman and Chief Executive Officer

Steven H. Pruett    President, Chief Financial Officer and Secretary

Kyle A. McGraw      Executive Vice President- Business Development and Land

Paul T. Horne       Vice President-Operations

William M. Morris   Controller

SCHEDULE I

INITIAL DIRECTORS

Cary D. Brown
Dale A. Brown
Kyle A. McGraw
S. Wil VanLoh, Jr.

Exhibit 4.1

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is entered into March 15, 2006, by and among Legacy Reserves, LP, a Delaware limited partnership (the "PARTNERSHIP"), Legacy Reserves GP, LLC, a Delaware limited liability company (the "GP" and, together with the Partnership, the "LEGACY ENTITIES"), and Friedman, Billings, Ramsey & Co., Inc., a Delaware corporation ("FBR"), for the benefit of the purchasers of the units representing limited partner interests in the Partnership (the "UNITS"), as participants ("PARTICIPANTS") in the offering and sale of the Units and the direct and indirect transferees of FBR and each of the Participants.

WITNESSETH:

WHEREAS, FBR, the Legacy Entities and other parties entered into the Purchase/Placement Agreement dated March 6, 2006 (the "PLACEMENT AGREEMENT"), in connection with which the Partnership agreed to sell 5,000,000 newly issued Units (plus an additional 250,000 Units to cover over allotments and optional issuances, if any), with FBR acting as initial purchaser of the 144A Units (as defined) and placement agent with respect to the Private Placement Units (as defined);

WHEREAS, to induce FBR to enter into the Placement Agreement, the Partnership has agreed to provide the registration rights provided for in this Agreement for the holders of Registrable Units (as defined below); and

WHEREAS, the execution of this Agreement is a condition to the closing of the transactions contemplated by the Placement Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Definitions. As used in this Agreement, the following terms shall have the following meanings:

"144A UNITS" is defined in the Placement Agreement.

"ADDITIONAL PAYMENTS" is defined in Section 7(a).

"AFFILIATE" means, as to any specified Person, (i) any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified Person, (ii) any executive officer, director, trustee or general partner of the specified Person and (iii) any legal entity for which the specified Person acts as an executive officer, director, trustee or general partner. For purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly, or indirectly through one or more intermediaries, of the power to direct or cause the direction of the management and policies of such Person, whether by contract, through the ownership of voting securities, partner interests or other equity interests or otherwise.

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"AGREEMENT" is defined in the introductory paragraph.

"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York are authorized or obligated by applicable law, regulation or executive order to close.

"CLOSING DATE" is defined in the Placement Agreement.

"COMMISSION" means the Securities and Exchange Commission.

"PARTNERSHIP" is defined in the introductory paragraph.

"CONTROLLING PERSON" is defined in Section 6(a).

"END OF SUSPENSION NOTICE" is defined in Section 5(b).

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission pursuant thereto.

"FBR" is defined in the introductory paragraph.

"FBR MERCHANT BANKING" means Friedman, Billings, Ramsey Group, Inc. and any successor thereto.

"FBR MANDATORY SHELF REGISTRATION STATEMENT" is defined in Section 2(a).

"FORM 10-K" means an annual report required to be filed with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act, as such form may be amended from time to time, or any similar form, rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such form, provided that such form need not include those items required by Section 404 of the Sarbanes-Oxley Act of 2002.

"FORM 10-Q" means a quarterly report required to be filed with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act, as such form may be amended from time to time, or any similar form, rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such form, provided that such form need not include those items required by Section 404 of the Sarbanes-Oxley Act of 2002.

"GAAP" is defined in Section 3(e).

"GP" is defined in the introductory paragraph.

"HOLDER" means each owner of any Registrable Units from time to time, including FBR and its Affiliates.

"HOLDERS MANDATORY SHELF REGISTRATION STATEMENT" is defined in Section

2(a).

"INDEMNIFIED PARTY" is defined in Section 6(c).

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"INDEMNIFYING PARTY" is defined in Section 6(c).

"IPO REGISTRATION STATEMENT" is defined in Section 8.

"LEGACY ENTITIES" is defined in the introductory paragraph.

"LIABILITIES" is defined in Section 6(a).

"MANDATORY SHELF REGISTRATION STATEMENT" is defined in Section 2(a).

"NASD" means the National Association of Securities Dealers, Inc.

"NO OBJECTIONS LETTER" is defined in Section 4(t).

"NOTICE AND QUESTIONNAIRE" is defined in Section 2(a)(iii).

"PARTICIPANTS" is defined in the introductory paragraph.

"PERSON" means an individual, limited liability company, partnership, corporation, trust, unincorporated organization, government or agency or political subdivision thereof, or any other legal entity.

"PIGGYBACK REGISTRATION STATEMENT" is defined in Section 2(b).

"PLACEMENT AGREEMENT" is defined in the first recital clause.

"PRIOR HOLDER" means an investor party to or other beneficiary of the Founders Registration Rights Agreement, dated March 6, 2006, among the Partnership and certain other parties listed therein that has not waived its rights under such Registration Rights Agreement and holding "Registrable Securities" (as defined in such Registration Rights Agreement).

"PRIVATE PLACEMENT UNITS" means Units initially sold by the Partnership directly to "accredited investors" (within the meaning of Rule 501(a) promulgated under the Securities Act) as Participants, with FBR acting as placement agent.

"PROSPECTUS" means the prospectus included in any Registration Statement, including any preliminary prospectus, and all other amendments and supplements to any such prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference, if any, in such prospectus.

"PURCHASER INDEMNITEE" is defined in Section 6(a).

"REGISTRABLE UNITS" means the 144A Units and the Private Placement Units, upon original issuance thereof, and at all times subsequent thereto, including upon the transfer thereof by the original holder or any subsequent holder and any units or other securities issued in respect of such Registrable Units because of or in connection with any dividend, distribution, split, purchase in any rights offering or in connection with any exchange for or replacement of such Registrable Units or any combination of units, recapitalization, merger or consolidation, or any

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other equity securities issued pursuant to any other pro rata distribution with respect to the Units, until, in the case of any such 144A Unit or Private Placement Unit, the earliest to occur of:

(i) the date on which it has been sold pursuant to a Registration Statement or sold pursuant to Rule 144;

(ii) the date on which it is saleable, in the opinion of counsel to the Partnership, without registration under the Securities Act, pursuant to Rule 144(k);

(iii) the date on which it is saleable, without restriction, pursuant to an available exemption from registration under the Securities Act; or

(iv) the date on which it is sold to the Partnership or its subsidiaries.

"REGISTRATION DEFAULT" is defined in Section 7(a).

"REGISTRATION EXPENSES" means any and all expenses incident to the performance of or compliance with this Agreement, including: (i) all Commission, securities exchange, NASD registration, listing, inclusion and filing fees (including those of FBR, FBR Merchant Banking and Holders associated or affiliated with FBR), (ii) all fees and expenses incurred in connection with compliance with international, federal or state securities or blue sky laws (including any registration, listing and filing fees and reasonable fees and disbursements of counsel in connection with blue sky qualification of any of the Registrable Units and the preparation of a blue sky memorandum and compliance with the rules of the NASD), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, duplicating, printing, delivering and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements, certificates and any other documents relating to the performance under and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing or inclusion of any of the Registrable Units on the New York Stock Exchange, the American Stock Exchange or The NASDAQ Stock Market pursuant to Section 4(n), (v) the fees and disbursements of counsel for the Partnership and of the independent public accountants of the Partnership (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance) and the reasonable fees and disbursements of one counsel, reasonably acceptable to the Partnership, for the Holders, selected by the Holders holding a majority of the Registrable Units, and (vi) any fees and disbursements customarily paid by issuers in issues and sales of securities (including the fees and expenses of any experts retained by the Partnership in connection with any Registration Statement), provided, however, that Registration Expenses shall exclude brokers' or underwriters' discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Units by a Holder and the fees and disbursements of any counsel to the Holders other than as provided for in clause (v).

"REGISTRATION STATEMENT" means any Mandatory Registration Statement or Piggyback Registration Statement.

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"RULE 144", "RULE 144A", "RULE 158", "RULE 415", "RULE 424", or "RULE 429", respectively, means such specified rule promulgated by the Commission pursuant to the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such rule.

"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Commission thereunder.

"SUSPENSION EVENT" is defined in Section 5(b).

"SUSPENSION NOTICE" is defined in Section 5(b).

"UNDERWRITTEN OFFERING" means a sale of securities of the Partnership to an underwriter or underwriters for reoffering to the public.

"UNITS" is defined in the introductory paragraph.

2. Registration Rights.

(a) Mandatory Shelf Registration. As set forth in Section 4, the Partnership will file with the Commission as soon as reasonably practicable, but not later than May 15, 2006, (A) a shelf registration statement on Form S-1 or such other form under the Securities Act then available to the Partnership providing for the resale pursuant to Rule 415 from time to time by the Holders, other than those Holders for which the resale of such Holder's Registrable Units is provided for under the FBR Mandatory Shelf Registration Statement (as defined below), of any and all of such Holders' Registrable Units (including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference, if any, in such registration statement, the "HOLDERS MANDATORY SHELF REGISTRATION STATEMENT"), and (B) a shelf registration statement on Form S-1 or such other form under the Securities Act then available to the Partnership providing for the resale pursuant to Rule 415 from time to time by FBR, FBR Merchant Banking and any Holder that is associated or affiliated with FBR of any and all of such Holders' Registrable Units (including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference, if any, in such registration statement, the "FBR MANDATORY SHELF REGISTRATION STATEMENT"; either or both the Holders Mandatory Shelf Registration and the FBR Mandatory Shelf Registration Statement may be referred to herein without distinction as a "MANDATORY SHELF REGISTRATION STATEMENT"). If the Partnership has an effective Holders Mandatory Shelf Registration Statement on Form S-1 and becomes eligible to use Form S-3 or such other short-form registration statement form under the Securities Act, the Partnership shall promptly give notice of such eligibility to the Holders covered thereby and may, or at the request of such Holders with a majority of such Registrable Units shall, promptly convert such Holders Mandatory Shelf Registration Statement on Form S-1 to a registration statement on Form S-3 or such other short-form registration statement by means of a post-effective amendment or otherwise, unless any Holder with Registrable Units under the initial

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Holders Mandatory Shelf Registration Statement notifies the Partnership within 10 Business Days of receipt of the Partnership notice that such conversion would interfere with its distribution of Registrable Units already in progress and provides a reasonable explanation therefor, in which case the Partnership will delay the conversion of the Holders Mandatory Shelf Registration Statement for a reasonable time after receipt of the first such notice, not to exceed 30 days in the aggregate, for all Holders requesting such suspension (unless the Partnership, at such time as the conversion from Form S-1 to Form S-3 or such other short-form registration statement may occur, would otherwise be required to amend the Holders Mandatory Shelf Registration Statement and require that Holders suspend sales under Section 4(i) or Section 5). If the Partnership has an effective FBR Mandatory Shelf Registration Statement on Form S-1 under the Securities Act and becomes eligible to use Form S-3 or such other short-form registration statement form under the Securities Act, the Partnership shall promptly give notice of such eligibility to the Holders covered thereby and may (unless FBR or FBR Merchant Banking reasonably objects unless the Partnership, at such time as the conversion from Form S-1 to Form S-3 or such other short-form registration statement may occur, would otherwise be required to amend the FBR Mandatory Shelf Registration Statement and require that Holders suspend sales under Section 4(i) or Section 5), or at the request of FBR or FBR Merchant Banking shall, promptly convert such FBR Mandatory Shelf Registration Statement on Form S-1 to a Registration Statement on Form S-3 or such other short-form registration statement by means of a post-effective amendment or otherwise.

(i) Effectiveness and Scope. The Partnership shall use its commercially reasonable efforts to cause the Mandatory Registration Statement to be declared effective by the Commission as soon as practicable following such filing, and to remain effective until the date on which all Units in respect thereof cease to be Registrable Units. The Partnership may not include any Units owned by a Prior Holder in the Holders Mandatory Shelf Registration Statement or the FBR Mandatory Shelf Registration Statement. Each Mandatory Shelf Registration Statement shall provide for the resale from time to time, and pursuant to any method or combination of methods legally available (including an Underwritten Offering, a direct sale to purchasers, a sale through brokers or agents, or a sale over the internet) by the Holders of any and all Registrable Units. The Partnership shall not file any registration statement on behalf of or for the benefit of any Prior Holder unless it has filed or files concurrently each Mandatory Shelf Registration Statement, and the Partnership shall not submit an acceleration request to the Commission requesting effectiveness of any such Prior Holder registration statement unless it has submitted or concurrently submits an acceleration request to the Commission requesting effectiveness of each Mandatory Shelf Registration Statement and reasonably believes based on communications with the Commission that such request with respect to each Mandatory Shelf Registration Statement will be granted.

(ii) Underwriting. If any Holder proposes to conduct an Underwritten Offering under a Mandatory Shelf Registration Statement, such Holder shall advise the Partnership and all other Holders whose securities are included in such Mandatory Shelf Registration Statement (if applicable), of the managing underwriters for such proposed Underwritten Offering (which may include FBR or an Affiliate thereof); such managing underwriters to be subject to the approval of the Partnership, not to be unreasonably withheld. In such event, the Partnership shall enter into an underwriting agreement in customary form with the managing underwriters, which shall include, among other provisions, indemnities to the

6

effect and to the extent provided in Section 6, and shall take all such other reasonable actions as are requested by the managing underwriter in order to expedite or facilitate the registration and disposition of the Registrable Units included in such Underwritten Offering; provided, however, that the Partnership shall not be required to cause appropriate officers of the Partnership or its Affiliates to participate in a "road show" or similar marketing effort being conducted by such underwriter with respect to such Underwritten Offering more than once in any six month calendar period or if the Holders do not reasonably anticipate gross proceeds from such Underwritten Offering of at least $30 million. All Holders proposing to distribute their Registrable Units through such Underwritten Offering shall enter into an underwriting agreement in customary form with the managing underwriters selected for such underwriting and complete and execute any questionnaires, powers of attorney, indemnities, securities escrow agreements and other documents reasonably required under the terms of such underwriting, and furnish to the Partnership such information in writing as the Partnership may reasonably request for inclusion in the Registration Statement; provided, however, that no Holder shall be required to make any representations or warranties to or agreements with the Partnership or the underwriters other than representations, warranties or agreements as are customary and reasonably requested by the underwriters. Notwithstanding any other provision of this Agreement, with respect to an Underwritten Offering in connection with a Mandatory Shelf Registration Statement, if the managing underwriters determine in good faith that marketing factors require a limitation on the number of Units to be included in such Underwritten Offering, then the managing underwriters may exclude Units (including Registrable Units) from the Underwritten Offering, and any Units included in the Underwritten Offering shall be allocated first, to each of the Holders requesting inclusion of their Registrable Units in such Underwritten Offering on a pro rata basis based on the total number of Registrable Units requested to be included, second to the Partnership requesting inclusion of primary Units in such Underwritten Offering, and third, to any Prior Holders requesting inclusion of their Units in such Underwritten Offering in the manner provided in the Founders Registration Rights Agreement. In the case of the FBR Mandatory Shelf Registration Statement, such exclusion shall be negotiated by FBR, FBR Merchant Banking and the underwriters.

(iii) Selling Stockholder Questionnaires. Each Holder agrees, by its acquisition of Units, that if such Holder wishes to sell Registrable Units pursuant to a Mandatory Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(a)(iii). Each Holder wishing to sell Registrable Units pursuant to a Mandatory Shelf Registration Statement and related Prospectus agrees to deliver a written notice, substantially in form and substance of Annex V to the preliminary offering memorandum, subject to completion, dated February 13, 2006 (a "NOTICE AND QUESTIONNAIRE"), to the Partnership. The Partnership shall mail the Notice and Questionnaire to the Holders no later than the date of initial filing of a Mandatory Shelf Registration Statement with the Commission. No Holder shall be entitled to be named as a selling securityholder in a Mandatory Shelf Registration Statement as of the initial effective date of a Mandatory Shelf Registration Statement, and no Holder may use the Prospectus forming a part thereof for resales of Registrable Units at any time, unless such Holder has returned a completed and signed Notice and Questionnaire to the Partnership by the deadline for response set forth therein; provided, however, Holders shall have at least 20 days from the date on which the Notice and Questionnaire is first mailed to such Holders to return a completed and signed Notice and Questionnaire to the Partnership. Notwithstanding the foregoing, (x) upon the request of any Holder that did not return a Notice and Questionnaire on a timely basis or did

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not receive a Notice and Questionnaire because it was a subsequent transferee of Registrable Units after the Partnership mailed the Notice and Questionnaire, the Partnership shall distribute a Notice and Questionnaire to such Holders at the address set forth in the request and (y) upon receipt of a properly completed Notice and Questionnaire from such Holder, the Partnership shall use its reasonable best efforts to name such Holder as a selling securityholder in such Mandatory Shelf Registration Statement by means of a pre-effective amendment, by means of a post-effective amendment or, if permitted by the Commission, by means of a Prospectus supplement to the Mandatory Shelf Registration Statement; provided, however, that the Partnership will have no obligation to add Holders to a Mandatory Shelf Registration Statement as selling securityholders more frequently than one time every 30 calendar days.

(b) Piggyback Registration. If, after the date hereof, the Partnership proposes to file a registration statement under the Securities Act providing for a public offering of the Partnership's equity securities, other than the Holders Mandatory Shelf Registration Statement, the FBR Mandatory Shelf Registration Statement or a registration statement on Form S-8 or Form S-4 or any similar form hereafter adopted by the Commission as a replacement therefor (including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference, if any, in such registration statement, the "PIGGYBACK REGISTRATION STATEMENT"), the Partnership will notify each Holder of the proposed filing if clause (i) of the following sentence applies, or only those affected Holders if clause (ii) or (iii) of the following sentence applies. If (i) the Piggyback Registration Statement relates to an IPO Registration Statement, (ii) a Mandatory Shelf Registration Statement is not then effective or (iii) Registrable Units eligible for inclusion in a Mandatory Shelf Registration Statement when initially declared effective were not included in a Mandatory Shelf Registration Statement (unless such Units have been or can be added to a Mandatory Registration Statement at such time), then each Holder in the case of clause (i), and each such affected Holder in the case of clause (ii) and (iii), shall be given an opportunity to include in such Piggyback Registration Statement all or any part of such Holder's Registrable Units. Each such Holder desiring to include in any such Piggyback Registration Statement all or part of such Holder's Registrable Units shall, within 10 days after receipt of the above-described notice by the Partnership, so notify the Partnership in writing, and in such notice shall inform the Partnership of the number of Registrable Units such Holder wishes to include in such Piggyback Registration Statement and provide, as a condition to such inclusion, such information regarding itself, its Registrable Units and the intended method of disposition of such securities as is required pursuant to Regulation S-K promulgated under the Securities Act to effect the registration of the Registrable Units. Any Holder's election to include any Registrable Units in such Piggyback Registration Statement will not affect the inclusion of such Registrable Units in a Mandatory Shelf Registration Statement until such Registrable Units have been sold under the Piggyback Registration Statement at which time the Partnership may remove such Units from a Mandatory Shelf Registration Statement.

(i) Right to Terminate Piggyback Registration. The Partnership may terminate or withdraw any Piggyback Registration Statement, and without any obligation to any such Holder whether or not any Holder has elected to include Registrable Units in such registration. The Partnership may suspend the effectiveness and use of any Piggyback Registration Statement at any time for an unlimited amount of time whether or not any Holder

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has elected to include Registrable Units in such registration. In the event of any such termination or withdrawal or unlimited suspension with respect to an IPO Registration Statement, the following Registration Statement (other than a Mandatory Shelf Registration Statement) for a public offering of securities by the Partnership filed under the Securities Act shall, for purposes of this Agreement, be an IPO Registration Statement.

(ii) Underwriting. The Partnership shall advise the Holders of the managing underwriters for any Underwritten Offering proposed under the Piggyback Registration Statement. The right of any such Holder's Registrable Units to be included in any Piggyback Registration Statement pursuant to this Section 2(b) shall be conditioned upon such Holder's participation in such Underwritten Offering and the inclusion of such Holder's Registrable Units in the Underwritten Offering to the extent provided herein. All Holders proposing to distribute their Registrable Units through such Underwritten Offering shall enter into an underwriting agreement in customary form with the managing underwriters selected for such underwriting and complete and execute any questionnaires, powers of attorney, indemnities, securities escrow agreements and other documents reasonably required under the terms of such underwriting, and furnish to the Partnership such information in writing as the Partnership may reasonably request for inclusion in the Registration Statement; provided, however, that no Holder shall be required to make any representations or warranties to or agreements with the Partnership or the underwriters other than representations, warranties or agreements as are customary and reasonably requested by the underwriters. Notwithstanding any other provision of this Agreement, if the managing underwriters determine in good faith that marketing factors require a limitation on the number of Units to be included, then the managing underwriters may exclude Units (including Registrable Units) from the Piggyback Registration Statement and the Underwritten Offering, and any Units included in the Piggyback Registration Statement and the Underwritten Offering shall be allocated, first, to the Partnership, and second, to each Holder and the Prior Holder(s) requesting inclusion of their Registrable Securities in such Piggyback Registration Statement on a pro rata basis based on the total number of such Units requested to be included provided that among the Prior Holders the allocation shall be made taking into account the provisions of the Founders Registration Rights Agreement, provided, however, that the number of Registrable Units to be included in the Piggyback Registration Statement shall not be reduced unless all other securities of the Partnership held by other holders of the Partnership's capital stock with registration rights that are inferior (with respect to such reduction) to the registration rights of the Holders set forth herein, are first entirely excluded from the underwriting and registration. If any Holder disapproves of the terms of any Underwritten Offering, such Holder may elect to withdraw therefrom by written notice to the Partnership and the underwriter, delivered at least 10 Business Days before the effective date of the Piggyback Registration Statement. Any Registrable Units excluded or withdrawn from such Underwritten Offering shall be excluded and withdrawn from the Piggyback Registration Statement.

(iii) Hold-Back Agreement. By electing to include Registrable Units in the Piggyback Registration Statement, if any, the Holder shall be deemed to have agreed not to effect any sale or distribution of securities of the Partnership of the same or similar class or classes of the securities included in the Registration Statement or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during such periods as reasonably requested (but in no event longer than 30 days before and 75 days following the effective date of the Piggyback Registration Statement,

9

provided the Prior Holders and each of the executive officers and directors of the Legacy Entities that hold Units or securities convertible into or exchangeable or exercisable for Units are subject to at least the same restriction for the entire time period required of the Holders hereunder) by the representatives of the underwriters, if an Underwritten Offering.

(iv) Mandatory Shelf Registration not Impacted by Piggyback Registration Statement. The Partnership's obligation to file any Mandatory Shelf Registration Statement shall not be affected by the filing or effectiveness of the Piggyback Registration Statement.

(c) Expenses. The Partnership shall pay all Registration Expenses in connection with the registration of the Registrable Units pursuant to this Agreement. Each Holder participating in a registration pursuant to this Section 2 shall bear such Holder's proportionate share (based on the total number of Registrable Units sold in such registration) of all discounts and commissions payable to underwriters or brokers and all transfer taxes in connection with a registration of Registrable Units pursuant to this Agreement and any other expense of the Holders not specifically allocated to the Partnership pursuant to this Agreement relating to the sale or disposition of such Holder's Registrable Units pursuant to any Registration Statement.

3. Rule 144 and Rule 144A Reporting; Reports to Holders.

(a) With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Registrable Units to the public without registration, the Partnership agrees to, so long as any Holder owns any Registrable Units:

(i) make and keep adequate current public information available, as those terms are understood and defined in Rule 144(c) at all times after the effective date of the first registration statement filed by the Partnership relating to an offering of the Partnership's securities to the general public;

(ii) use its reasonable best efforts to file with the Commission in a timely manner all reports and other documents required to be filed by the Partnership under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements);

(iii) furnish to any Holder promptly upon request a written statement by the Partnership as to its compliance with the reporting requirements of Rule
144 (at any time after 60 days after the effective date the first registration statement filed by the Partnership for an offering of its securities to the general public) and of the Exchange Act, a copy of the most recent annual or quarterly report of the Partnership, and such other reports and documents of the Partnership, and take such further actions consistent with this Section 3, as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such Registrable Units without registration; and

(iv) so long as a Holder owns any Registrable Units constituting 144A Units, if the Partnership is not required to file reports and other documents under the Securities Act and the Exchange Act, it will make available other information as required by, and so long as necessary to permit sales of Registrable Units pursuant to, Rule 144 or Rule 144A.

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(b) So long as a Holder owns any Units, notwithstanding that the Partnership may not be required to file interim reports under the Securities Act, or the Exchange Act or otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the Commission, the Partnership shall use best efforts to furnish to the Holders all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-K and 10-Q if the Partnership were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, audit reports thereon by the certified independent accountants of the Partnership. Such annual reports shall be furnished by March 31 of the next year and such quarterly reports shall be furnished within 45 days after the end of such quarter. Notwithstanding the foregoing, such information shall not be required until April 15, 2006, with respect to the year ended December 31, 2005 and May 30, 2006, with respect to the quarter ended March 31, 2006.

(c) Until the Units are listed on the New York Stock Exchange or the American Stock Exchange or approved for quotation on The NASDAQ Stock Market, within 60 days of the end of each fiscal quarter (or, with respect to the quarter ending on the Partnership's fiscal year end, 110 days after the end of such fiscal quarter (115 with respect to the year ended December 31, 2005)), the Partnership shall hold a quarterly conference call attended by the GP's Chief Executive Officer and Chief Financial Officer of a type customarily held by companies subject to the reporting requirements of the Exchange Act for the Holders to discuss the results of the prior quarter reported pursuant to Section 3(b) and other relevant matters; provided, however, that if the GP's Board of Directors determines in good faith upon the advice of legal counsel that such a call would be inadvisable due to the provisions of the Securities Act or Exchange Act as a result of any proposed financing, acquisition, merger or other significant transaction involving the Partnership, the Partnership may suspend or delay such calls so long as and to the extent that it discontinues all similar calls with investors in or persons or entities that do business with the Partnership; provided further that the Partnership shall not suspend such calls for more than 90 days out of any 365-day period.

4. Registration Procedures.

In connection with the obligations of the Partnership with respect to any registration pursuant to this Agreement, the Partnership shall:

(a) notify FBR, in writing, at least 10 Business Days prior to the initial filing of a Registration Statement, of its intention to file a Registration Statement with the Commission and, at least five Business Days prior to filing, provide a draft of the Registration Statement to FBR; prepare and file with the Commission, as specified in this Agreement, each Registration Statement, which Registration Statement at the time it is declared effective shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith and shall be reasonably acceptable to FBR; notify FBR at least five Business Days prior to filing of any amendment or supplement to such Registration Statement and, at least three Business Days prior to filing, provide a draft of such amendment or supplement to FBR for review and comment; promptly following receipt from the Commission, provide to FBR copies of any comments made by the

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staff of the Commission relating to such Registration Statement and the Partnership's responses thereto for review and comment; and, in the case of the Mandatory Shelf Registration Statement, use its commercially reasonable efforts to cause such Mandatory Shelf Registration Statement to become effective as soon as practicable after filing and to remain effective as set forth in Section 2(a)(i);

(b) subject to Section 4(i), (i) prepare and file with the Commission such amendments and post-effective amendments to each such Registration Statement as may be necessary to keep such Registration Statement effective for the period described in Section 2(a)(i), (ii) cause each Prospectus contained therein to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 or any similar rule that may be adopted under the Securities Act, (iii) promptly and in any event within 10 calendar days after the filing thereof amend or supplement each such Registration Statement to include the Partnership's quarterly and annual financial information and other material developments (until the Partnership is eligible to incorporate such information by reference into the Registration Statement), during which time sales of the Registrable Securities under the Registration Statement will be suspended until such amendment or supplement is filed and effective, and (iv) comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by each Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the selling Holders thereof;

(c) furnish to each Holder and to each underwriter in any Underwritten Offering, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as any party may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Units; the Partnership hereby consents to the use of such Prospectus, including each preliminary Prospectus, by the Holders, if any, in connection with the offering and sale of the Registrable Units covered by any such Prospectus;

(d) use its reasonable best efforts to register or qualify, or obtain exemption from registration or qualification for, all Registrable Units by the time the applicable Registration Statement is declared effective by the Commission under all applicable state securities or "blue sky" laws of such jurisdictions as FBR or any Holder covered by a Registration Statement shall reasonably request in writing, keep each such registration or qualification or exemption effective for as long as such Registration Statement is required to be kept effective pursuant to this Agreement and do any and all other acts and things that may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Units owned by such Holder; provided, however, that the Partnership shall not be required to (i) qualify generally to do business in any jurisdiction or to register as a broker or dealer in such jurisdiction where it would not otherwise be required to qualify but for this Section 4(d), (ii) subject itself to taxation in any such jurisdiction, or (iii) submit to the general service of process in any such jurisdiction;

(e) use its reasonable best efforts to cause all Registrable Units covered by such Registration Statement to be registered and approved by such other governmental agencies or authorities, if any, as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Units;

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(f) notify FBR and each Holder with Registrable Units covered by a Registration Statement promptly and, if requested by FBR or any such Holder, confirm such advice in writing (i) when such Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose, (iii) of any request by the Commission or any other federal, state, or foreign governmental authority for amendments or supplements to such Registration Statement or related Prospectus or for additional information, (iv) of the happening of any event during the period such Registration Statement is effective as a result of which such Registration Statement or the related Prospectus or any document incorporated by reference therein contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading (which information shall be accompanied by an instruction to suspend the use of the Registration Statement and the Prospectus until the requisite changes have been made) and (v) at the request of any such Holder, promptly to furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such Prospectus prepared in accordance with Section 4(i);

(g) during the period of time referred to in Section 2(a)(i), use its reasonable best efforts to avoid the issuance of, or if issued, to obtain the withdrawal of, any order enjoining or suspending the use or effectiveness of a Registration Statement or suspending the qualification (or exemption from qualification) of any of the Registrable Units for sale in any jurisdiction, as promptly as practicable;

(h) upon request, furnish to each requesting Holder with Registrable Units covered by a Registration Statement, without charge, at least one conformed copy of such Registration Statement and any post-effective amendment or supplement thereto (without documents incorporated therein by reference or exhibits thereto, unless requested);

(i) except as provided in Section 5, upon the occurrence of any event contemplated by Section 4(f)(iv), use its reasonable best efforts to promptly prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Units, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, upon request, promptly furnish to each requesting Holder covered by such Registration Statement a reasonable number of copies of each such supplement or post-effective amendment;

(j) if requested by the representative of the underwriters, if any, or any Holders of Registrable Units being sold in connection with such offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such material information as the representative of the underwriters, if any, or such Holders indicate relates to them or otherwise reasonably request be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Partnership has

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received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment;

(k) in the case of an Underwritten Offering with reasonably anticipated gross proceeds of at least $15 million, use its reasonable best efforts to furnish or caused to be furnished to each Holder of Registrable Units covered by such Registration Statement and the underwriters a signed counterpart, addressed to each such Holder (to the extent customarily so addressed) and the underwriters, of: (i) an opinion of counsel for the Partnership, dated the date of each closing under the underwriting agreement, reasonably satisfactory to the underwriters; and (ii) a "comfort" letter, dated the effective date of such Registration Statement and the date of each closing under the underwriting agreement, signed by the independent public accountants who have certified the Partnership's financial statements included in such Registration Statement, covering substantially the same matters with respect to such Registration Statement (and the Prospectus included therein) and with respect to events subsequent to the date of such financial statements, as are customarily covered in accountants' letters delivered to underwriters in underwritten public offerings of securities, and such other financial matters as the underwriters may reasonably request and customarily obtained by underwriters in underwritten offerings, provided that, to be an addressee of the comfort letter, each Holder may be required to confirm that it is in the category of persons to whom a comfort letter may be delivered in accordance with applicable accounting literature;

(l) enter into customary agreements (including in the case of an Underwritten Offering, an underwriting agreement in customary form) and take all other action in connection therewith to expedite or facilitate the distribution of the Registrable Units included in such Registration Statement and, in the case of an Underwritten Offering, make representations and warranties to the underwriters in such form and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same to the extent customary if and when requested;

(m) in the case of an Underwritten Offering with reasonably anticipated gross proceeds of at least $15 million, use its reasonable best efforts to make available for inspection by the representatives of the Holders and the representative of any underwriters participating in any disposition pursuant to a Registration Statement, and any special counsel or accountants retained by such Holders or underwriters, all financial and other records, pertinent corporate documents and properties of the Partnership and cause the respective officers, directors and employees of the Partnership to supply all information reasonably requested by any such representatives, the representative of the underwriters, counsel thereto or accountants in connection with a Registration Statement; provided, however, that such records, documents or information that the Partnership determines, in good faith, to be confidential and notifies such representatives, representative of the underwriters, counsel thereto or accountants are confidential shall not be disclosed by the representatives, representative of the underwriters, counsel thereto or accountants unless (i) the disclosure of such records, documents or information is necessary to avoid or correct a misstatement or omission in a Registration Statement or Prospectus,
(ii) the release of such records, documents or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such records, documents or information have been generally made available to the public;

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(n) use its commercially reasonable efforts (including curing the listing or inclusion application for any deficiencies cited by the relevant exchange or market) to list or include all Registrable Units on the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market (if the Partnership meets the listing criteria for any such exchange or market);

(o) prepare and file in a timely manner all documents and reports required by the Exchange Act and, to the extent the Partnership's obligation to file such reports pursuant to Section 15(d) of the Exchange Act expires prior to the expiration of the effectiveness period of the Registration Statement as required by Section 2(a)(i), the Partnership shall register the Registrable Units under the Exchange Act and shall maintain such registration through the effectiveness period required by Section 2(a)(i);

(p) provide a CUSIP number for all Registrable Units not later than the effective date of the Registration Statement;

(q) (i) otherwise use its reasonable best efforts to comply in all material respects with all applicable rules and regulations of the Commission, (ii) make generally available to its stockholders, as soon as reasonably practicable, earnings statements covering at least 12 months that satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder, and (iii) delay filing any Registration Statement or Prospectus or amendment or supplement to such Registration Statement or Prospectus to which any Holder of Registrable Units covered by any such Registration Statement shall have reasonably objected on the grounds that such Registration Statement or Prospectus or amendment or supplement does not comply in all material respects with the requirements of the Securities Act, such Holder having been furnished with a copy thereof at least three Business Days before the filing thereof, provided that the Partnership may file such Registration Statement or Prospectus or amendment or supplement following such time as the Partnership shall have made a good faith effort to resolve any such issue with the objecting Holder and shall have advised the Holder in writing of its reasonable belief that such filing complies in all material respects with the requirements of the Securities Act;

(r) cause to be maintained a registrar and transfer agent for all Registrable Units covered by any Registration Statement from and after a date not later than the effective date of such Registration Statement;

(s) in connection with any sale or transfer of the Registrable Units (whether or not pursuant to a Registration Statement) that will result in the securities being delivered no longer constituting Registrable Units, cooperate with the Holders and the representative of the underwriters, if any, to facilitate the timely preparation and delivery of certificates representing the Registrable Units to be sold, which certificates shall not bear any transfer restrictive legends (other than as required by the Partnership's charter), and to enable such Registrable Units to be in such denominations and registered in such names as the representative of the underwriters, if any, or the Holders may request at least three Business Days prior to any sale of the Registrable Units; provided, however, that such Holder has provided the Partnership with any documents that are reasonably requested by the Partnership;

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(t) if required under the rules of the NASD, in connection with the initial filing of a Shelf Registration Statement and each amendment thereto with the Commission pursuant to Section 2(a), prepare and file with the NASD all forms and information required or requested by the NASD in order to obtain written confirmation from the NASD that the NASD does not object to the fairness and reasonableness of the underwriting terms and arrangements (or any deemed underwriting terms and arrangements) (each such written confirmation, a "NO OBJECTIONS LETTER") relating to the resale of Registrable Units pursuant to the Shelf Registration Statement, including, without limitation, information provided to the NASD through its COBRADesk system, and pay all costs, fees and expenses incident to the NASD's review of the Shelf Registration Statement and the related underwriting terms and arrangements, including, without limitation, all filing fees associated with any filings or submissions to the NASD and the legal expenses, filing fees and other disbursements of FBR and any other NASD member that is the holder of, or is affiliated or associated with an owner of, Registrable Units included in the Shelf Registration Statement (including in connection with any initial or subsequent member filing); and

(u) upon effectiveness of the first Registration Statement filed under this Agreement, the Partnership will take such actions and make such filings as are necessary to effect the registration of the Units under the Exchange Act simultaneously with or immediately following the effectiveness of the Registration Statement.

The Partnership may require the Holders to furnish to the Partnership such information regarding the proposed distribution by such Holder as the Partnership may from time to time reasonably request in writing or as shall be required to effect the registration of the Registrable Units, and no Holder shall be entitled to be named as a selling stockholder in any Registration Statement and no Holder shall be entitled to use the Prospectus forming a part thereof if such Holder does not provide such information to the Partnership. Each Holder further agrees to furnish promptly to the Partnership in writing all information required from time to time to make the information previously furnished by such Holder not misleading.

Each Holder agrees that, upon receipt of any notice from the Partnership of the happening of any event of the kind described in Section 4(f)(ii), 4(f)(iii) or 4(f)(iv), such Holder will immediately discontinue disposition of Registrable Units pursuant to a Registration Statement until (i) any such stop order is vacated or (ii) if an event described in Section 4(f)(iii) or 4(f)(iv) occurs, such Holder's receipt of the copies of the supplemented or amended Prospectus. If so directed by the Partnership, such Holder will deliver to the Partnership (at the reasonable expense of the Partnership) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Units current at the time of receipt of such notice.

5. Suspension Period.

(a) Subject to the provisions of this Section 5, following the effectiveness of a Registration Statement (and the filings with any international, federal or state securities commissions), the Partnership may direct the Holders, in accordance with Section 5(b), to suspend sales of the Registrable Units pursuant to a Registration Statement for such times as the Partnership reasonably may determine is necessary and advisable (but in no event, (A) in the

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case of clause (i) below, for more than 60 consecutive days and (B) in the case of clauses (i), (ii) and (iii) below, for more than an aggregate of 90 days in any consecutive 12-month period commencing on the Closing Date or more than 60 days in any consecutive 90-day period, except (in the case of clause (B)) as a result of a review of any post-effective amendment by the Commission prior to declaring any post-effective amendment to the Registration Statement effective, provided that the Partnership has used its commercially reasonable efforts to cause such post-effective amendment to be declared effective), so long as in each of the following cases (1) the Prior Holders and (2) the Holders under the FBR Mandatory Registration Statement and the Holders Mandatory Registration Statement, if applicable, are given a substantially similar notice and are required to suspend sales for the same period, if any of the following events shall occur: (i) except with respect to an initial public offering governed by
Section 8, the representative of the underwriters of an Underwritten Offering of primary units by the Partnership has advised the Partnership that the sale of Registrable Units pursuant to such Registration Statement would have a material adverse effect on such Underwritten Offering; (ii) the majority of the members of the Board of Directors of the GP shall have determined in good faith that (1) the offer or sale of any Registrable Units would materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, merger, tender offer, business combination, corporate reorganization, consolidation or other significant transaction involving the Partnership, (2) upon the advice of counsel, the sale of Registrable Units pursuant to such Registration Statement would require disclosure of non-public material information not otherwise required to be disclosed under applicable law, or (3) either (x) the Partnership has a bona fide business purpose for preserving the confidentiality of such transaction, (y) disclosure would have a material adverse effect on the Partnership or the Partnership's ability to consummate such transaction, or (z) the proposed transaction renders the Partnership unable to comply with Commission requirements, in each case under circumstances that would make it impractical or inadvisable to cause the Registration Statement (or such filings) to become effective or to promptly amend or supplement the Registration Statement on a post-effective basis, as applicable; or (iii) the majority of the members of the Board of Directors of the Partnership shall have determined in good faith that it is required by law, rule or regulation or Commission published release or interpretation to supplement the Registration Statement or file a post-effective amendment to the Registration Statement in order to incorporate information into the Registration Statement including for the purpose of (1) including in the Registration Statement any prospectus required under Section 10(a)(3) of the Securities Act; (2) reflecting in the prospectus included in the Registration Statement any facts or events arising after the effective date of the Registration Statement (or of the most-recent post-effective amendment) that, individually or in the aggregate, represents a fundamental change in the information set forth therein; or (3) including in the prospectus included in the Registration Statement any material information with respect to the plan of distribution not disclosed in the Registration Statement or any material change to such information. Upon the occurrence of any such suspension, the Partnership shall use its reasonable best efforts to cause the Registration Statement to become effective or to promptly amend or supplement the Registration Statement on a post-effective basis or to take such action as is necessary to make resumed use of the Registration Statement compatible with the Partnership's best interests, as applicable, so as to permit the Holders to resume sales of the Registrable Units as soon as possible.

(b) In the case of an event that causes the Partnership to suspend the use of a Registration Statement (a "SUSPENSION EVENT"), the Partnership shall give written notice (a

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"SUSPENSION NOTICE") to FBR and the Holders to suspend sales of the Registrable Units included in such Registration Statement and such notice shall continue only for so long as the Suspension Event or its effect is continuing. No Holder shall effect any sales of the Registrable Units pursuant to such Registration Statement (or such filings) at any time after it has received a Suspension Notice from the Partnership and prior to receipt of an End of Suspension Notice (as defined below) with respect to such Registration Statement. If so directed by the Partnership, each Holder will deliver to the Partnership (at the expense of the Partnership) all copies other than permanent file copies then in such Holder's possession of the Prospectus covering the Registrable Units at the time of receipt of the Suspension Notice. The Holders may recommence effecting sales of the Registrable Units pursuant to such Registration Statement (or such filings) following further notice to such effect (an "END OF SUSPENSION NOTICE") from the Partnership, which End of Suspension Notice shall be given by the Partnership to the Holders and FBR in the manner described above promptly following the conclusion of any Suspension Event and its effect.

(c) Notwithstanding any provision herein to the contrary, subject to any Suspension Events or as contemplated by Section 4(f)(iv), each Registration Statement shall be maintained effective pursuant to this Agreement until the Registrable Units are not Registrable Units.

6. Indemnification and Contribution.

(a) The Partnership agrees to indemnify and hold harmless (i) FBR, each Holder and any underwriter (as determined in the Securities Act) for such Holder (including, if applicable, FBR), (ii) each Person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act) any of the foregoing (a "CONTROLLING PERSON"), and (iii) the respective officers, directors, partners, members, employees, representatives and agents of any such Person or any Controlling Person (any Person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "PURCHASER INDEMNITEE") from and against any and all losses, claims, damages, judgments, actions, reasonable out-of-pocket expenses, and other liabilities, including, as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of outside counsel to any Purchaser Indemnitee, joint or several (the "LIABILITIES"), directly or indirectly related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (as amended or supplemented if the Partnership shall have furnished to such Purchaser Indemnitee any amendments or supplements thereto), or any preliminary Prospectus or any other document which document is used in connection with the offering of Registrable Units pursuant to this Agreement, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus, in light of the circumstances under which they were made), not misleading, except insofar as such Liabilities arise out of or are based upon
(i) any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Purchaser Indemnitee furnished to the Partnership or any underwriter in writing by such Purchaser Indemnitee expressly for use therein, or (ii) any sales by any Holder after the delivery by the Partnership to such Holder of a Suspension Notice and before the delivery by the Partnership of an End of Suspension Notice. The Partnership shall notify the Holders promptly

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of the institution, threat or assertion of any claim, proceeding (including any governmental investigation), or litigation which it shall have become aware in connection with the matters addressed by this Agreement which involves the Partnership or a Purchaser Indemnitee. The indemnity provided for herein shall remain in full force and effect regardless of any investigation made by or on behalf of any Purchaser Indemnitee.

(b) In connection with any Registration Statement in which a Holder is participating, such Holder agrees, severally and not jointly, to indemnify and hold harmless FBR, the Partnership, each Person who controls the Partnership or FBR within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and the respective officers, directors, partners, members, representatives, employees and agents of such Person or Controlling Person to the same extent as the foregoing indemnity from the Partnership to each Purchaser Indemnitee, but only with reference to (i) untrue statements or omissions or alleged untrue statements or omissions made in reliance upon and in strict conformity with information relating to such Holder furnished to the Partnership in writing by such Holder expressly for use in any Registration Statement or Prospectus, any amendment or supplement thereto, or any preliminary Prospectus and (ii) any sales by any Holder after the delivery by the Partnership to such Holder of a Suspension Notice and before the delivery by the Partnership of an End of Suspension Notice. The liability of any Holder pursuant to clause (i) of the immediately preceding sentence shall in no event exceed the net proceeds received by such Holder from sales of Registrable Units giving rise to such obligations. If a Holder elects to include Registrable Units in an Underwritten Offering, the Holder shall be required to agree to such customary indemnification provisions as may reasonably be required by the underwriter in connection with such Underwritten Offering.

(c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to Section 6(a) or 6(b), such Person (the "INDEMNIFIED PARTY"), shall promptly notify the Person against whom such indemnity may be sought (the "INDEMNIFYING PARTY"), in writing (to the extent legally advisable) of the commencement thereof (but the failure to so notify an Indemnifying Party shall not relieve it from any Liability which it may have under this Section 6, except to the extent the Indemnifying Party is materially prejudiced by the failure to give notice), and the Indemnifying Party, upon request of the Indemnified Party, shall retain counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party and any others the Indemnifying Party may reasonably designate in such proceeding and shall assume the defense of such proceeding and pay the fees and expenses actually incurred by such counsel related to such proceeding. Notwithstanding the foregoing, in any such proceeding, any Indemnified Party may retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed in writing to the contrary, (ii) the Indemnifying Party failed within a reasonable time after notice of commencement of the action to assume the defense and employ counsel reasonably satisfactory to the Indemnified Party, (iii) the Indemnifying Party and its counsel do not pursue in a reasonable manner the defense of such action or (iv) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, or any Affiliate of the Indemnifying Party, and such Indemnified Party shall have been reasonably advised by counsel that, either (x) there may be one or more legal defenses available

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to it which are different from or additional to those available to the Indemnifying Party or such Affiliate of the Indemnifying Party or (y) a conflict may exist between such Indemnified Party and the Indemnifying Party or such Affiliate of the Indemnifying Party, in which event the Indemnifying Party may not assume or direct the defense of such action on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or separate but substantially similar or related actions arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Indemnified Parties, which firm shall be designated in writing by those Indemnified Parties who sold a majority of the Registrable Units sold by all such Indemnified Parties and any such separate firm for the Partnership, the directors, the officers and such control Persons of the Partnership as shall be designated in writing by the Partnership. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final non-appealable judgment for the plaintiff, the Indemnifying Party agrees to indemnify any Indemnified Party from and against any Liability by reason of such settlement or judgment to the extent provided in this Section 6 without reference to this sentence. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all Liability on claims that are the subject matter of such proceeding.

(d) If the indemnification provided for in Section 6(a) or 6(b) is for any reason held to be unavailable to an Indemnified Party in respect of any Liabilities referred to therein (other than by reason of the exceptions provided therein) or is insufficient to hold harmless a party indemnified thereunder, then each Indemnifying Party under such sections, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Liabilities (i) in such proportion as is appropriate to reflect the relative benefits of the Indemnified Party on the one hand and the Indemnifying Parties on the other in connection with the statements or omissions that resulted in such Liabilities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Indemnifying Parties and the Indemnified Party, as well as any other relevant equitable considerations. The relative fault of the Partnership, on the one hand, and any Purchaser Indemnitees, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Partnership or by such Purchaser Indemnitees and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

(e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation (even if such Indemnified Parties were treated as one entity for such purpose), or by any other method of allocation that does not take account of the equitable considerations referred to in Section 6(d). The amount paid or payable by an Indemnified Party as a result of any Liabilities referred to in Section 6(d) shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses

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actually incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this
Section 6, in no event shall a Purchaser Indemnitee be required to contribute any amount in excess of the amount by which proceeds received by such Purchaser Indemnitee from sales of Registrable Units exceeds the amount of any damages that such Purchaser Indemnitee has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 6, each Person, if any, who controls (within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act) FBR or a Holder shall have the same rights to contribution as FBR or such Holder, as the case may be, and each Person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act) the Partnership, and each officer, director, partner, member, employee, representative, agent or manager of the Partnership shall have the same rights to contribution as the Partnership. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 6 or otherwise, except to the extent that any party is materially prejudiced by the failure to give notice. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

(f) The indemnity and contribution agreements contained in this Section 6 will be in addition to any Liability which any Indemnifying Party may otherwise have to any Indemnified Party referred to above. Each Purchaser Indemnitee's obligations to contribute pursuant to this Section 6 are not joint but are several in the proportion that the number of Units sold by such Purchaser Indemnitee bears to the number of Units sold by all Purchaser Indemnities.

7. Registration Defaults.

(a) Additional payments ("ADDITIONAL PAYMENTS") with respect to the Units shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iii) below being herein called a "REGISTRATION DEFAULT"):

(i) either a Mandatory Shelf Registration Statement has not been (A) filed with the Commission before May 15, 2006 or (B) declared effective by the Commission within 180 days of the filing thereof (provided that (x) if a majority of the Independent Directors (as defined in the Amended and Restated Agreement of Limited Partnership of the Partnership) determine in good faith that causing the Mandatory Shelf Registration Statement to comply with the requirements as to acquired company financial statements included in Section 3-05 and Article 11 of Regulation S-X under the Securities Act would materially impede, delay or interfere with a proposed acquisition, then the date required for effectiveness of the Mandatory Shelf Registration Statement may be extended for not more than 60 days, and (y) in such event, the Partnership has given notice of such determination to the Holders five days after it is made);

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(ii) the Partnership fails, with respect to a Holder that supplies a Notice and Questionnaire described in Section 2(a)(iii), to cause an amendment to the already effective Mandatory Shelf Registration Statement to be filed or, if permitted by the Commission, to prepare a Prospectus supplement to such Mandatory Shelf Registration Statement and distribute such supplement to Holders, in each case within the time period set forth in Section 2(a)(iii) to name such Holder as an additional selling securityholder; or

(iii) any Mandatory Shelf Registration Statement is declared effective by the Commission but (A) a Mandatory Shelf Registration Statement thereafter ceases to be effective during the period contemplated by Section 2(a)(i) or (B) as specified in Section 5(a), a Mandatory Shelf Registration Statement or the Prospectus ceases to be usable in connection with resales of Registrable Units during the periods specified herein and the Partnership fails to (1) cure such Mandatory Shelf Registration Statement within five business days by a post-effective amendment or a report filed pursuant to the Exchange Act or (2) if applicable, terminate the suspension period described in
Section 5(a) by the 60th day.

Each of the foregoing will constitute a Registration Default whatever the reason for any such event and whether it is voluntary or involuntary or is beyond the Partnership's control or pursuant to operation of law or as a result of any action or inaction by the Commission.

(b) Additional Payments shall accrue on the Units from and including the date on which any such Registration Default occurs to but excluding the date on which all such Registration Defaults have been cured, at the rate of $0.085 per Unit ($0.17 with respect to Registration Defaults under
Section 7(a)(i)(A)) per annum (subject to adjustment for splits, recombinations and similar matters); provided, however, that in no event shall Additional Payments accrue on any Units for more than one Registration Default at any one time, and in the case of a Registration Default the Partnership's obligation to pay Additional Payments extends only to the affected Registrable Units. Except as described in Section
7(c), other than the obligation to pay Additional Payments, the Partnership will have no other liabilities for monetary damages with respect to its registration obligations. With respect to each Holder, the Partnership's obligations to pay Additional Payments remain in effect only so long as the securities held by the Holder are Registrable Units.

(c)

(i) Notwithstanding any other provision of this Agreement, if the Holders Mandatory Registration Statement is not filed within 240 days of the date hereof, in lieu of the right to receive Additional Payments, the Holders may appoint a majority of the GP's Board of Directors (the "BOARD"). The Partnership must provide notice of such failure to file the Registration Statement within 245 days of the date hereof to the ten Holders hereunder having the greatest "beneficial ownership" (as defined under Section 13d-3 and 13d-5 under the

22

Exchange Act) of Registrable Units. Such Holders may serve on a committee to propose individuals to serve on the Board. The Holders who elect to serve on such committee shall meet within 255 days of the date hereof to nominate individuals to serve on the Board. The committee's vote shall be made based on the number of Units the applicable members "beneficially own." Committee meetings may be in person or telephonically.

(ii) If members of such committee beneficially own greater than 50% of the Registrable Units, the members of such committee having beneficial ownership of greater than 50% of the Registrable Units may directly appoint the members of the Board. If members of such committee holding greater than 50% of the Registrable Units cannot agree on Board members, within 15 days of the date of the nomination of individuals to serve on the Board, the GP shall deliver proxies to Holders as of the 240th day after the date hereof who shall vote on such nominees. Such Holders may act with respect to such matters in person or by proxy. It shall take the approval of a majority of the Holders of Registrable Units present in person or by proxy to select Board members. Holders beneficially owning greater than 50% of the Registrable Units may also act by written consent. If an insufficient number of individuals receive the affirmative vote of the majority of the Registrable Units to constitute a majority of the Board, then no members shall be elected and Additional Payments shall continue to be due.

8. Market Stand-off Agreement.

Each Holder hereby agrees that it shall not, to the extent requested by the Partnership or an underwriter of securities of the Partnership, directly or indirectly sell, offer to sell (including without limitation any short sale), grant any option or otherwise transfer or dispose of any Registrable Units or other Units or any securities convertible into or exchangeable or exercisable for Units then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for 75 days following the effective date of a registration statement (other than the Mandatory Shelf Registration Statement) for an initial public offering of securities by the Partnership filed under the Securities Act (an "IPO REGISTRATION STATEMENT"); provided, however, that:

(a) the restrictions above shall not apply to Registrable Units sold pursuant to the IPO Registration Statement;

(b) all Prior Holders, and all executive officers and directors of the Legacy Entities then holding Units or securities convertible into or exchangeable or exercisable for Units are subject to the same restrictions for the entire time period required of the Holders hereunder;

(c) the Holders shall be allowed any concession or proportionate release allowed to any officer or director that entered into similar agreements (with such proportion being determined by dividing the number of Units being released with respect to such officer or director by the total number of Units held by such officer or director); provided, that nothing in this Section 7(c) shall be construed as a right to proportionate release for the executive officers

23

and directors of the Legacy Entities upon the expiration of the 75-day period applicable to all Holders other than the executive officers and directors of the Legacy Entities.

To enforce the foregoing covenant, the Partnership may place restrictive legends on the certificates representing the securities subject to this Section 8 and to impose stop transfer instructions with respect to the Registrable Units and such other securities of each Holder (and the securities of every other Person subject to the foregoing restriction) until the end of such period.

9. Termination of the Partnership's Obligations.

The Partnership shall have no further obligations pursuant to this Agreement at such time as no Registrable Units are outstanding after their original issuance, provided, however, that the Partnership's obligations under Sections 6 and 11 (and any related definitions) shall remain in full force and effect following such time.

10. Limitations on Subsequent Registration Rights.

From and after the date of this Agreement, the Partnership shall not, without the prior written consent of the Holders of a majority of the Registrable Units of such Holders that are not Affiliates of the Partnership, enter into any agreement with any holder or prospective holder of any securities of the Partnership that would allow such holder or prospective holder to include such securities in a Holders Mandatory Shelf Registration Statement or, except as provided herein and in the Founders Registration Rights Agreement with respect to Holders and Prior Holders, the IPO Registration Statement, if any, filed pursuant to the terms hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities on such Holders Mandatory Shelf Registration Statement or such IPO Registration Statement only to the extent that the inclusion of such securities will not reduce the amount of Registrable Units of the Holders that is included on the Holders Mandatory Shelf Registration Statement or such IPO Registration Statement. From and after the date of this Agreement, the Partnership shall not, without the prior written consent of FBR or FBR Merchant Banking, enter into any agreement with any holder or prospective holder or any securities of the Partnership that would allow such holder or prospective holder to include such securities in the FBR Mandatory Shelf Registration Statement.

11. Miscellaneous.

(a) Remedies. In the event of a breach by the Partnership of any of its obligations under this Agreement, each Holder, in addition to being entitled to exercise all rights provided herein or, in the case of FBR, in the Placement Agreement, or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. Subject to Section 7, the Partnership agrees that monetary damages would not be adequate compensation for any loss incurred because of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.

(b) Amendments and Waivers. This Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be

24

given, without the written consent of the Partnership and Holders beneficially owning a majority of the Registrable Units; provided, however, that for purposes of this Agreement, Registrable Units owned, directly or indirectly, by an Affiliate of the Partnership shall not be deemed to be outstanding. Notwithstanding the foregoing, a waiver or consent to or departure from the provisions hereof with respect to a matter that relates exclusively to (i) a Holders Mandatory Shelf Registration Statement or FBR Mandatory Shelf Registration Statement may be given only with the consent of a majority of Registrable Units covered thereby and (ii) the rights of a Holder whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders may be given by such Holder; provided that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence.

(c) Notices. All notices and other communications, provided for or permitted hereunder shall be made in writing and delivered by facsimile (with receipt confirmed), overnight courier or registered or certified mail, return receipt requested, or by telegram, addressed as follows:

(i) if to a Holder, at the most current address given by the transfer agent and registrar of the Units to the Partnership;

(ii) if to the Partnership, at the offices of the Partnership at 303 W. Wall Street, Suite 1600, Midland, Texas 79701; Attention: Steven H. Pruett (facsimile (432) 686-8318); with a copy (which shall not constitute notice) to Andrews Kurth LLP, 600 Travis St., Suite 4200, Houston, Texas 77002, Attention:
James Baird (facsimile (713) 238-7120); and

(iii) if to FBR, at the offices of FBR at 1001 19th Street North, Arlington, Virginia 22209, Attention: William Ginivan, Esq. (facsimile (804) 788-8218); with a copy (which shall not constitute notice) to Akin Gump Strauss Hauer & Feld LLP, 1111 Louisiana St., Houston, Texas 77002, Attention: Julien Smythe, Esq. and Vince Kendrick, Esq. (facsimile (713) 236-0822).

(d) Successors and Assigns; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto and shall inure to the benefit of each Holder. The Partnership agrees that the Holders shall be third party beneficiaries to the agreements made hereunder by FBR and the Partnership, and each Holder shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder; provided, however, that such Holder fulfills all of its obligations hereunder.

(e) No Inconsistent Terms. Each Legacy Entity represents, warrants and agrees that (i) the rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of any other outstanding securities issued or guaranteed by the Partnership under any other agreement and (ii) the Partnership has not entered into any agreement that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.

25

(f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK OR THE SUPREME COURT OF THE STATE OF NEW YORK OR SITTING IN NEW YORK COUNTY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(h) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties hereto that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

(i) Entire Agreement. This Agreement, together with the Placement Agreement, is intended by the parties hereto as a final expression of their agreement, and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. All of the obligations, agreements, covenants, representations and warranties under the engagement letter dated March 6, 2006, between the Partnership and FBR (the "ENGAGEMENT LETTER") shall survive the execution, delivery and termination and the performance of this Agreement and the consummation of the transactions contemplated hereby without any modification thereof; provided, that to the extent there is a conflict between the provisions of the Engagement Letter and the provisions of this Agreement, this Agreement shall prevail to that extent.

(j) Registrable Units Held by the Partnership or its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Units is required hereunder,

26

Registrable Units (or securities convertible into Registrable Units) held by the Partnership or Affiliates of the Partnership shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.

(k) Survival. This Agreement is intended to survive the consummation of the transactions contemplated by the Placement Agreement. The indemnification and contribution obligations under Section 6 shall survive the termination of the Partnership's obligations under Section 2.

(l) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the provisions of this Agreement. All references made in this Agreement to "Section" refer to such
Section of this Agreement, unless expressly stated otherwise.

(m) Adjustment for Splits, etc. Wherever in this Agreement there is a reference to a specific number of equity interests with respect to any securities, then upon the occurrence of any subdivision, combination, or dividend of such equity interests, the specific number of equity interests with respect to any securities so referenced in this Agreement shall automatically be proportionally adjusted to reflect the effect on the outstanding equity interests of such class or series of partner interest by such subdivision, combination, or dividend.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

27

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

LEGACY RESERVES LP

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    -------------------------------------
Name:  Steven H. Pruett
Title: President, Chief Financial Officer
       and Secretary

LEGACY RESERVES GP, LLC 

By: /s/ Steven H. Pruett
    -------------------------------------
Name:  Steven H. Pruett
Title: President, Chief Financial Officer
       and Secretary

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
(for the benefit of the Holders) 

By: /s/ James R. Kleeblatt
    -------------------------------------
Name:   James R. Kleeblatt
      -----------------------------------
Title:  Senior Managing Director
       ----------------------------------

Signature Page - Registration Rights Agreement

Exhibit 10.1

EXECUTION COPY

CREDIT AGREEMENT

DATED AS OF
MARCH 15, 2006

AMONG

LEGACY RESERVES LP,
AS BORROWER,

BNP PARIBAS,
AS ADMINISTRATIVE AGENT,

AND

THE LENDERS PARTY HERETO

SOLE LEAD ARRANGER AND BOOK RUNNER

BNP PARIBAS

TABLE OF CONTENTS 

                                                                            PAGE
                                                                            ----
                                    ARTICLE I
                       DEFINITIONS AND ACCOUNTING MATTERS

Section 1.01  Terms Defined Above........................................     1
Section 1.02  Certain Defined Terms......................................     1
Section 1.03  Types of Loans and Borrowings..............................    19
Section 1.04  Terms Generally............................................    19
Section 1.05  Accounting Terms and Determinations; GAAP..................    19

                                   ARTICLE II
                                   THE CREDITS

Section 2.01  Commitments................................................    19
Section 2.02  Loans and Borrowings.......................................    20
Section 2.03  Requests for Borrowings....................................    21
Section 2.04  Interest Elections.........................................    21
Section 2.05  Funding of Borrowings......................................    23
Section 2.06  Termination and Reduction of Aggregate Maximum Credit
              Amounts....................................................    23
Section 2.07  Borrowing Base.............................................    24
Section 2.08  Letters of Credit..........................................    26

                                   ARTICLE III
              PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES

Section 3.01  Repayment of Loans.........................................    30
Section 3.02  Interest...................................................    31
Section 3.03  Alternate Rate of Interest.................................    31
Section 3.04  Prepayments................................................    32
Section 3.05  Fees.......................................................    33

                                   ARTICLE IV
               PAYMENTS; PRO RATA TREATMENT; SHARING OF SET-OFFS.

Section 4.01  Payments Generally; Pro Rata Treatment; Sharing of
              Set-offs...................................................    34
Section 4.02  Presumption of Payment by the Borrower.....................    35
Section 4.03  Certain Deductions by the Administrative Agent.............    35

                                    ARTICLE V
           INCREASED COSTS; BREAK FUNDING PAYMENTS; TAXES; ILLEGALITY

Section 5.01  Increased Costs............................................    36
Section 5.02  Break Funding Payments.....................................    37
Section 5.03  Taxes......................................................    37
Section 5.04  Designation of Different Lending Office....................    38
Section 5.05  Illegality.................................................    38

i 
                                   ARTICLE VI
                              CONDITIONS PRECEDENT

Section 6.01  Effective Date.............................................    39
Section 6.02  Each Credit Event..........................................    41

                                   ARTICLE VII
                         REPRESENTATIONS AND WARRANTIES

Section 7.01  Organization; Powers.......................................    42
Section 7.02  Authority; Enforceability..................................    42
Section 7.03  Approvals; No Conflicts....................................    42
Section 7.04  Financial Position; No Material Adverse Change.............    42
Section 7.05  Litigation.................................................    43
Section 7.06  Environmental Matters......................................    43
Section 7.07  Compliance with the Laws and Agreements; No Defaults.......    44
Section 7.08  Investment Company Act.....................................    44
Section 7.09  Taxes......................................................    45
Section 7.10  ERISA......................................................    45
Section 7.11  Disclosure; No Material Misstatements......................    46
Section 7.12  Insurance..................................................    46
Section 7.13  Restriction on Liens.......................................    46
Section 7.14  Subsidiaries...............................................    46
Section 7.15  Location of Business and Offices...........................    47
Section 7.16  Properties; Titles, Etc....................................    47
Section 7.17  Maintenance of Properties..................................    48
Section 7.18  Gas Imbalances, Prepayments................................    48
Section 7.19  Marketing of Production....................................    48
Section 7.20  Swap Agreements............................................    49
Section 7.21  Use of Loans and Letters of Credit.........................    49
Section 7.22  Solvency...................................................    49

                                  ARTICLE VIII
                              AFFIRMATIVE COVENANTS

Section 8.01  Financial Statements; Ratings Change; Other Information....    49
Section 8.02  Notices of Material Events.................................    52
Section 8.03  Existence; Conduct of Business.............................    52
Section 8.04  Payment of Obligations.....................................    53
Section 8.05  Performance of Obligations under Loan Documents............    53
Section 8.06  Operation and Maintenance of Properties....................    53
Section 8.07  Insurance..................................................    54
Section 8.08  Books and Records; Inspection Rights.......................    54
Section 8.09  Compliance with Laws.......................................    54
Section 8.10  Environmental Matters......................................    54
Section 8.11  Further Assurances.........................................    55
Section 8.12  Reserve Reports............................................    56
Section 8.13  Title Information..........................................    56
Section 8.14  Additional Collateral; Additional Guarantors...............    57
Section 8.15  ERISA Compliance...........................................    58

ii 
Section 8.16  Marketing Activities.......................................    58

                                   ARTICLE IX
                               NEGATIVE COVENANTS

Section 9.01  Financial Covenants........................................    59
Section 9.02  Debt.......................................................    59
Section 9.03  Liens......................................................    60
Section 9.04  Dividends, Distributions and Redemptions...................    60
Section 9.05  Investments, Loans and Advances............................    60
Section 9.06  Nature of Business.........................................    61
Section 9.07  Limitation on Leases.......................................    61
Section 9.08  Proceeds of Notes..........................................    62
Section 9.09  ERISA Compliance...........................................    62
Section 9.10  Sale or Discount of Receivables............................    63
Section 9.11  Mergers, Etc...............................................    63
Section 9.12  Sale of Properties.........................................    63
Section 9.13  Environmental Matters......................................    64
Section 9.14  Transactions with Affiliates...............................    64
Section 9.15  Subsidiaries...............................................    64
Section 9.16  Negative Pledge Agreements; Dividend Restrictions..........    64
Section 9.17  Gas Imbalances, Take-or-Pay or Other Prepayments...........    64
Section 9.18  Swap Agreements............................................    65
Section 9.19  Tax Status as Partnership; Partnership Agreement...........    65

                                    ARTICLE X
                           EVENTS OF DEFAULT; REMEDIES

Section 10.01 Events of Default..........................................    65
Section 10.02 Remedies...................................................    67
Section 10.03 Disposition of Proceeds....................................    68

                                   ARTICLE XI
                            THE ADMINISTRATIVE AGENT

Section 11.01 Appointment; Powers........................................    68
Section 11.02 Duties and Obligations of Administrative Agent.............    68
Section 11.03 Action by Administrative Agent.............................    69
Section 11.04 Reliance by Administrative Agent...........................    70
Section 11.05 Subagents..................................................    70
Section 11.06 Resignation or Removal of Administrative Agent.............    70
Section 11.07 Administrative Agent and Lenders...........................    71
Section 11.08 No Reliance................................................    71
Section 11.09 Administrative Agent May File Proofs of Claim..............    71
Section 11.10 Authority of Administrative Agent to Release Collateral
              and Liens..................................................    72
Section 11.11 The Arranger...............................................    72

                                   ARTICLE XII
                                  MISCELLANEOUS

Section 12.01 Notices....................................................    72
Section 12.02 Waivers; Amendments........................................    74

iii 
Section 12.03 Expenses, Indemnity; Damage Waiver.........................    75
Section 12.04 Successors and Assigns.....................................    77
Section 12.05 Survival; Revival; Reinstatement...........................    80
Section 12.06 Counterparts; Integration; Effectiveness...................    80
Section 12.07 Severability...............................................    81
Section 12.08 Right of Setoff............................................    81
Section 12.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF
              PROCESS....................................................    81
Section 12.10 Headings...................................................    82
Section 12.11 Confidentiality............................................    82
Section 12.12 Interest Rate Limitation...................................    83
Section 12.13 EXCULPATION PROVISIONS.....................................    84
Section 12.14 Collateral Matters; Swap Agreements........................    84
Section 12.15 No Third Party Beneficiaries...............................    84
Section 12.16 USA Patriot Act Notice.....................................    84

iv 
Annex I       List of Maximum Credit Amounts

Exhibit A     Form of Note
Exhibit B     Form of Compliance Certificate
Exhibit C-1   Security Instruments
Exhibit C-2   Form of Guaranty Agreement
Exhibit C-3   Form of Pledge Agreement
Exhibit D     Form of Assignment and Assumption

Schedule 7.05 Litigation
Schedule 7.12 Material Agreements
Schedule 7.15 Subsidiaries and Partnerships
Schedule 7.18 Gas Imbalances
Schedule 7.19 Marketing Contracts
Schedule 7.20 Swap Agreements

v

This CREDIT AGREEMENT dated as of March 15, 2006, is among Legacy Reserves LP, a limited partnership duly formed and existing under the laws of the State of Delaware (the "Borrower"); each of the Lenders from time to time party hereto; and BNP PARIBAS (in its individual capacity, "BNP Paribas"), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent").

RECITALS

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 I
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.

"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 Maximum Credit Amounts" at any time shall equal the sum of the Maximum Credit Amounts, as the same may be reduced or terminated pursuant to
Section 2.06.

"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 highest of (a) the Prime Rate in effect on such day and (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, 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            Eurodollar
                           Percentage                       Loans     ABR Loans
          --------------------------------------------   ----------   ---------
Level 1   less than 33%                                    1.250%      0.000%

Level 2   greater than or equal to 33%, but less than      1.500%      0.000%
          66%

Level 3   greater than or equal to 66%, but less than      1.750%      0.250%
          85%

Level 4   greater than or equal to 85%                     1.875%      0.375%

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 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 Maximum Credit Amounts represented by such Lender's Maximum Credit Amount 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 A/A2 by S&P or Moody's (or their equivalent) or higher.

"Arranger" means BNP Paribas, in its capacity as lead arranger and book runner hereunder.

"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 D 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.

2

"Available Cash" means, with respect to any fiscal quarter ending prior to the Termination Date:

(a) the sum of (i) all cash and cash equivalents of the Borrower and its Subsidiaries, treated as a single consolidated entity, on hand at the end of such fiscal quarter; and (ii) all additional cash and cash equivalents of the Borrower and its Subsidiaries on hand on the date of determination of Available Cash with respect to such fiscal quarter resulting from working capital borrowings (including borrowings under this Agreement) made subsequent to the end of such fiscal quarter, less

(b) the amount of any cash reserves established by Legacy Reserves GP, LLC as the general partner of the Borrower to (i) provide for the proper conduct of the business of the Borrower and its Subsidiaries (including reserves for future capital expenditures including drilling and acquisitions and for anticipated future credit needs of the Borrower and its Subsidiaries), (ii) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which the Borrower or an Affiliate is a party or by which it is bound or its assets are subject or (iii) provide funds for distributions with respect to any one or more of the next four fiscal quarters; provided, that disbursements made by the Borrower or its Subsidiaries or cash reserves established, increased or reduced after the end of such fiscal quarter but on or before the date of determination of Available Cash with respect to such fiscal quarter shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such fiscal quarter if Legacy Reserves GP, LLC as the general partner of the Borrower so determines.

"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) or Section 9.12(d).

"Borrowing Base Deficiency" occurs if at any time the total Revolving Credit Exposures exceeds the Borrowing Base then in effect.

"Borrowing Base Utilization Percentage" means, as of any day, the fraction expressed as a percentage, the numerator of which is the sum of the 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.

"Brothers" means Brothers Production Properties, Ltd., a Texas limited partnership.

"Brothers Credit Agreement" means the Credit Agreement dated September 13, 2005 among Brothers, BNP Paribas, as administrative agent, and the lenders party thereto.

"Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City or Houston, Texas are authorized or required by law to remain

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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 loss, casualty or other insured 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 Subsidiaries having a fair market value in excess of $100,000 in the aggregate for any calendar year.

"Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group of Persons acting in concert as a partnership or other "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) other than any Permitted Holders (except that such person or group shall be deemed to have "beneficial ownership" of all shares that any person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), of Equity Interests representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower (or its successor by merger, consolidation or purchase of all or substantially all of its assets); (b) the first day on which a majority of the members of the Board of Directors of Legacy Reserves GP, LLC are not Continuing Directors; (c) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets (including Equity Interests of the Subsidiaries) of the Borrower and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d) and 14(d) of the Securities and Exchange Act of 1934); (d) the adoption of a plan relating to the liquidation or dissolution of the Borrower; or (e) Legacy Reserves GP, LLC ceases to be the sole general partner of the Borrower.

"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 any Issuing Bank (or, for purposes of Section 5.01(b), by any lending office of such Lender or by such Lender's or such 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.

"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

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12.04(b). The amount representing each Lender's Commitment shall at any time be the lesser of such Lender's Maximum Credit Amount and such Lender's Applicable Percentage of the then effective Borrowing Base.

"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 a 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; and (d) any extraordinary gains or losses during such period; and provided further that if the Borrower or any Consolidated Subsidiary shall acquire or dispose of any Property during such period, then Consolidated Net Income shall be calculated after giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period.

"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.

"Continuing Directors" means, as of any date of determination, any member of the board of directors of Legacy Reserves GP, LLC who (a) was a member of such board of directors on the date of this Agreement; (b) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board of directors at the time of such nomination or election; or (c) was elected by holders of any of the Borrower's Equity Interests, if such election took place as the result of the Borrower's failure to file a registration statement pursuant to a registration rights agreement among the Borrower, Legacy Reserves GP, LLC and Friedman, Billings, Ramsey & Co., Inc. in connection with the Offering within 240 days of the Offering.

"Contributing Parties" means Moriah Properties, Ltd., a Texas limited partnership, DAB Resources, Ltd., a Texas limited partnership, Brothers Production Properties, Ltd., a Texas limited partnership, Brothers Production Company, Inc., a Texas corporation, Brothers Operating Company, Inc., a Texas corporation, J&W McGraw Properties, Ltd., a Texas limited partnership, H2K Holdings, Ltd., a Texas limited partnership, MBN Properties LP, a Delaware limited partnership, Charities Support Foundation, Inc., a Texas nonprofit corporation, Moriah Foundation, Inc., a Texas nonprofit corporation, and Cary Brown Family Foundation, Inc., a Texas nonprofit corporation.

"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. For the purposes of this definition, and without limiting the

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generality of the foregoing, any Person that owns directly or indirectly 10% or more of the Equity Interests having ordinary voting power for the election of the directors or other governing body of a Person will be deemed to "control" such other Person. "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, in each such case 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 (or for which the holder of such Debt has an existing right, contingent or otherwise, to be 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.

"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.

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

"Domestic Subsidiary" means any Subsidiary that is organized under the laws of the United States of America or any state thereof or the District of Columbia.

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"EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) expense for income and income based taxes paid or accrued, (iii) depreciation, depletion, amortization, accretion and impairment, including without limitation, impairment of goodwill, and (iv) any non-cash items associated with (a) mark to market accounting related to derivatives or investments, (b) stock based compensation arising from the grant of or issuance or replacement of stock, stock options or other equity-based awards or any amendment, modification, substitution or change of any such stock, stock options or other equity-based awards, in each case in connection with employee plans or other compensation arrangements, and/or (c) any gains or losses attributable to writeups or writedowns of assets, including ceiling test writedowns; less, all non-cash items increasing Consolidated Net Income, all calculated for the Borrower and its Subsidiaries on a consolidated basis.

"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 of its Subsidiaries is conducting or at any time has conducted business, or where any Property of the Borrower or any of its Subsidiaries 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 of its Subsidiaries 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, 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.

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"ERISA Affiliate" means each trade or business (whether or not incorporated) which together with the Borrower or any of its Subsidiaries 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 or any of its Subsidiaries 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, (e) receipt of a notice of withdrawal liability pursuant to Section 4202 of ERISA or (f) 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 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 of its Subsidiaries 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 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

8

such deposit account is intended by the 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 of its Subsidiaries 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, that do not secure any monetary obligations and 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 of its Subsidiaries 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, any 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 Agreements" means Brothers Credit Agreement, Moriah Credit Agreement and MBN Credit Agreement.

"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 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, for any Person, the chief financial officer, principal accounting officer, treasurer or controller of such Person. Unless otherwise specified, all references to a Financial Officer shall mean a Financial Officer of the Borrower.

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

"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.

"Foreign Subsidiary" means any Subsidiary that is not a Domestic Subsidiary.

"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 or any of its Subsidiaries, any of their Properties, the Administrative Agent, any 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 (a) Legacy Reserves Operating LP, (b) Legacy Reserves Operating GP LLC, (c) Legacy Reserves Services, Inc., and (d) each Material Domestic Subsidiary formed or acquired during the term of this Agreement or other Domestic Subsidiary that guarantees the Indebtedness pursuant to Section 8.14(b).

"Guaranty Agreement" means the Guarantee Agreement executed by the Guarantors in substantially the form attached as Exhibit C-2, unconditionally guarantying on a joint and several basis payment of the Indebtedness, as the same may be amended, modified or supplemented from time to time.

"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 applicable to such Lender 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.

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"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, any of its Subsidiaries or any Guarantor (whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising): (a) to the Administrative Agent, any Issuing Bank or any Lender under any Loan Document; (b) to any Lender or any Affiliate of a Lender under any Swap Agreements among such Person and the Borrower or any Subsidiary or assigned to such Person while such Person (or in the case of its Affiliate, the Lender affiliated therewith) is a Lender hereunder and (c) all renewals, extensions and/or rearrangements of any of the above.

"Indemnified Taxes" means Taxes other than Excluded Taxes.

"Initial Reserve Reports" means the report of LaRoche Petroleum Consultants Ltd. dated as of December 31, 2005, with respect to the value of the Oil and Gas Properties of Brothers, Moriah and MBN contributed to Legacy Reserves Operating LP under Section 6.01(i).

"Interest Election Request" means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.04.

"Interest Expense" means, for any period, the sum (determined without duplication) of the aggregate gross interest expense of the Borrower and the Consolidated Subsidiaries for such period, including (a) to the extent included in interest expense under GAAP: (i) amortization of debt discount, (ii) capitalized interest and (iii) the portion of any payments or accruals under Capital Leases allocable to interest expense, plus the portion of any payments or accruals under Synthetic Leases allocable to interest expense whether or not the same constitutes interest expense under GAAP and (b) cash dividend payments by the Borrower in respect of any Disqualified Capital Stock.

"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 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).

"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 capital contribution to, assumption of Debt of, purchase or

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other acquisition of any other Debt or equity participation or interest in, 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); (c) the purchase or acquisition (in one or a series of transactions) of Property of another Person that constitutes a business unit or (d) 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 BNP Paribas, in its capacity as an issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section
2.08(i). Any Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of such 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 Twenty Five Million Dollars ($25,000,000).

"LC Disbursement" means a payment made by any Issuing Bank pursuant to a Letter of Credit issued by such Issuing Bank.

"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 its Applicable Percentage of the total LC Exposure at such time.

"Legacy Reserves GP, LLC" means Legacy Reserves GP, LLC, a Delaware limited liability company and the general partner of the Borrower.

"Legacy Reserves Operating GP LLC" means Legacy Reserves Operating GP LLC, a Delaware limited liability company, the general partner of Legacy Reserves Operating LP and a wholly-owned Subsidiary of the Borrower.

"Legacy Reserves Operating LP" means Legacy Reserves Operating LP, a Delaware limited partnership and a wholly-owned Subsidiary of the Borrower.

"Legacy Reserves Services, Inc." means Legacy Reserves Services, Inc., a Texas corporation and a wholly-owned Subsidiary of the Borrower.

"Lenders" means the Persons listed on Annex I, and 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.

"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 any Issuing Bank relating to any Letter of Credit issued by such Issuing Bank.

"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

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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 (rounded upwards, if necessary, to the next 1/16th of 1%) at which dollar deposits of $1,000,000 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 they have acquired or hold 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.

"Majority Lenders" means, at any time while no Loans or LC Exposure is outstanding, Lenders having at least sixty-six and two-thirds percent (66.67%) of the Aggregate Maximum Credit Amounts; and at any time while any Loans or LC Exposure is outstanding, Lenders holding at least sixty-six and two-thirds percent (66.67%) 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 change in, or material adverse effect on (a) the business, operations, Property, liabilities (actual or contingent) or condition (financial or otherwise) of the Borrower and its Guarantors taken as a whole, (b) the ability of the Borrower, any of its Subsidiaries or any Guarantor to perform any of its obligations under any Loan Document to which it is a party, (c) the validity or enforceability of any Loan Document or (d) the rights and remedies of or benefits available to the Administrative Agent, any Issuing Bank or any Lender under any Loan Document.

"Material Domestic Subsidiary" means, as of any date, any Domestic Subsidiary that (a) is a Wholly-Owned Subsidiary and (b) together with its Subsidiaries, owns Property having a fair market value of $1,000,000 or more.

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"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 $1,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any of its Subsidiaries 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.

"Maturity Date" means March 15, 2010.

"Maximum Credit Amount" means, as to each Lender, the amount set forth opposite such Lender's name on Annex I under the caption "Maximum Credit Amounts", as the same may be (a) reduced or terminated from time to time in connection with a reduction or termination of the Aggregate Maximum Credit Amounts pursuant to Section 2.06(b) or (b) modified from time to time pursuant to any assignment permitted by Section 12.04(b).

"MBN" means MBN Properties LP, a Delaware limited partnership.

"MBN Credit Agreement" means the Credit Agreement dated September 14, 2005 among MBN Properties LP, BNP Paribas, as administrative agent, and the lenders party thereto.

"Moody's" means Moody's Investors Service, Inc. and any successor thereto that is a nationally recognized rating agency.

"Moriah" means Moriah Properties, Ltd., a Texas limited partnership.

"Moriah Credit Agreement" means the Credit Agreement dated September 13, 2005 among Moriah, BNP Paribas, as administrative agent, and the lenders party thereto.

"Moriah Group" means the accounts of Moriah Resources, Inc., the general partner of Moriah Properties, Ltd., Moriah Properties, Ltd., the oil and natural gas interests individually owned by Dale A. and Rita Brown until October 1, 2005 when those interests were transferred to DAB Resources, Ltd., and the accounts of MBN.

"Mortgaged Property" means any Property owned by the Borrower or any Guarantor, which is subject to the Liens existing and to exist under the terms of the Security Instruments.

"Multiemployer Plan" means a Plan that 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).

"Newstone Group" means the collective entities: Blackstone Investments I Ltd., Blackstone Investments II, Ltd., Trinity Equity Partners I, LP, SHP Capital LP, Newstone Capital, LP.

"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.

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"Offering" means the first to occur of (i) a placement of units of the Borrower with accredited investors or qualified institutional buyers in a 144A offering and (ii) the initial public offering of common limited partner interests of the Borrower.

"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).

"Partnership Agreement" means the Partnership Agreement of the Borrower.

"PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto.

"Permitted Holders" means (i) the natural persons that are the direct or indirect beneficial owners as of the Effective Date of the Contributing Parties,
(ii) any family members (including spouses) of any Persons described in clause
(i), and (iii) any Affiliates of the Persons described in clauses (i) or (ii), including the Contributing Parties, as of the Effective Date, but only for such time as they remain so affiliated.

"Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

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"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, any of its Subsidiaries 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, any of its Subsidiaries or an ERISA Affiliate.

"Pledge Agreement" means the Pledge Agreement executed by Borrower pledging its limited partner interests in Legacy Reserves Operating LP and its membership interests in Legacy Reserves Operating GP LLC, and by Legacy Reserves Operating GP LLC pledging its general partner interest in Legacy Reserves Operating LP, in substantially the form attached as Exhibit C-3.

"Prime Rate" means the rate of interest per annum publicly announced from time to time by BNP Paribas as its prime rate in effect at its principal office in New York City; 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 BNP Paribas as a general reference rate of interest, taking into account such factors as BNP Paribas may deem appropriate; it being understood that many of BNP Paribas'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 BNP Paribas 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).

"Proved Developed Producing Properties" means Oil and Gas Properties which are categorized as "Proved Reserves" that are both "Developed" and "Producing", as such terms are defined in the Definitions for Oil and Gas Reserves as promulgated by the Society of Petroleum Engineers (or any generally recognized successor) as in effect at the time in question.

"Redemption" means with respect to any Debt, the repurchase, redemption, prepayment, repayment or defeasance or any other acquisition or retirement for value (or the segregation of funds with respect to any of the foregoing) of any such Debt. "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).

"Register" has the meaning assigned such term in Section 12.04(b)(iv).

"Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors (including attorneys, accountants and experts) of such Person and such Person's Affiliates.

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"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 January 1st or July 1st (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 its 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 economic assumptions consistent with the Administrative Agent's lending 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).

"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).

"Security Instruments" means the Guaranty Agreement, the Pledge Agreement, mortgages, deeds of trust and other agreements, instruments or certificates described or referred to in Exhibit C-1, and any and all other agreements, instruments, consents 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.

"Subordinated Debt" means subordinated Debt pursuant to that certain Amended and Restated Loan Agreement dated as of September 14, 2005 between MBN Properties LP, as Borrower, and Brothers, Moriah and the Newstone Group, as Lenders, as evidenced by the Subordinated Notes thereunder, in an original aggregate principal amount not to exceed $34,000,000 plus interest and other amounts due thereunder.

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"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.

"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 any of its 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.

"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, 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) any Guarantor, the execution, delivery and performance by such Guarantor 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 Guarantor and such Guarantor's grant of the security interests and provision of collateral under the Security Instruments, and the grant of Liens by such Guarantor on Mortgaged Properties and other Properties pursuant to the Security Instruments.

"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 LIBO Rate.

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"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 are owned 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 in the Loan Documents herein), (b) any reference herein to any law shall be construed as referring to such law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, (c) any reference herein to any Person shall be construed to include such Person's successors and assigns (subject to the restrictions contained in the Loan Documents herein), (d) 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, (e) with respect to the determination of any time period, the word "from" means "from and including" and the word "to" means "to and including" and
(f) any reference 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. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any Person solely because such Person or its legal representative drafted such provision.

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 the 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 Lenders 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.

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

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Lender's Commitment or (b) the total Revolving Credit Exposures exceeding the total 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 $500,000 and not less than $1,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $250,000 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 eight (8) 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 or (ii) any Lender that becomes a party hereto pursuant to an Assignment and Assumption, as of the effective date of the Assignment and Assumption, payable to the order of such Lender in a principal amount equal to its Maximum Credit Amount as in effect on such date, and otherwise duly completed. In the event that any Lender's Maximum Credit Amount increases or decreases for any reason (whether pursuant to Section 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 Maximum Credit Amount 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.

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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 11:00 a.m., Houston time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 12:00 noon, Houston time, on the date of the proposed Borrowing; provided that no such notice shall be required for any deemed request of an ABR Borrowing to finance the reimbursement of an LC Disbursement as provided in Section 2.08(e). 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 total Revolving Credit Exposures (without regard to the requested Borrowing) and the pro forma total 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 a Eurodollar Loan having an Interest Period of one-month. 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 Borrowing shall not cause the total Revolving Credit Exposures to exceed the total Commitments (i.e., the lesser of the Aggregate Maximum Credit Amounts and the then effective Borrowing Base).

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

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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".

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 and Borrowing Base Deficiencies 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 continued as a Eurodollar Loan having an Interest Period of one-month. Notwithstanding any contrary provision hereof, if an Event of Default or a Borrowing Base Deficiency has occurred and is continuing: (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing (and any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar

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Borrowing shall be ineffective) 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 1:00 p.m., Houston 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 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 that made such LC Disbursement. Nothing herein shall be deemed to obligate any Lender to obtain the funds for its Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for its Loan in any particular place or manner.

(b) Presumption of Funding by the Lenders. Unless the Administrative Agent shall have received 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. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing.

Section 2.06 Termination and Reduction of Aggregate Maximum Credit Amounts.

(a) Scheduled Termination of Commitments. Unless previously terminated, the Commitments shall terminate on the Maturity Date. If at any time the Aggregate Maximum Credit Amounts 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 Maximum Credit Amounts; provided that (A) each reduction of the Aggregate Maximum Credit Amounts shall be in an amount that is an integral multiple of $500,000 and not less than $1,000,000 and (B) the Borrower shall not terminate or reduce the Aggregate Maximum Credit Amounts if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 3.04(c), the total Revolving Credit Exposures would exceed the total Commitments.

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(ii) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Aggregate Maximum Credit Amounts 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 Maximum Credit Amounts shall be permanent and may not be reinstated. Each reduction of the Aggregate Maximum Credit Amounts shall be made ratably among the Lenders in accordance with each Lender's Applicable Percentage.

Section 2.07 Borrowing Base.

(a) Initial Borrowing Base. For the period from and including the Effective Date to but excluding April 1st, 2006, the amount of the Borrowing Base shall be equal to $130,000,000. Notwithstanding the foregoing, the Borrowing Base may be subject to further adjustments from time to time pursuant to Section 8.13(c) or Section 9.12(d).

(b) Scheduled and Interim Redeterminations. Subject to Section 2.07(d), the Borrowing Base shall be redetermined (a "Scheduled Redetermination") on April 1st and October 1st of each year, commencing April 1st, 2006. In addition, either the Borrower or the Administrative Agent, at the direction of the Majority Lenders, may once during each calendar year, each elect to cause the Borrowing Base to be redetermined between Scheduled Redeterminations (an "Interim Redetermination") in accordance with this Section
2.07. The Borrower shall have the right, once during each calendar year, to initiate an Interim Redetermination in addition to the one otherwise provided in this Section 2.07(b) upon the proposed acquisition of Proved Developed Producing Properties whose purchase price is greater than 10% of the Borrowing Base, provided such Interim Redetermination is 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 in its sole discretion and consistent with its normal oil and gas lending criteria as it exists at the particular time. In no event shall the Proposed Borrowing Base exceed the Aggregate Maximum Credit Amounts.

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(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 the March 15th and September 15th of such year following the date of delivery of such Engineering Report 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 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 in any event, within fifteen
(15) days after the Administrative Agent has received the required Engineering Report; 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 the Administrative Agent shall poll the Lenders to ascertain the highest Borrowing Base then acceptable to a number of Lenders sufficient to constitute the Majority Lenders and, so long as such amount does not increase the Borrowing Base then in effect, such 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 the 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 Administrative Agent, each Issuing Bank and the Lenders:

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(i) in the case of a Scheduled Redetermination, (A) 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 the April 1st or October 1st, as applicable, following delivery of the New Borrowing Base Notice, or (B) 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 the New Borrowing Base Notice; and

(ii) 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) or Section 9.12(d), whichever occurs first.

Section 2.08 Letters of Credit.

(a) General. Subject to the terms and conditions set forth herein, the Borrower may request any Issuing Bank to issue Letters of Credit for its own account or for the account of the Borrower or any of its Subsidiaries, in a form reasonably acceptable to the Administrative Agent and such Issuing Bank, at any time and from time to time during the Availability Period; provided that the Borrower may not request the issuance, amendment, renewal or extension of Letters of Credit hereunder if a Borrowing Base Deficiency exists at such time or would exist as a result thereof. 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, an 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 deliver as permitted by Section 12.01(a) (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to any 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 issued by such Issuing Bank 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;

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(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 and whether a Borrowing Base Deficiency exists at such time, the current total 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 total 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 total Revolving Credit Exposures shall not exceed the lesser of the Aggregate Maximum Credit Amounts and the then effective Borrowing Base.

If requested by any Issuing Bank, the Borrower also shall submit a letter of credit application on such 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 that issues such Letter of Credit or the Lenders, each Issuing Bank that issues a Letter of Credit hereunder hereby grants to each Lender, and each Lender hereby acquires from such 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 any Issuing Bank that issues a Letter of Credit hereunder, such Lender's Applicable Percentage of each LC Disbursement made by such 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, the existence of a Borrowing Base Deficiency 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 any Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit issued by such Issuing Bank, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 1:00 p.m., Houston time, on the third day after such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 9:00 a.m., Houston 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 1:00 p.m., Houston time, on (i) the third day after the Borrower receives such

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notice, if such notice is received prior to 9:00 a.m., Houston time, on the day of receipt, or (ii) the Business Day immediately following the third day after 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 shall, subject to the conditions to Borrowing set forth herein, be deemed to have requested, and the Borrower does hereby request under such circumstances, that such payment be financed with a Eurodollar Borrowing with an Interest Period of one month 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 Eurodollar Borrowing. If the Borrower fails to make such payment when due, 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 that issued such Letter of Credit 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 that issued such Letter of Credit or, to the extent that Lenders have made payments pursuant to this
Section 2.08(e) to reimburse such Issuing Bank, then to such Lenders and such Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this Section 2.08(e) to reimburse any Issuing Bank for any LC Disbursement (other than the funding of ABR Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. Any LC Disbursement not reimbursed by the Borrower or funded as a Loan prior to 1:00 p.m., Houston time on the date such Disbursement is made, shall bear interest for each such day such Disbursement is outstanding at the ABR plus the Applicable Margin.

(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 any Issuing Bank under a Letter of Credit issued by such Issuing Bank 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 any 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 any Issuing Bank; provided that the foregoing shall not be construed to excuse any 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

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law) suffered by the Borrower that are caused by such Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of any Issuing Bank (as finally determined by a court of competent jurisdiction), such 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 that issued such Letter of Credit 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. Each Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit issued by such Issuing Bank. Such Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether such 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 such Issuing Bank and the Lenders with respect to any such LC Disbursement.

(h) Interim Interest. If any Issuing Bank shall make any LC Disbursement, then, until the Borrower shall have reimbursed such 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 such Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to Section 2.08(e) to reimburse such Issuing Bank shall be for the account of such Lender to the extent of such payment.

(i) Replacement of an Issuing Bank. Any Issuing Bank may be replaced or resign at any time by written agreement among the Borrower, the Administrative Agent, such resigning or replaced Issuing Bank and, in the case of a replacement, the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such resignation or replacement of an Issuing Bank. At the time any such resignation or replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the resigning or replaced Issuing Bank pursuant to Section 3.05(b). In the case of the replacement of an Issuing Bank, from and after the effective date of such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the replaced Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to "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 resignation or replacement of an Issuing Bank hereunder, the resigning or replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such resignation or 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

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demanding the deposit of cash collateral pursuant to this Section 2.08(j), or
(ii) the Borrower is 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 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 of its Subsidiaries described in Section 10.01(h) or Section
10.01(i). The Borrower hereby grants to the Administrative Agent, for the benefit of each 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, any 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 any 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; provided that investments of funds in such account in investments permitted by Section 9.05(c) or (e) may be made at the option of the Borrower at its direction, risk and expense. 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, on a pro rata basis, each 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, if any, 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

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.

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Section 3.02 Interest.

(a) ABR Loans. Each ABR Loan comprising an 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. Each Eurodollar Loan comprising a Eurodollar Borrowing shall bear interest at the LIBO Rate for the Interest Period in effect for such Eurodollar Loan plus the Applicable Margin, but in no event to exceed the Highest Lawful Rate.

(c) Post-Default and Borrowing Base Deficiency Rate. Notwithstanding the foregoing, (i) if an Event of Default has occurred and is continuing, or 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, and including any payments in respect of a Borrowing Base Deficiency under Section 3.04(c), then all Loans outstanding, in the case of an Event of Default, and such overdue amount, in the case of a failure to pay amounts when due, shall bear interest, after as well as before judgment, at the Alternate Base Rate plus two percent (2%), but in no event to exceed the Highest Lawful Rate, and (ii) during any Borrowing Base Deficiency, the amount of such Borrowing Base Deficiency shall bear interest, after as well as before judgment, at the rate then applicable to such Loans, plus the Applicable Margin, if any, plus an additional two percent (2%), 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: (i) with respect to any ABR Loan, the last day of each March, June, September and December; (ii) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part but, in the case of any Interest Period longer than three months, each successive date three months after the first day of such Interest Period, and (iii) in any case, on the Termination Date; provided that (x) interest accrued pursuant to Section 3.02(c)(i) shall be payable on demand, (y) 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 (z) 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 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 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:

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(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the LIBO Rate or the LIBO Rate for such Interest Period; or

(b) the Administrative Agent is advised by the Majority Lenders that the 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) and payment of applicable breakage costs, if any, under Section 5.02.

(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 12:00 noon, Houston time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Borrowing, not later than 12:00 noon, Houston 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 Maximum Credit Amounts pursuant to Section 2.06(b), the total Revolving Credit Exposures exceeds the total Commitments, then the Borrower shall (A) prepay the Borrowings on the date of such termination or reduction in an aggregate principal amount equal to such excess, and (B) 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).

(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 total Revolving Credit Exposures exceeds the redetermined or adjusted Borrowing Base, then the Borrower

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shall (A) prepay the Borrowings in an aggregate principal amount equal to such excess, and (B) 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 and/or deposit of cash collateral within one hundred twenty (120) days following the later of 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(d), if the total Revolving Credit Exposures exceed the Borrowing Base as adjusted, then the Borrower shall (A) prepay the Borrowings in an aggregate principal amount equal to such excess, and (B) 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 and/or deposit of cash collateral on the date it or any Subsidiary receives cash proceeds as a result of such disposition; 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.

(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 a rate per annum equal to 0.375% on the average daily amount of the 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).

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(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 each Issuing Bank a fronting fee equal to 0.125% per annum on the face amount of each Letter of Credit issued by such Issuing Bank hereunder, provided that in no event shall such fee be less than $500 and (iii) to each Issuing Bank, for its own account, its standard fees with respect to the amendment, renewal or extension of any Letter of Credit issued by such Issuing Bank or processing of drawings thereunder. Participation 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 and fronting fees with respect to any Letter of Credit shall be payable at the time of issuance of such Letter of Credit; 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 an 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 such fees 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.

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., Houston time, on the date when due, in immediately available funds, without defense, deduction, recoupment, set-off or counterclaim. Fees, once paid, shall be fully earned and 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 an 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.

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(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 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 any 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 such 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 such 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 such 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

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the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid.

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:

impose, modify or deem applicable any reserve (including marginal, special, emergency or supplemental reserves), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender for Eurocurrency liabilities under Regulation D of the Board (as the same may be amended, supplemented or replaced from time to time) or otherwise; or

(i) 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 any 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 such Issuing Bank's capital or on the capital of such Lender's or such 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 such Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender's or such Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or such Issuing Bank's policies and the policies of such Lender's or such Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank or such Lender's or such Issuing Bank's holding company for any such reduction suffered.

(c) Certificates. A certificate of a Lender or any Issuing Bank setting forth in reasonable detail the basis of its request and the amount or amounts necessary to compensate such Lender or such 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 such 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 any Issuing Bank to demand compensation pursuant to this Section 5.01 shall not constitute a waiver of such Lender's or such Issuing Bank's right to demand such compensation, provided that no Lender may make any such demand more than 180 days after the

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Termination Date, nor for any amount which has accrued more than 270 days prior to such Lender or Issuing Bank delivering the certificate required in Section 5.01(c).

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, 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 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 Guarantor 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 or any Guarantor 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 or such Guarantor shall make such deductions and (iii) the Borrower or such Guarantor 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 each 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 such 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

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Governmental Authority. A certificate of the Administrative Agent, a Lender or an Issuing Bank as to the basis of such Indemnified Taxes and Other Taxes and 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.

(d) Evidence of Payments. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower or a Guarantor 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.

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 (a) would eliminate or reduce amounts payable pursuant to Section 5.01 or Section 5.03, as the case may be, in the future and (b) 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 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.

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ARTICLE VI
CONDITIONS PRECEDENT

Section 6.01 Effective Date. The obligations of the Lenders to make the initial Loans and of any 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 Arranger, the Administrative Agent and the Lenders shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

(b) The Administrative Agent shall have received a certificate of the Borrower and of each Guarantor setting forth (i) resolutions of the board of directors or other managing body 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,
(ii) the individuals (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 individual 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 other Loan Documents to which it is a party, (iii) specimen signatures of such authorized individuals, and (iv) the articles or certificate of incorporation or formation and bylaws, operating agreement or partnership agreement, as applicable, of the Borrower and each Guarantor, in each case, 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, if any.

(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 Effective Date.

(e) 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.

(f) The Administrative Agent shall have received duly executed Notes payable to the order of each Lender in a principal amount equal to its Maximum Credit Amount dated as of the date hereof.

(g) The Administrative Agent shall have received from each party thereto duly executed counterparts (in such number as may be requested by the Administrative Agent) of the Security Instruments, including the Guaranty Agreements, the Pledge Agreement, and the other Security Instruments described on Exhibit C-1. In connection with the execution and delivery of the Security Instruments, the Administrative Agent shall be reasonably satisfied that the Security Instruments create first priority, perfected Liens (subject only to Excepted Liens identified in clauses

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(a) to (d) and (f) of the definition thereof, but subject to the provisos at the end of such definition) on at least 80% of the total value of the Oil and Gas Properties evaluated in the Initial Reserve Report.

(h) The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent of duly executed assignment of existing Swap Agreements of Brothers, Moriah and MBN to the Borrower.

(i) The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent of contribution of assets by Brothers, Moriah and MBN and their respective Affiliates to Legacy Reserves Operating LP.

(j) The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent of consummation of the Offering with net cash proceeds of no less than $11,200,000.

(k) The Administrative Agent shall have received an opinion of (i) Andrews Kurth, LLP, special counsel to the Borrower and (ii) Cotton, Bledsoe, Tighe & Dawson, P.C., special New Mexico counsel, each in form and substance satisfactory to the Administrative Agent, as to such matters incident to the Transactions as the Administrative Agent may reasonably request.

(l) 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 7.12.

(m) The Administrative Agent shall have received such information as the Administrative Agent may reasonably require, all of which shall be reasonably satisfactory to the Administrative Agent in form and substance, on the title to not less than 70% of the Oil and Gas Properties evaluated in the Initial Reserve Report.

(n) The Administrative Agent shall have received a certificate of a Responsible Officer certifying that the Borrower has received all consents and approvals required by Section 7.03.

(o) The Administrative Agent shall have received the pro forma combined financial statements referred to in Section 7.04(a) and the Initial Reserve Reports.

(p) The Administrative Agent shall have received appropriate UCC search certificates reflecting no prior Liens encumbering the Properties of the Borrower, and its Subsidiaries for each of the following jurisdictions: Texas, New Mexico, New York, Delaware 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.

(q) The Administrative Agent shall have received evidence reasonably satisfactory to Administrative Agent of the payment in full of all amounts due under the Subordinated Debt, the termination of all commitments to lend thereunder and the release of all Liens securing such obligations and any other obligations secured thereby contemporaneously with the proceeds of the initial funding under this Agreement.

(r) The Administrative Agent shall have received evidence reasonably satisfactory to Administrative Agent of the payment in full of all amounts due under the Existing Credit Agreements, the termination of all commitments to lend thereunder and the release of all

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Liens securing such obligations and any other obligations secured thereby contemporaneously with the proceeds of the initial funding under this Agreement.

(s) 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 each 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 1:00 p.m., Houston time, on March 15, 2006 (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 each 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, if any, set forth in this Agreement and in the other Loan Documents shall be true and correct 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.

(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 any 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 request for a 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).

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ARTICLE VII
REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lenders that:

Section 7.01 Organization; Powers. Each of the Borrower and its Subsidiaries is duly organized, validly existing and, if applicable, 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, member action (including, without limitation, any action required to be taken by any class of directors of the Borrower or any other Person, whether interested or disinterested, in order to ensure the due authorization of the Transactions). When executed and delivered, each Loan Document to which the Borrower and any Guarantor is a party will have been duly executed and delivered by the Borrower and such Guarantor and will constitute 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 (including the members or any class of directors of the Borrower or any other Person, whether interested or disinterested), 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, and except for the filing and recording of Security Instruments to perfect the Liens created hereby, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries 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 of its Subsidiaries or their Properties, or give rise to a right thereunder to require any payment to be made by the Borrower or such Subsidiary and (d) will not result in the creation or imposition of any Lien on any Property of the Borrower or any of its Subsidiaries (other than the Liens created by the Loan Documents).

Section 7.04 Financial Position; No Material Adverse Change.

(a) The Borrower has heretofore furnished to the Lenders the unaudited pro forma financial statements of Borrower ended December 31, 2004 and the nine month ended September 30, 2005, and the combined historical financial statements for the Moriah Group as of September 30, 2005. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Borrower and the Moriah Group as of such dates and for such periods in accordance with GAAP.

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(b) Since September 30, 2005, (i) there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect and (ii) the business of the Borrower and its Subsidiaries has been conducted only in the ordinary course consistent with past business practices.

(c) Neither the Borrower nor any of its Subsidiaries has on the date hereof any material Debt (including Disqualified Capital Stock), or any contingent liabilities, off-balance sheet liabilities or partnerships, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the Financial Statements.

Section 7.05 Litigation. Except as set forth on Schedule 7.05, there are no 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 of its Subsidiaries (a) 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 (b) that involve any Loan Document or the Transactions. 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 of its Subsidiaries 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 of its Subsidiaries 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 of its Subsidiaries, 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 or requested, and the Borrower and each of its Subsidiaries 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 of its Subsidiaries 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

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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.

(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 of its Subsidiaries 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 of its Subsidiaries 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 of its Subsidiaries 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 its Subsidiaries 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 authorizations granted by Governmental Authorities necessary for the ownership of its Property and the present 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 of its Subsidiaries 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 any of its Subsidiaries to Redeem or make any offer to Redeem all or any portion of any Debt outstanding under any indenture, note, credit agreement or instrument pursuant to which any Material Indebtedness is outstanding or by which the Borrower or any of its Subsidiaries 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 of its Subsidiaries 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.

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Section 7.9 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 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 7.10 ERISA.

(a) The Borrower, its Subsidiaries and each ERISA Affiliate have complied in all material respects with ERISA and, where applicable, the Code regarding each Plan, if any.

(b) Each Plan, if any, is, and has been, maintained in substantial compliance with ERISA and, where applicable, the Code.

(c) No act, omission or transaction has occurred that could result in imposition on the Borrower, any of its Subsidiaries or any ERISA Affiliate (whether directly or indirectly) of (i) 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 (ii) 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 of its Subsidiaries or any ERISA Affiliate has been or is expected by the Borrower, any of its Subsidiaries 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, any of its Subsidiaries or any ERISA Affiliate is required under the terms of each Plan, if any, 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, if any, 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, its 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

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such entities, that may not be terminated by the Borrower, any of its Subsidiaries or any ERISA Affiliate in its sole discretion at any time without any material liability.

(h) Neither the Borrower, its 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, its 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 7.11 Disclosure; No Material Misstatements. As set forth on Schedule 7.12, the Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its 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. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower or any of its Subsidiaries 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 of its Subsidiaries that 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 of its Subsidiaries prior to, or on, the date hereof in connection with the transactions contemplated hereby. There are no 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 7.12 Insurance. The Borrower has, and has caused all of its Subsidiaries to have, (a) all insurance policies sufficient for the compliance by each of them with all material Governmental Requirements and all material agreements and (b) 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 Subsidiaries. The Administrative Agent and the Lenders have been named as additional insureds in respect of such liability insurance policies and the Administrative Agent has been named as loss payee with respect to Property loss insurance.

Section 7.13 Restriction on Liens. Neither the Borrower nor any of its Subsidiaries is a party to any material agreement or arrangement, 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 7.14 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

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supplement to Schedule 7.15, the Borrower has no Subsidiaries. The Borrower has no Foreign Subsidiaries.

Section 7.15 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 Legacy Reserves LP, and the organizational identification number of the Borrower in its jurisdiction of organization is 4038949 (or as set forth in a notice delivered to the Administrative Agent pursuant to Section 8.01(m) in accordance with Section 12.01). 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 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 7.16 Properties; Titles, Etc.

(a) Each of the Borrower and its Subsidiaries has good and defensible title to its 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 any of its Subsidiaries 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 any of its Subsidiaries 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 any of its Subsidiaries' net revenue interest in such Property.

(b) All material leases and agreements necessary for the present conduct of the business of the Borrower and its 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 could reasonably be expected to have a Material Adverse Effect.

(c) The rights and Properties presently owned, leased or licensed by the Borrower and its Subsidiaries including, without limitation, all easements and rights of way, include all rights and Properties necessary to permit the Borrower and its Subsidiaries to conduct their business in all material respects as of the date hereof.

(d) All of the material Properties of the Borrower and each of its Subsidiaries that 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 of its Subsidiaries 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 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 Subsidiaries

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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 7.17 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 as could not reasonably be expected to have a Material Adverse Effect, (a) 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 (b) 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 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 Subsidiaries, in a manner consistent with the Borrower's or its Subsidiaries' past practices (other than those the failure of which to maintain in accordance with this Section 7.17 could not reasonably be expect to have a Material Adverse Effect).

Section 7.18 Gas Imbalances, Prepayments. As of the date hereof, except as set forth on Schedule 7.18 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 Subsidiaries to deliver, in the aggregate, two percent (2%) or more of the monthly production from Hydrocarbons produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

Section 7.19 Marketing of Production. Except for contracts listed and in effect on the date hereof on Schedule 7.19, 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 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 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 more than six (6) months from the date hereof.

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Section 7.20 Swap Agreements. Schedule 7.20, as of the date hereof, and after the date hereof, each report required to be delivered by the Borrower pursuant to Section 8.01(e), sets forth, a true and complete list of all Swap Agreements of the Borrower and each of its Subsidiaries, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net marked-to-market value thereof, all credit support agreements relating thereto (including any margin required or supplied) and the counterparty to each such agreement.

Section 7.21 Use of Loans and Letters of Credit. The proceeds of the Loans and the Letters of Credit shall be used (a) to refinance the existing debt of the Borrower (including the Subordinated Debt), (b) for the acquisition, exploration and development of oil and gas properties, (c) for the issuance of Letters of Credit, (d) for any distribution advances of Available Cash, provided that if the Borrowing Base Utilization Percentage is equal to or exceeds 90% before or after giving effect to the requested Loan or Letter of Credit, then no proceeds of any Loan or any Letter of Credit may be used to fund Restricted Payments under Section 9.04, and (e) 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 T, 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 T, U or X of the Board.

Section 7.22 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 believe that it will have thereafter) unreasonably small capital for the conduct of its business.

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. As soon as available, but in any event not later than 90 days after the end of each fiscal year, the Borrower's audited consolidated balance sheet and related statements of operations, members' 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 independent public accountants of recognized national standing and reasonably acceptable to the

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Administrative Agent (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 position 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. As soon as available, but in any event not later than 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, members' equity and cash flows as of the end of and for such 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 a Financial Officer as presenting fairly in all material respects the financial position 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 proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 9.01 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the Effective Date and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate.

(d) Certificate of Accounting Firm -- Defaults. Concurrently with any delivery of financial statements under Section 8.01(a), a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines).

(e) Certificate of Financial Officer - Swap Agreements. Concurrently with any delivery of financial statements under Section 8.01(a) and Section 8.01(b), a certificate of a Financial Officer, in form and substance satisfactory to the Administrative Agent, setting forth as of the last Business Day of such calendar month or fiscal year, a true and complete list of all Swap Agreements of the Borrower and each of its Subsidiaries, 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 7.21, any margin required or supplied under any credit support document, and the counterparty to each such agreement.

(f) 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.

(g) 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

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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 to such letter or report.

(h) 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.

(i) 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.

(j) Lists of Purchasers. Concurrently with the delivery of any Reserve Report to the Administrative Agent pursuant to Section 8.12, a list of all Persons purchasing Hydrocarbons from the Borrower or any of its Subsidiaries.

(k) Notice of Sales of Oil and Gas Properties. In the event the Borrower or any of its Subsidiaries intends to sell, transfer, assign or otherwise dispose of any Oil or Gas Properties included in the most recently delivered Reserve Report (or any Equity Interests in any Subsidiary owning interests in such Oil and Gas Properties) during any period between two successive Scheduled Redetermination Dates having a fair market value, individually or in the aggregate, in excess of $250,000, prior written notice of such disposition, the price thereof, the anticipated date of closing, and any other details thereof requested by the Administrative Agent or any Lender.

(l) 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.

(m) Information Regarding Borrower and Guarantors. Prompt written notice (and in any event within thirty (30) days prior thereto) 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, if any.

(n) Production Report and Lease Operating Statements. Within 30 days after the end of each fiscal quarter, a report setting forth, for each calendar month during the then-current fiscal year to date, the volume of production and sales attributable to production (and the prices at which such sales were made and the revenues derived from such sales) for each such calendar month from the Oil and Gas Properties, and setting forth the related ad valorem, severance and production taxes and lease operating expenses attributable thereto and incurred for each such calendar month.

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(o) Notices of Certain Changes. Promptly, but in any event within five
(5) Business Days after the execution thereof, copies of any amendment, modification or supplement to the certificate or articles of incorporation, by-laws, any preferred stock designation or any other organic document of the Borrower or any of its Subsidiaries.

(p) Annual Budget. Promptly, but in any event within 90 days after the end of each fiscal year, a budget for the then current fiscal year, including a pro forma balance sheet and income and cash flow projections.

(q) Certificate of Financial Officer - Available Cash. As soon as available, but in any event not later than 45 days after the end of each fiscal quarter, commencing with the quarter ending on June 30, 2006, a certificate of a financial officer (i) setting forth reasonably detailed calculations of Available Cash with respect to such quarter and (ii) the distributions to holders of Borrower's Equity Interests with respect to such quarter.

(r) Other Requested Information. Promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any of its Subsidiaries (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, promptly after the Borrower obtains knowledge thereof, written notice of the following:

(a) the occurrence of any Default;

(b) the filing or commencement of, or the threat in writing of, any action, suit, investigation, arbitration or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Subsidiary thereof, or any material adverse development in any action, suit, proceeding, investigation or arbitration (whether or not previously disclosed to the Lenders), that, in either case, if adversely determined, could reasonably be expected to result in liability in excess of $500,000;

(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 $500,000; and

(d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect.

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 of its Subsidiaries 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

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to the conduct of its business and maintain, if necessary, its qualification to do business in each other jurisdiction in which any of 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 of its Subsidiaries 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 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 of its Subsidiaries.

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 the Borrower will cause each of its Subsidiaries 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. The Borrower will, and will cause each of its Subsidiaries 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 proration 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 material 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 and in all material respects, the obligations

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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) to the extent the Borrower or one of its Subsidiaries 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 of its Subsidiaries 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. The loss payable clauses or provisions in said insurance policy or policies insuring any of the collateral for the Loans shall be endorsed in favor of and made payable to the Administrative Agent as its interests may appear and such policies shall name the Administrative Agent and the Lenders as "additional insureds" and provide that the insurer will give at least 30 days prior notice of any cancellation to the Administrative Agent.

Section 8.08 Books and Records; Inspection Rights. The Borrower will, and will cause each of its Subsidiaries 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 of its Subsidiaries 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 of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to them or their 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, and shall cause each of its Subsidiaries to:
(i) comply, and shall cause its Properties and operations and each of its Subsidiaries 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 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 of its Subsidiaries 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 of its Subsidiaries 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

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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 of its Subsidiaries to establish and implement, such procedures as may be reasonably 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 after the occurrence thereof, 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) The Borrower will, and will cause each of its Subsidiaries to, provide environmental audits and tests in accordance with American Society of Testing Materials standards upon request by the Administrative Agent and the Lenders (or as otherwise required to be obtained by the Administrative Agent or the Lenders by any Governmental Authority), in connection with any future acquisitions of Oil and Gas Properties or other material Properties.

Section 8.11 Further Assurances.

(a) The Borrower at its sole expense will, and will cause each of its Subsidiaries 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 of its Subsidiaries, 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 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 sole 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 other Guarantor 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.

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Section 8.12 Reserve Reports.

(a) On or before March 1st and September 1st of each year, commencing on the Effective Date, the Borrower shall furnish to the Administrative Agent and the Lenders a Reserve Report as of the immediately preceding January 1 or July 1, as applicable. The Reserve Report as of July 1 of each year shall be prepared by one or more petroleum engineers reasonably acceptable to the Administrative Agent and the January 1 Reserve Report of each year shall be prepared by or under the supervision of the chief engineer 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 July 1 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 chief engineer 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 January 1 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 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 7.18 with respect to their Oil and Gas Properties evaluated in such Reserve Report that would require the Borrower or any of its Subsidiaries to deliver Hydrocarbons either generally or produced from such Oil and Gas Properties at some future 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 that the Borrower could reasonably be expected to have been obligated to list on Schedule 7.19 had such agreement been in effect on the date hereof and (vi) 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 present value that 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), to the extent requested by the Administrative Agent, 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

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Administrative Agent, satisfactory title information on at least 80% 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 reasonably 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 80% 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 80% 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 reasonably satisfied with title to any Mortgaged Property after the 60-day period has elapsed, such unacceptable Mortgaged Property shall not count towards the 80% 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 compliance with the requirement to provide acceptable title information on 80% 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 80% 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 80% of such total value, then the Borrower shall, and shall cause its Subsidiaries to, grant to the Administrative Agent or its designee as security for the Indebtedness a first-priority Lien interest (provided the Excepted Liens of the type described in clauses (a) to (d) and (f) of the definition thereof may exist, 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 80% 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 or its designee and in sufficient executed (and acknowledged where necessary or appropriate) counterparts for recording purposes. In order to comply with the foregoing, if any Subsidiary places a Lien on its

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Oil and Gas Properties and such Subsidiary is not a Guarantor, then it shall become a Guarantor and comply with Section 8.14(b).

(b) In the event that (i) the Borrower determines that any Subsidiary is a Material Domestic Subsidiary or (ii) any Domestic Subsidiary incurs or guarantees any Debt, then 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 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 or its designee.

Section 8.15 ERISA Compliance. The Borrower will promptly furnish, and will cause its Subsidiaries and any ERISA Affiliate to promptly furnish, to the Administrative Agent (a) 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, if any, or any trust created thereunder, (b) 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 of the Borrower, its Subsidiaries or the ERISA Affiliate, as the case may be, specifying the nature thereof, what action the Borrower, its Subsidiaries or the ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, and (c) 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, if any (other than a Multiemployer Plan), the Borrower will, and the Borrower will cause each of its Subsidiaries and ERISA Affiliates 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 Marketing Activities. The Borrower will not, and will not permit any of its Subsidiaries to, engage in marketing activities for any Hydrocarbons or enter into any contracts related thereto other than (a) contracts for the sale of Hydrocarbons scheduled or reasonably estimated to be produced from their proved Oil and Gas Properties during the period of such contract, (b) contracts for the sale of Hydrocarbons scheduled or reasonably estimated to be produced from proved Oil and Gas Properties of third parties during the period of such contract associated with the Oil and Gas Properties of the Borrower and its Subsidiaries that the Borrower or one of its Subsidiaries has the right to market pursuant to joint operating agreements, unitization agreements or other similar contracts that are usual and customary in the oil and gas business and (c) other contracts for the purchase and/or sale of Hydrocarbons of third parties (i) which have generally offsetting provisions
(i.e. corresponding pricing mechanics, delivery dates and points and volumes)
such that no "position" is taken and (ii) for which appropriate credit support has been taken to alleviate the material credit risks of the counterparty thereto.

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ARTICLE IX
NEGATIVE 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 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 EBITDA to Interest Expense. The Borrower will not, as of any date of determination, permit its ratio of EBITDA for the period of the four most recently ended fiscal quarters to Interest Expense for such period to be less than 2.5 to 1.0; provided, that (i) for the fiscal quarter ending June 30, 2006, EBITDA shall be EBITDA for such fiscal quarter multiplied by 4; (ii) for the six-month period ending September 30, 2006, EBITDA shall be EBITDA for such six-month period multiplied by 2; and (iii) for the nine-month period ending December 31, 2006, EBITDA shall be EBITDA for such nine-month period multiplied by 4/3.

(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, but excluding non-cash assets under FAS 133) to (ii) consolidated current liabilities (excluding non-cash obligations under FAS 133 and current maturities under this Agreement) to be less than 1.0 to 1.0.

Section 9.02 Debt. Neither the Borrower nor any of its Subsidiaries 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) accounts payable and other accrued expenses, liabilities or other obligations to pay (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 ninety (90) 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.

(c) intercompany Debt between the Borrower and any of its Subsidiaries or between 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 their 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.

(d) endorsements of negotiable instruments for collection in the ordinary course of business.

(e) other Debt not to exceed $2,000,000 in the aggregate at any one time outstanding.

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Section 9.03 Liens. Neither the Borrower nor any of its Subsidiaries 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 on Property not constituting collateral for the Indebtedness and not otherwise permitted by the foregoing clauses of this Section 9.03; provided that the aggregate principal or face amount of all Debt secured under this Section 9.03(c) shall not exceed $100,000 at any time.

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 capital to its stockholders or make any distribution of their Property to their respective Equity Interest holders, except (a) the Borrower may declare and pay dividends or distributions with respect to its Equity Interests payable solely in additional shares of its Equity Interests (other than Disqualified Capital Stock), (b) Subsidiaries may declare and pay dividends or distributions ratably with respect to their Equity Interests, (c) after consummation of the Offering so long as no Borrowing Base Deficiency, Default or Event of Default has occurred and is continuing or would result therefrom, and, subject to the proviso in Section 7.21(d), the Borrower may declare and pay quarterly cash dividends to its partners of Available Cash in accordance with the Partnership Agreement, and (d) Restricted Payments made contemporaneously with the Offering (or the sale of common Equity Interests associated with any over-allotment option granted in connection with the Offering) from the net cash proceeds of sale of such Equity Interests.

Section 9.05 Investments, Loans and Advances. Neither the Borrower nor any of its Subsidiaries 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.

(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 $250,000,000 (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.

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(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 (i) made by the Borrower in or to the Guarantors, (ii) made by any Subsidiary in or to the Borrower or any Guarantor, and (iii) made by the Borrower or any Guarantor in Subsidiaries that are not Guarantors, provided that the aggregate of all Investments made by the Borrower and the Guarantors in or to all Subsidiaries that are not Guarantors shall not exceed $2,000,000 at any time, and only to the extent an Event of Default or Borrowing Base Deficiency does not exist and would not result from making such Investments.

(h) 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 any of its Subsidiaries 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, (ii) the 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 $2,000,000, and only to the extent an Event of Default or Borrowing Base Deficiency does not exist and would not result from making such Investments.

(i) subject to the limits in Section 9.06, 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, and only to the extent an Event of Default or Borrowing Base Deficiency does not exist and would not result from making such Investments.

(j) loans or advances to employees, officers or directors in the ordinary course of business of the Borrower or any of its Subsidiaries, in each case only as permitted by applicable law, including Section 402 of the Sarbanes Oxley Act of 2002, but in any event not to exceed $250,000 in the aggregate at any time.

(k) Investments in stock, obligations or securities received in settlement of debts arising from Investments permitted under this Section 9.05 owing to the Borrower or any of its Subsidiaries as a result of a bankruptcy or other insolvency proceeding of the obligor in respect of such debts or upon the enforcement of any Lien in favor of the Borrower or any of its Subsidiaries; provided that the Borrower shall give the Administrative Agent prompt written notice in the event that the aggregate amount of all investments held at any one time under this Section 9.05(i) exceeds $250,000.

Section 9.06 Nature of Business. Neither the Borrower nor any of its Subsidiaries will allow any material change to be made in the character of its business as an independent oil and gas exploration and production company. The Borrower will not, and will not permit any of its Subsidiaries to, operate its business outside the geographical boundaries of the United States.

Section 9.07 Limitation on Leases. Neither the Borrower nor any of its Subsidiaries will create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Property of

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any kind whatsoever (real or personal but excluding leases of Hydrocarbon Interests), under leases or lease agreements which would cause the aggregate amount of all payments made by the Borrower and its Subsidiaries pursuant to all such leases or lease agreements, including, without limitation, any residual payments at the end of any lease, to exceed $5,000,000 in any period of twelve consecutive calendar months during the life of such leases.

Section 9.08 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
7.21. 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 T, 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, Regulation T or Regulation X of the Board, as the case may be.

Section 9.09 ERISA Compliance. The Borrower and its 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 any of its Subsidiaries 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, any of its Subsidiaries 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, any of its Subsidiaries 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, any of its Subsidiaries 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.

(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 any of its Subsidiaries or with respect to any ERISA Affiliate of the Borrower or any of its Subsidiaries if such

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Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to,
(i) any Multiemployer Plan, or (ii) 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, any of its Subsidiaries or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code.

Section 9.10 Sale or Discount of Receivables. Except for receivables obtained by the Borrower or any of its Subsidiaries 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 of its Subsidiaries will discount or sell (with or without recourse) any of its notes receivable or accounts receivable.

Section 9.11 Mergers, Etc. Neither the Borrower nor any of its Subsidiaries 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, except that any Wholly-Owned Subsidiary may merge with any other Wholly-Owned Subsidiary and that the Borrower may merge with any Wholly-Owned Subsidiary so long as the Borrower is the survivor.

Section 9.12 Sale of Properties. The Borrower will not, and will not permit any of its Subsidiaries 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 Subsidiary or is replaced by equipment of at least comparable value and use; provided that the total fair market value of such equipment being sold or transferred does not exceed $100,000 during any 12-month period; (d) sales or other dispositions (including Casualty Events) of Oil and Gas Properties or any interest therein or Subsidiaries owning Oil and Gas Properties; provided that (i) 100% of the consideration received in respect of such sale or other disposition shall be cash, (ii) the consideration received in respect of such sale or other disposition shall be equal to or greater than the fair market value of the Oil and Gas Property, interest therein or Subsidiary subject of such sale or other disposition (as reasonably determined by the board of directors of the Borrower and, if requested by the Administrative Agent, the Borrower shall deliver a certificate of a Responsible Officer of the Borrower certifying to that effect), (iii) if such sale or other disposition of Oil and Gas Property or Subsidiary owning Oil and Gas Properties

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included in the most recently delivered Reserve Report during any period between two successive Scheduled Redetermination Dates has a fair market value (as determined by the Administrative Agent), individually or in the aggregate, in excess of 5% of the Borrowing Base, 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, as determined by the Majority Lenders in the most recently delivered Reserve Report; (iv) if any such sale or other disposition is of a Subsidiary owning Oil and Gas Properties, such sale or other disposition shall include all the Equity Interests of such Subsidiary; and (v) such sales under this Section 9.12(d) shall be allowed only to the extent an Event of Default or Borrowing Base Deficiency does not exist and would not result from such sale or transfer; and (e) sales and other dispositions of Properties not regulated by Section 9.12(a) to (d) having a total fair market value not to exceed $250,000 during any 12-month period.

Section 9.13 Environmental Matters. The Borrower will not, and will not permit any Subsidiary to, violate 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 9.14 Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, 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 9.15 Subsidiaries. The Borrower shall have no Subsidiaries other than Wholly-Owned Subsidiaries. The Borrower shall not, and shall not permit its Subsidiaries to, create or acquire any additional 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 of its Subsidiaries to, sell, assign or otherwise dispose of any Equity Interests in any of its Subsidiaries. The Borrower shall have no Foreign Subsidiaries.

Section 9.16 Negative Pledge Agreements; Dividend Restrictions. Neither the Borrower nor any of its Subsidiaries will create, incur, assume or suffer to exist any contract, agreement or understanding (other than this Agreement or the Security Instruments) that 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 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 9.17 Gas Imbalances, Take-or-Pay or Other Prepayments. The Borrower will not, and will not permit any of its Subsidiaries to, allow gas imbalances, take-or-pay or other prepayments with respect to the Oil and Gas Properties of the Borrower or any of its Subsidiaries that would require the Borrower or such Subsidiary to deliver, in the aggregate, two percent (2%) or more of the monthly production of Hydrocarbons at some future time without then or thereafter receiving full payment therefor.

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Section 9.18 Swap Agreements. Neither the Borrower nor any of its Subsidiaries 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 other than basis differential swaps on volumes already hedged pursuant to other Swap Agreements) do not exceed, as of the date such Swap Agreement is executed, 85% of the reasonably anticipated projected production from Proved Developed Producing Properties for each month during the period during which such Swap Agreement is in effect for each of crude oil and natural gas, calculated separately, for each of the next five succeeding calendar years, provided that puts and put options may be purchased on production that is subject of an acquisition, pending the completion of such acquisition, and puts, excluding the effect of the provision for pending acquisitions, may be purchased limited to total notional volumes of all Swap Agreements and puts options not exceeding 100% of projected production from Proved Developed Producing Properties as described in (a)(ii) above, and (b) Swap Agreements in respect of interest rates with an Approved Counterparty, which effectively convert interest rates from floating to fixed, the notional amounts of which (when aggregated with all other Swap Agreements of the Borrower and its Subsidiaries then in effect effectively converting interest rates from floating to fixed) do not exceed 75% of the then outstanding principal amount of the Borrower's Debt for borrowed money which bears interest at a floating rate. In no event shall any Swap Agreement contain any requirement, agreement or covenant for the Borrower or any of its Subsidiaries to post collateral or margin to secure their obligations under such Swap Agreement or to cover market exposures.

Section 9.19 Tax Status as Partnership; Partnership Agreement. The Borrower shall not alter its status as a partnership for purposes of United States Federal Income taxes. The Borrower shall not, and shall not permit any Subsidiary to, amend or modify any provision of the Partnership Agreement or any other organizational document, or any agreements with Affiliates of the type referred to in Section 9.14, if such amendment or modification could reasonably be expected to have a Material Adverse Effect.

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 five Business Days.

(c) any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries 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

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Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect when made or deemed made.

(d) the Borrower or any of its Subsidiaries shall fail to observe or perform any covenant, condition or agreement contained in, Section 8.01(m),
Section 8.01(n), Section 8.02, Section 8.03 or in ARTICLE IX.

(e) the Borrower or any of its Subsidiaries 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 (i) notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender) or (ii) a Responsible Officer of the Borrower or any of its Subsidiaries otherwise becoming aware of such default.

(f) the Borrower or any of its Subsidiaries 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 (after giving effect to any applicable notice and cure period).

(g) any event or condition occurs (after giving effect to any notice or cure period) 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 of its Subsidiaries 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 of its Subsidiaries 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 of its Subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered.

(i) the Borrower or any of its Subsidiaries 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 of its Subsidiaries 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; or any member of the Borrower shall make any request or take any action for the purpose of calling a meeting of the members of the Borrower to consider a resolution to dissolve and wind-up the Borrower's affairs.

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(j) the Borrower or any of its Subsidiaries shall become unable, admit in writing its inability or fail generally to pay its debts as they become due.

(k) (i) 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) or (ii) any one or more non monetary judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, shall be rendered against the Borrower, any of its Subsidiaries or any combination thereof; and, in case of each of clause (i) or (ii), 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 by a judgment creditor to attach or levy upon any assets of the Borrower or any of its Subsidiaries 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 shall be repudiated by them, 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 of its Subsidiaries 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 liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $1,000,000 in any year.

(n) a Change in Control shall occur.

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, notice of intent to accelerate, notice of acceleration 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,

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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 of expenses and indemnities provided for in this Agreement and the Security Instruments; second, to accrued interest on the Notes; third, to fees; fourth, pro rata to principal outstanding on the Notes and Indebtedness referred to in Clause (b) of the definition of Indebtedness owing to a Lender or an Affiliate of a Lender; 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.

Section 10.03 Disposition of Proceeds. The Security Instruments contain an assignment by the Borrower and/or the Guarantors unto and in favor of the Administrative Agent for the benefit of the Lenders of all of the Borrower's or each Guarantor'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, except after the occurrence and during the continuance 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 Subsidiaries 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 its Subsidiaries.

ARTICLE XI
THE ADMINISTRATIVE AGENT

Section 11.01 Appointment; Powers. Each of the Lenders and each 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 have no 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 (the use of the term "agent" herein and in the other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law; rather, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties), (b) the Administrative Agent shall have no 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 have no duty to disclose, and shall not be

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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. For purposes of determining compliance with the conditions specified in ARTICLE VI, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received written notice from such Lender prior to the proposed closing date specifying its objection thereto.

Section 11.03 Action by Administrative Agent. The Administrative Agent shall have no duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise in 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 the Administrative Agent 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

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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 each 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 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, each 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 each Issuing Bank, appoint a successor Administrative Agent. 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.

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Section 11.07 Administrative Agent and Lenders. Each bank serving as the 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 an 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 an 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, neither the Administrative Agent nor the Arranger shall have any duty or responsibility to provide any 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 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower or any of its Subsidiaries, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Indebtedness that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Section 12.03) allowed in such judicial proceeding; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

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and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 12.03.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Indebtedness or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

Section 11.10 Authority of Administrative Agent to Release Collateral and Liens. Each Lender and each 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 each 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 9.12 or is otherwise authorized by the terms of the Loan Documents.

Section 11.11 The Arranger. The Arranger shall have no duties, responsibilities or liabilities under this Agreement and the other Loan Documents other than its duties, responsibilities and liabilities in its capacity as a Lender hereunder to the extent it is a party to this Agreement as a Lender.

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

Legacy Reserves LP
303 West Wall Street, Suite 1600 Midland, TX 79701

Attention: Steven H. Pruett, President and CFO Email: spruett@legacyLP.com Phone: 432-682-2516
Fax: 432-682-4013

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(ii) if to the Administrative Agent, to it at

919 Third Avenue
New York, New York 10022 Attention: Millie Carillo, Loan Assistant Telecopy: 212-841-2683

with a copy to the Administrative Agent at:

1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Russell Otts Telecopy: 713-659-6915

(iii) if to any other Lender, in its capacity as such, or any other Lender in its capacity as an Issuing Bank, 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. 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.

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(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, any 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, each 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 any 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 Maximum Credit Amount of any Lender without the written consent of such Lender, (ii) increase the Borrowing Base without the written consent of each Lender, decrease or maintain the Borrowing Base without the consent of the Majority Lenders, or modify in any manner Section 2.07 without the consent of each Lender, (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 or the Maturity 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) waive or amend Section 6.01, Section 10.02(c) or Section 8.14 or change the definition of the terms "Domestic Subsidiary", "Foreign Subsidiary", "Material Domestic Subsidiary" or "Subsidiary", without the written consent of each Lender, (vii) release any Guarantor (except as set forth in the Guaranty Agreement), release all or substantially all of the collateral (other than as provided in Section 11.09), or reduce the percentage set forth in Section 8.14(a) to less than 80%, 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

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agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or any Issuing Bank hereunder or under any other Loan Document without the prior written consent of the Administrative Agent or such 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, 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 out-of-pocket 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 each Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit issued by such Issuing Bank or any demand for payment thereunder, (iv) all out-of-pocket expenses incurred by the Administrative Agent, any Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, any 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 ARRANGER, EACH 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 FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE, INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR 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 OF ITS SUBSIDIARIES TO COMPLY WITH THE TERMS OF ANY LOAN DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (iii) ANY

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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 ANY ISSUING BANK TO HONOR A DEMAND FOR PAYMENT UNDER A LETTER OF CREDIT ISSUED BY SUCH ISSUING BANK 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 ITS SUBSIDIARIES 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 OF ITS SUBSIDIARIES WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, (x) THE PAST OWNERSHIP BY THE BORROWER OR ANY OF ITS SUBSIDIARIES 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 OF ITS SUBSIDIARIES 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 BORROWER OR ANY OF ITS SUBSIDIARIES, OR (xiii) 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

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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 any Issuing Bank under Section 12.03(a) or (b), each Lender severally agrees to pay to the Administrative Agent or such 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 such 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 within ten (10) Business Days of 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 any 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 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 any 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, each 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 if such assignment is to a Lender or an Affiliate of a Lender or, if an Event of Default has occurred and is continuing, is to 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

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Lender or any Affiliate of 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; and

(D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

(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, each 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, any Issuing Bank and any Lender, at any reasonable time and

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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, each 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 any 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, each 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 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.

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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, any 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.

(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

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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 of its Subsidiaries against any of and all the obligations of the Borrower or any of its Subsidiaries 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, HOUSTON DIVISION, 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.

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(c) 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. The Administrative Agent, each 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, 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 their 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, any 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

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information received from the Borrower or any of its Subsidiaries relating to the Borrower or any of its Subsidiaries and their businesses, other than any such information that is available to the Administrative Agent, any Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower or any of its Subsidiaries; provided that, in the case of information received from the Borrower, or any of its Subsidiaries 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: (a) 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 (b) 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 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

83

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 Collateral Matters; Swap Agreements. The benefit of the Security Instruments and of the provisions of this Agreement relating to any collateral securing the Indebtedness shall also extend to and be available to those Lenders or their Affiliates which are counterparties to any Swap Agreement with the Borrower or any of its Subsidiaries on a pro rata basis in respect of any obligations of the Borrower or any of its Subsidiaries which arise under any such Swap Agreement while such Person or its Affiliate is a Lender, but only while such Person or its Affiliate is a Lender, including any Swap Agreements between such Persons in existence prior to the date hereof. No Lender or any Affiliate of a Lender shall have any voting rights under any Loan Document as a result of the existence of obligations owed to it under any such Swap Agreements.

Section 12.15 No Third Party Beneficiaries. This Agreement, the other Loan Documents, and the agreement of the Lenders to make Loans and the Issuing Bank to issue, amend, renew or extend Letters of Credit hereunder are solely for the benefit of the Borrower, and no other Person (including, without limitation, any Subsidiary of the Borrower, any obligor, contractor, subcontractor, supplier or materialsman) shall have any rights, claims, remedies or privileges hereunder or under any other Loan Document against the Administrative Agent, the Issuing Bank or any Lender for any reason whatsoever. There are no third party beneficiaries.

Section 12.16 USA Patriot Act Notice. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.

[SIGNATURES BEGIN NEXT PAGE]

84

The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. 

BORROWER:                               LEGACY RESERVES LP

                                        BY: LEGACY RESERVES GP, LLC,
                                            ITS GENERAL PARTNER


                                        By: /s/ Steven H. Pruett
                                            ------------------------------------
                                            Steven H. Pruett,
                                            President, Chief Financial Officer
                                            and Secretary

                                SIGNATURE PAGE 1

ADMINISTRATIVE AGENT:                   BNP PARIBAS, as Administrative Agent


                                        By:     /s/ Russell Otts
                                               ---------------------------------
                                        Name:   Russell Otts
                                        Title:  Vice President


                                        By:     /s/ Betsy Jocher
                                               ---------------------------------
                                        Name:   Betsy Jocher
                                        Title:  Vice President

SIGNATURE PAGE 2

LENDERS: BNP PARIBAS 

By:    /s/ Russell Otts
    ------------------------------------
Name:  Russell Otts
Title: Vice President


By:    /s/ Betsy Jocher
    ------------------------------------
Name:  Betsy Jocher
Title: Vice President

SIGNATURE PAGE 3

BANK OF AMERICA N.A. 

By:    /s/ Charles W. Patterson
    ------------------------------------
Name:  Charles W. Patterson
Title: Managing Director

SIGNATURE PAGE 4

COMERICA BANK 

By:    /s/ Matthew J. Purchase
    ------------------------------------
Name:  Matthew J. Purchase
Title: Vice President

SIGNATURE PAGE 5

KEYBANK N.A. 

By:    /s/ Thomas Rajan
    ------------------------------------
Name:  Thomas Rajan
Title: Senior Vice President

SIGNATURE PAGE 6

ANNEX I
LIST OF MAXIMUM CREDIT AMOUNTS

AGGREGATE MAXIMUM CREDIT AMOUNTS 

   NAME OF LENDER      APPLICABLE PERCENTAGE   MAXIMUM CREDIT AMOUNT
   --------------      ---------------------   ---------------------
BNP Paribas                 34.6153846%           $103,846,153.85
Bank of America N.A.        30.7692308%           $ 92,307,692.31
Comerica Bank               17.3076923%           $ 51,923,076.92
KeyBank N.A.                17.3076923%           $ 51,923,076.92
                            ----------            ---------------
TOTAL                              100%           $300,000,000.00
                            ==========            ===============

ANNEX I-1

EXHIBIT A
[FORM OF] NOTE

$[_______] [_______], 200[__]

FOR VALUE RECEIVED, Legacy Reserves LP, a Delaware limited partnership (the "Borrower"), hereby promises to pay to the order of [______] (the "Lender"), at the principal office of BNP Paribas, as administrative agent (the "Administrative Agent"), the principal sum of [______] Dollars ($[______]) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower under the Credit Agreement, as hereinafter defined), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement.

The date, amount, Type, interest rate, Interest Period and maturity of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, may be endorsed by the Lender on the schedules attached hereto or any continuation thereof or on any separate record maintained by the 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 this Note.

This Note is one of the Notes referred to in the Credit Agreement dated as of March 15, 2006 among the Borrower, the Administrative Agent, and the lenders signatory thereto (including the Lender), and evidences Loans made by the Lender thereunder (such Credit Agreement as the same may be amended, supplemented or restated from time to time, the "Credit Agreement"). Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement.

This Note is issued pursuant to, and is subject to the terms and conditions set forth in, the Credit Agreement and is entitled to the benefits provided for in the Credit Agreement and the other Loan Documents. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events, for prepayments of Loans upon the terms and conditions specified therein and other provisions relevant to this Note.

EXHIBIT A

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS

OF THE STATE OF TEXAS.

LEGACY RESERVES LP

BY: LEGACY RESERVES GP, LLC,
ITS GENERAL PARTNER

By:

Name: Steven H. Pruett Title: President, Chief Financial Officer and Secretary

EXHIBIT A

EXHIBIT B
[FORM OF]
COMPLIANCE CERTIFICATE

Each of the undersigned hereby certifies that he/she is the [__________] of Legacy Reserves LP, a Delaware limited partnership (the "Borrower"), and that as such he/she is authorized to execute this certificate on behalf of the Borrower. With reference to the Credit Agreement dated as of March 15, 2006 (together with all amendments, supplements or restatements thereto being the "Agreement") among the Borrower, BNP Paribas, as Administrative Agent, and the lenders (the "Lenders") which are or become a party thereto, and such Lenders, each of the undersigned represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Agreement unless otherwise specified):

(a) The representations and warranties of the Borrower contained in Article VII of the Agreement and in the Loan Documents and otherwise made in writing by or on behalf of the Borrower or any other Guarantor pursuant to the Agreement and the Loan Documents were true and correct when made, and are repeated at and as of the time of delivery hereof and are true and correct in all material respects at and as of the time of delivery hereof, except to the extent such representations and warranties are expressly limited to an earlier date or the Majority Lenders have expressly consented in writing to the contrary.

(b) The Borrower has performed and complied with all agreements and conditions contained in the Agreement and in the Loan Documents required to be performed or complied with by it prior to or at the time of delivery hereof [or specify default and describe].

(c) Since September 30, 2005, no change has occurred, either in any case or in the aggregate, in the condition, financial or otherwise, of the Borrower or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect [or specify event].

(d) There exists no Default or Event of Default [or specify Default and describe].

(e) Attached hereto are the detailed computations necessary to determine whether the Borrower is in compliance with Section 9.01 and Section 8.14 as of the end of the fiscal quarter ending [_______].

EXHIBIT B

EXECUTED AND DELIVERED this [______] day of [______].

LEGACY RESERVES LP

By: Legacy Reserves GP, LLC,
its general partner

By:

Name:
Title:

EXHIBIT B

EXHIBIT C-1
SECURITY INSTRUMENTS

1) Guaranty Agreement among Legacy Reserves Operating LP, Legacy Reserves Operating GP LLC, Legacy Reserves Services, Inc., and the Administrative Agent

2) Pledge Agreement among the Borrower, Legacy Reserves Operating GP LLC, and the Administrative Agent pledging limited partner interests in Legacy Reserves Operating LP, membership interests in Legacy Reserves Operating GP LLC and general partner interests in Legacy Reserves Operating LP

3) Pledge Agreement Financing Statements:

(a) Borrower

(b) Legacy Reserves Operating GP LLC

4) Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment of As-Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement (New Mexico), by Legacy Reserves Operating LP in favor of Paribas North America, Inc., as Mortgagee and Administrative Agent

5) New Mexico UCC-1, to be filed with the Delaware Secretary of State

6) Deed of Trust, Mortgage, Assignment of As-Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement (Texas), by Legacy Reserves Operating LP in favor of BNP Paribas, as Mortgagee and Administrative Agent

7) Texas UCC-1, to be filed with the Delaware Secretary of State

8) Fee Letter with BNP Paribas referred to in Section 3.05(c)

EXHIBIT C-1

EXHIBIT C-2
FORM OF GUARANTY AGREEMENT

EXHIBIT C-2

GUARANTY AGREEMENT

DATED AS OF
MARCH 15, 2006

MADE BY

LEGACY RESERVES OPERATING LP,
LEGACY RESERVES OPERATING GP LLC,
LEGACY RESERVES SERVICES, INC.
AND
EACH OF THE OTHER GUARANTORS (AS DEFINED HEREIN)

IN FAVOR OF

BNP PARIBAS,
AS ADMINISTRATIVE AGENT

TABLE OF CONTENTS 

                                                                                                                Page
ARTICLE I DEFINITIONS.............................................................................................1
   Section 1.01         Definitions...............................................................................1
   Section 1.02         Rules of Interpretation...................................................................3
ARTICLE II GUARANTEE..............................................................................................3
   Section 2.01         Guarantee.................................................................................3
   Section 2.02         Right of Contribution.....................................................................4
   Section 2.03         No Subrogation............................................................................4
   Section 2.04         Guaranty Amendments, Etc. with respect to the Borrower Obligations........................4
   Section 2.05         Waivers...................................................................................5
   Section 2.06         Guaranty Absolute and Unconditional.......................................................5
   Section 2.07         Reinstatement.............................................................................7
   Section 2.08         Payments..................................................................................7
ARTICLE III REPRESENTATIONS AND WARRANTIES........................................................................7
   Section 3.01         Representations in Credit Agreement.......................................................7
   Section 3.02         Guarantor Information.....................................................................7
   Section 3.03         Benefit to the Guarantor..................................................................7
   Section 3.04         Solvency..................................................................................7
ARTICLE IV THE ADMINISTRATIVE AGENT...............................................................................8
   Section 4.01         Authority of Administrative Agent.........................................................8
ARTICLE V SUBORDINATION OF INDEBTEDNESS...........................................................................8
   Section 5.01         Subordination of All Guarantor Claims.....................................................8
   Section 5.02         Claims in Bankruptcy......................................................................8
   Section 5.03         Payments Held in Trust....................................................................9
   Section 5.04         Liens Subordinate.........................................................................9
   Section 5.05         Notation of Records.......................................................................9
ARTICLE VI MISCELLANEOUS..........................................................................................9
   Section 6.01         Waiver....................................................................................9
   Section 6.02         Notices..................................................................................10
   Section 6.03         Payment of Expenses, Indemnities, Etc....................................................10
   Section 6.04         Amendments in Writing....................................................................10
   Section 6.05         Successors and Assigns...................................................................10
   Section 6.06         Survival; Revival; Reinstatement.........................................................10
   Section 6.07         Counterparts; Integration; Effectiveness.................................................11
   Section 6.08         Severability.............................................................................12
   Section 6.09         Set-Off..................................................................................12
   Section 6.10         Governing Law; Submission to Jurisdiction................................................12
   Section 6.11         Headings.................................................................................13
   Section 6.12         Acknowledgments..........................................................................13
   Section 6.13         Additional Guarantors....................................................................14
   Section 6.14         Acceptance...............................................................................14

-i-

SCHEDULES: 

Schedule 1        Notice Addresses of Guarantors
Schedule 2        Location of Jurisdiction of Organization and Chief Executive
                  Office

ANNEXES:
Annex I Form of Assumption Agreement

-ii-

This GUARANTY AGREEMENT, dated as of March 15, 2006, is made by LEGACY RESERVES OPERATING LP, a Delaware limited partnership, LEGACY RESERVES OPERATING GP LLC, a Delaware limited liability company, LEGACY RESERVES SERVICES, INC., a Texas corporation, (together with any other Subsidiary of the Borrower, as defined below, that becomes a party hereto from time to time after the date hereof, the "Guarantors"), in favor of BNP PARIBAS as administrative agent (in such capacity, together with its successors in such capacity, the "Administrative Agent"), for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit Agreement dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lenders and the Administrative Agent.

R E C I T A L S

Legacy Reserves LP, a Delaware limited liability company (the "Borrower") has requested that the Lenders provide certain loans to and extensions of credit on behalf of the Borrower.

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

It is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Guarantors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Lenders.

In consideration of the premises herein and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and the Swap Agreements and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, the Guarantors hereby agree with the Administrative Agent, for the ratable benefit of the Lenders, as follows:

ARTICLE I
DEFINITIONS

Section 1.01 Definitions.

(a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein have the meanings given to them in the Credit Agreement, and all uncapitalized terms which are defined in the UCC on the date hereof are used herein as so defined.

(b) The following terms have the following meanings:

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

"Assumption Agreement" means an Assumption Agreement substantially in the form attached hereto as Annex I.

"Bankruptcy Code" means title 11, United States Code, as amended from time to time.

"Borrower Obligations" means the collective reference to the payment and performance of all Indebtedness and all obligations of the Borrower and its Subsidiaries under the Guaranteed Documents, including, without limitation, the unpaid principal of and interest on the Loans and the LC Exposure and all other obligations and liabilities of the Borrower and its Subsidiaries (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and LC Exposure and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Guaranteed Creditors, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Guaranteed Documents, whether on account of principal, interest, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Guaranteed Creditors that are required to be paid by the Borrower pursuant to the terms of any Guaranteed Documents).

"Guaranteed Creditors" means the collective reference to the Administrative Agent, the Lenders and the Affiliates of Lenders that are parties to Guaranteed Swap Agreements.

"Guaranteed Documents" means the collective reference to the Credit Agreement, the other Loan Documents, each Guaranteed Swap Agreement and any other document made, delivered or given in connection with any of the foregoing.

"Guaranteed Swap Agreement" means any Swap Agreement between the Borrower or any of its Subsidiaries and any Lender or any Affiliate of any Lender while such Person (or, in the case of an Affiliate of a Lender, the Person affiliated therewith) is a Lender regardless of when such Swap Agreement was entered into. For the avoidance of doubt, a Swap Agreement ceases to be a Guaranteed Swap Agreement if the Person that is the counterparty to the Borrower or one of its Subsidiaries under a Swap Agreement ceases to be a Lender under the Credit Agreement (or, in the case of an Affiliate of a Lender, the Person affiliated therewith ceases to be a Lender under the Credit Agreement).

"Guarantor Obligations" means with respect to any Guarantor, the collective reference to (a) the Borrower Obligations and (b) all obligations and liabilities of such Guarantor which may arise under or in connection with any Guaranteed Document to which such Guarantor is a party, in each case, whether on account of principal, interest, guarantee obligations, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to any Guaranteed Creditor under any Guaranteed Document).

"Obligations" means: (a) in the case of the Borrower, the Borrower Obligations and (b) in the case of each Guarantor, its Guarantor Obligations.

"Guarantor Claims" has the meaning assigned to such term in Section 5.01.

-2-

Section 1.02 Rules of Interpretation. Section 1.04 and Section 1.05 of the Credit Agreement are hereby incorporated herein by reference and shall apply to this Agreement, mutatis mutandis.

ARTICLE II
GUARANTEE

Section 2.01 Guarantee.

(a) Each of the Guarantors hereby jointly and severally, unconditionally and irrevocably, guarantees to the Guaranteed Creditors and each of their respective successors, indorsees, transferees and assigns, the prompt and complete payment in cash and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. This is a guarantee of payment and not collection and the liability of each Guarantor is primary and not secondary.

(b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.02).

(c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this ARTICLE II or affecting the rights and remedies of any Guaranteed Creditor hereunder.

(d) Each Guarantor agrees that if the maturity of the Borrower Obligations is accelerated by bankruptcy or otherwise, such maturity shall also be deemed accelerated for the purpose of this guarantee without demand or notice to such Guarantor. The guarantee contained in this ARTICLE II shall remain in full force and effect until all the Borrower Obligations shall have been satisfied by payment in full in cash, no Letter of Credit shall be outstanding and all of the Commitments are terminated, notwithstanding that from time to time during the term of the Credit Agreement, no Borrower Obligations may be outstanding.

(e) No payment made by any Guarantor, any other guarantor or any other Person or received or collected by any Guaranteed Creditor from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full in cash, no Letter of Credit shall be outstanding and all of the Commitments are terminated.

-3-

Section 2.02 Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.03. The provisions of this Section 2.02 shall in no respect limit the obligations and liabilities of any Guarantor to the Guaranteed Creditors, and each Guarantor shall remain liable to the Guaranteed Creditors for the full amount guaranteed by such Guarantor hereunder.

Section 2.03 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by any Guaranteed Creditor, no Guarantor shall be entitled to be subrogated to any of the rights of any Guaranteed Creditor against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by any Guaranteed Creditor for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any indemnity, exoneration, participation, contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Guaranteed Creditors by the Borrower on account of the Borrower Obligations are irrevocably and indefeasibly paid in full in cash, no Letter of Credit shall be outstanding and all of the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been irrevocably and indefeasibly paid in full in cash, any Letter of Credit shall be outstanding or any of the Commitments are in effect, such amount shall be held by such Guarantor in trust for the Guaranteed Creditors, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, in accordance with Section 10.02(c) of the Credit Agreement.

Section 2.04 Guaranty Amendments, Etc. with respect to the Borrower Obligations. Each Guarantor shall remain obligated hereunder, and such Guarantor's obligations hereunder shall not be released, discharged or otherwise affected, notwithstanding that, without any reservation of rights against any Guarantor and without notice to, demand upon or further assent by any Guarantor (which notice, demand and assent requirements are hereby expressly waived by such Guarantor), (a) any demand for payment of any of the Borrower Obligations made by any Guaranteed Creditor may be rescinded by such Guaranteed Creditor or otherwise and any of the Borrower Obligations continued; (b) the Borrower Obligations, the liability of any other Person upon or for any part thereof or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by, or any indulgence or forbearance in respect thereof granted by, any Guaranteed Creditor; (c) any Guaranteed Document may be amended, modified, supplemented or terminated, in whole or in part, as the Guaranteed Creditors may deem advisable from time to time; (d) any collateral security, guarantee or right of offset at any time held by any Guaranteed Creditor for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released; (e) any additional guarantors, makers or endorsers of the Borrower's Obligations may from time to time be obligated on the Borrower's Obligations or any additional security or collateral for the payment and performance of the Borrower's Obligations may from time to time secure the

-4-

Borrower's Obligations; or (f) any other event shall occur which constitutes a defense or release of sureties generally. No Guaranteed Creditor shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this ARTICLE II or any Property subject thereto.

Section 2.05 Waivers. Each Guarantor hereby waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by any Guaranteed Creditor upon the guarantee contained in this ARTICLE II or acceptance of the guarantee contained in this ARTICLE II; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this ARTICLE II and no notice of creation of the Borrower Obligations or any extension of credit already or hereafter contracted by or extended to the Borrower need be given to any Guarantor; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Guaranteed Creditors, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this ARTICLE II. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Borrower Obligations.

Section 2.06 Guaranty Absolute and Unconditional.

(a) Each Guarantor understands and agrees that the guarantee contained in this ARTICLE II is, and shall be construed as, a continuing, completed, absolute and unconditional guarantee of payment, and each Guarantor hereby waives any defense of a surety or guarantor or any other obligor on any obligations arising in connection with or in respect of any of the following and hereby agrees that its obligations hereunder shall not be discharged or otherwise affected as a result of any of the following:

(i) the invalidity or unenforceability of any Guaranteed Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Guaranteed Creditor;

(ii) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any other Person against any Guaranteed Creditor;

(iii) the insolvency, bankruptcy arrangement, reorganization, adjustment, composition, liquidation, disability, dissolution or lack of power of the Borrower or any other Guarantor or any other Person at any time liable for the payment of all or part of the Obligations, including any discharge of, or bar or stay against collecting, any Obligation (or any part of them or interest therein) in or as a result of such proceeding;

(iv) any sale, lease or transfer of any or all of the assets of the Borrower or any other Guarantor, or any changes in the shareholders of the Borrower or any other Guarantor;

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(v) any change in the corporate existence (including its constitution, laws, rules, regulations or power), structure or ownership of any Guarantor or in the relationship between the Borrower and any Guarantor;

(vi) the fact that any Collateral or Lien contemplated or intended to be given, created or granted as security for the repayment of the Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien, it being recognized and agreed by each of the Guarantors that it is not entering into this Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectability or value of any of the Collateral for the Obligations;

(vii) the absence of any attempt to collect the Obligations or any part of them from any Guarantor;

(viii) (A) any Guaranteed Creditor's election, in any proceeding instituted under chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code; (B) any borrowing or grant of a Lien by the Borrower, as debtor-in-possession, or extension of credit, under Section 364 of the Bankruptcy Code; (C) the disallowance, under
Section 502 of the Bankruptcy Code, of all or any portion of any Guaranteed Creditor's claim (or claims) for repayment of the Obligations; (D) any use of cash collateral under Section 363 of the Bankruptcy Code; (E) any agreement or stipulation as to the provision of adequate protection in any bankruptcy proceeding; (F) the avoidance of any Lien in favor of the Guaranteed Creditors or any of them for any reason; or (G) failure by any Guaranteed Creditor to file or enforce a claim against the Borrower or its estate in any bankruptcy or insolvency case or proceeding; or

(ix) any other circumstance or act whatsoever, including any action or omission of the type described in Section 2.04 (with or without notice to or knowledge of the Borrower or such Guarantor), which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this ARTICLE II, in bankruptcy or in any other instance.

(b) When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, any Guaranteed Creditor may, but shall be under no obligation to, join or make a similar demand on or otherwise pursue or exhaust such rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by any Guaranteed Creditor to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Guaranteed Creditor against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings.

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Section 2.07 Reinstatement. The guarantee contained in this ARTICLE II shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by any Guaranteed Creditor upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its Property, or otherwise, all as though such payments had not been made.

Section 2.08 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, without set-off, deduction or counterclaim, in dollars, in immediately available funds, at the offices of the Administrative Agent specified in Section 12.01 of the Credit Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder and to induce the Lenders (and their Affiliates) to enter into Swap Agreements with the Borrower and its Subsidiaries, each Guarantor hereby represents and warrants to the Administrative Agent and each Lender that:

Section 3.01 Representations in Credit Agreement. In the case of each Guarantor, the representations and warranties set forth in Article VII of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party are true and correct in all material respects, provided that each reference in each such representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 3.01, be deemed to be a reference to such Guarantor's knowledge.

Section 3.02 Guarantor Information. On the date hereof, the correct legal name of such Guarantor, all names and trade names that such Guarantor has used in the last five years, such Guarantor's jurisdiction of organization and each jurisdiction of organization of such Guarantor over the last five years, organizational number, taxpayor identification number, and the location(s) of such Guarantor's chief executive office or sole place of business over the last five years are specified on Schedule 2.

Section 3.03 Benefit to the Guarantor. The Borrower is a member of an affiliated group of companies that includes each Guarantor, and the Borrower and the other Guarantors are engaged in related businesses. Each Guarantor is a Subsidiary of the Borrower and its guaranty and surety obligations pursuant to this Agreement reasonably may be expected to benefit, directly or indirectly, it; and it has determined that this Agreement is necessary and convenient to the conduct, promotion and attainment of the business of such Guarantor and the Borrower.

Section 3.04 Solvency. Each Guarantor (a) is not insolvent as of the date hereof and will not be rendered insolvent as a result of this Agreement (after giving effect to Section 2.02), (b) is not engaged in business or a

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transaction, or about to engage in a business or a transaction, for which any Property remaining with it constitutes unreasonably small capital, and (c) does not intend to incur, or believe it will incur, Debt that will be beyond its ability to pay as such Debt matures.

ARTICLE IV
The Administrative Agent

Section 4.01 Authority of Administrative Agent. Each Guarantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Guaranteed Creditors, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Guarantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Guaranteed Creditors with full and valid authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE V
SUBORDINATION OF INDEBTEDNESS

Section 5.01 Subordination of All Guarantor Claims. As used herein, the term "Guarantor Claims" shall mean all debts and obligations of the Borrower or any other Guarantor to the Borrower or any other Guarantor, whether such debts and obligations now exist or are hereafter incurred or arise, or whether the obligation of the debtor thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or obligations be evidenced by note, contract, open account, or otherwise, and irrespective of the Person or Persons in whose favor such debts or obligations may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by. After and during the continuation of an Event of Default, no Guarantor shall receive or collect, directly or indirectly, from any other obligor in respect thereof any amount upon the Guarantor Claims.

Section 5.02 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency proceedings involving any Guarantor, the Administrative Agent on behalf of the Administrative Agent and the Guaranteed Creditors shall have the right to prove their claim in any proceeding, so as to establish their rights hereunder and receive directly from the receiver, trustee or other court custodian, dividends and payments which would otherwise be payable upon Guarantor Claims. Each Guarantor hereby assigns such dividends and payments to the Administrative Agent for the benefit of the Administrative Agent and the Guaranteed Creditors for application against the Borrower Obligations as provided under Section 10.02(c) of the Credit Agreement. Should any Agent or Guaranteed Creditor receive, for application upon the Obligations, any such dividend or payment which is otherwise payable to any Guarantor, and which, as between such Guarantors, shall constitute a credit upon the Guarantor Claims, then upon payment in full in cash of the Borrower Obligations, the expiration of all Letters of Credit outstanding under the Credit Agreement and

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the termination of all of the Commitments, the intended recipient shall become subrogated to the rights of the Administrative Agent and the Guaranteed Creditors to the extent that such payments to the Administrative Agent and the Guaranteed Creditors on the Guarantor Claims have contributed toward the liquidation of the Obligations, and such subrogation shall be with respect to that proportion of the Obligations which would have been unpaid if the Administrative Agent and the Guaranteed Creditors had not received dividends or payments upon the Guarantor Claims.

Section 5.03 Payments Held in Trust. In the event that, notwithstanding
Section 5.01 and Section 5.02, any Guarantor should receive any funds, payments, claims or distributions which is prohibited by such Sections, then it agrees:
(a) to hold in trust for the Administrative Agent and the Guaranteed Creditors an amount equal to the amount of all funds, payments, claims or distributions so received, and (b) that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions except to pay them promptly to the Administrative Agent, for the benefit of the Guaranteed Creditors; and each Guarantor covenants promptly to pay the same to the Administrative Agent.

Section 5.04 Liens Subordinate. Each Guarantor agrees that, until the Borrower Obligations are paid in full in cash, no Letter of Credit shall be outstanding and the termination of all of the Commitments, any Liens securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any Liens securing payment of the Obligations, regardless of whether such encumbrances in favor of such Guarantor, the Administrative Agent or any Guaranteed Creditor presently exist or are hereafter created or attach. Without the prior written consent of the Administrative Agent, no Guarantor, during the period in which any of the Borrower Obligations are outstanding or the Commitments are in effect, shall (a) exercise or enforce any creditor's right it may have against any debtor in respect of the Guarantor Claims, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceeding (judicial or otherwise, including without limitation the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce any Lien securing payment of the Guarantor Claims held by it.

Section 5.05 Notation of Records. Upon the request of the Administrative Agent, all promissory notes and all accounts receivable ledgers or other evidence of the Guarantor Claims accepted by or held by any Guarantor shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under the terms of this Agreement.

ARTICLE VI
MISCELLANEOUS

Section 6.01 Waiver. No failure on the part of the Administrative Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.

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The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity.

Section 6.02 Notices. All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 12.01 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1.

Section 6.03 Payment of Expenses, Indemnities, Etc.

(a) Each Guarantor agrees to pay or reimburse each Guaranteed Creditor and the Administrative Agent for all out-of-pocket expenses incurred by such Person, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Guaranteed Creditor, in connection with the enforcement or protection of its rights in connection with this Agreement or any other Loan Document, including, without limitation, all costs and expenses incurred in collecting against such Guarantor under the guarantee contained in ARTICLE II or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Guarantor is a party.

(b) Each Guarantor agrees to pay, and to save the Administrative Agent and the Guaranteed Creditors harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all Other Taxes which may be payable or determined to be payable in connection with any of the transactions contemplated by this Agreement.

(c) Each Guarantor agrees to pay, and to save the Administrative Agent and the Guaranteed Creditors harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to
Section 12.03 of the Credit Agreement.

Section 6.04 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 12.02 of the Credit Agreement.

Section 6.05 Successors and Assigns. The provisions of this Agreement shall be binding upon the Guarantors and their successors and assigns and shall inure to the benefit of the Administrative Agent and the Guaranteed Creditors and their respective successors and assigns; provided that except as set forth in Section 9.12 of the Credit Agreement, no Guarantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and the Lenders, and any such purported assignment, transfer or delegation shall be null and void.

Section 6.06 Survival; Revival; Reinstatement.

(a) All covenants, agreements, representations and warranties made by any Guarantor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be

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considered to have been relied upon by the Administrative Agent, the other Agents, the Issuing Bank and the Lenders 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 other Agents, 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 the Credit 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 6.03 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.

(b) To the extent that any payments on the Guarantor Obligations 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 Guarantor Obligations so satisfied shall be revived and continue as if such payment had not been received and the Administrative Agent's and the Guaranteed Creditors' Liens, security interests, rights, powers and remedies under this Agreement and each other 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 Guaranteed Creditors to effect such reinstatement.

Section 6.07 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 (OTHER THAN THE LETTERS OF CREDIT AND THE LETTER OF CREIDT AGREEMENTS) REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPERANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c) 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, the Lenders and their respective successors and assigns. Delivery of an executed counterpart of a

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signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

Section 6.08 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 6.09 Set-Off. 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 any Guarantor against any of and all the obligations of the Guarantor 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 6.09 are in addition to other rights and remedies (including other rights of setoff) which such Lender or its Affiliates may have.

Section 6.10 Governing Law; Submission to Jurisdiction.

(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT 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 OF THE PARTIES 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) 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

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SECTION 12.01 OF THE CREDIT AGREEMENT (OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO SECTION 12.01 OF THE CREDIT AGREEMENT) OR SCHEDULE 1 HERETO, AS APPLICABLE, 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 (1) 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; (2) 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; (3) 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 (4) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 9.10.

Section 6.11 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 6.12 Acknowledgments. Each Guarantor hereby acknowledges that:

(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b) neither the Administrative Agent nor any Guaranteed Creditor has any fiduciary relationship with or duty to any Guarantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Guarantors, on the one hand, and the Administrative Agent and Guaranteed Creditors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Guaranteed Creditors or among the Guarantors and the Guaranteed Creditors.

(d) Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged

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with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the Security Instruments 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 SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."

Section 6.13 Additional Guarantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 8.14 of the Credit Agreement shall become an Guarantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement and shall thereafter have the same rights, benefits and obligations as an Guarantor party hereto on the date hereof.

Section 6.14 Acceptance. Each Guarantor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the Administrative Agent and the Guaranteed Creditors being conclusively presumed by their request for this Agreement and delivery of the same to the Administrative Agent.

[Remainder of page intentionally left blank; signature page follows]

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IN WITNESS WHEREOF, each of the undersigned has caused this Guaranty Agreement to be duly executed and delivered as of the date first above written.

GUARANTORS: LEGACY RESERVES OPERATING LP

By: LEGACY RESERVES OPERATING GP
LLC, its general partner
By: LEGACY RESERVES LP, its sole
member
By: LEGACY RESERVES GP, LLC, its
general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

LEGACY RESERVES OPERATING GP LLC

By: LEGACY RESERVES LP, its sole
member
By: LEGACY RESERVES GP, LLC, its
general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

LEGACY RESERVES SERVICES, INC.

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

Signature Page - Guaranty Agreement 

Acknowledged and Agreed to as
of the date hereof by:

ADMINISTRATIVE AGENT:                   BNP PARIBAS


                                        By:
                                            -----------------------------------
                                        Name:
                                        Title:


                                        By:
                                            -----------------------------------
                                        Name:

Title:

Signature Page - Guaranty Agreement

Schedule 1

NOTICE ADDRESSES OF GUARANTORS

Legacy Reserves Operating LP, Legacy Reserves Operating GP LLC and Legacy Reserves Services, Inc.

303 West Wall Street, Suite 1600
Midland, Texas 79701

Attn: Steven H. Pruett, President and CFO Tel. 432-682-2516
Fax 432-682-4013
E-mail spruett@legacylp.com

Schedule 1 - 1

Schedule 2

LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE

Legal name: Legacy Reserves LP
Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves LP has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 16-1751069 Organizational number: 4038949

Legal name: Legacy Reserves Operating LP Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Operating LP has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 20-4307259 Organizational number: 4096664

Legal name: Legacy Reserves Operating GP LLC Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Operating GP LLC has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 20-4307209 Organizational number: 4096662

Legal name: Legacy Reserves Services, Inc. Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Services, Inc. has used in the last five years: No other names
Jurisdiction of organization over the last five years: Texas Current jurisdiction of organization: Texas Taxpayer identification number: 20-4442710 Organizational number: 800619799

Schedule 2 - 1

Annex I

Assumption Agreement

ASSUMPTION AGREEMENT, dated as of [ ], 200[ ], made by
[ ], a [ ] (the "Additional Guarantor"), in favor of BNP PARIBAS, as administrative agent (in such capacity, the "Administrative Agent") for the Guaranteed Creditors (used herein as defined in the Guaranty Agreement referred to below). All capitalized terms not defined herein shall have the meaning ascribed to them in the Credit Agreement referred to below.

W I T N E S S E T H:

WHEREAS, Legacy Reserves LP, a Delaware limited partnership (the "Borrower"), the Administrative Agent, and certain financial institutions have entered into that certain Credit Agreement, dated as of March 15, 2006 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement");

WHEREAS, in connection with the Credit Agreement, certain of Borrower's Affiliates (other than the Additional Guarantor) have entered into a Guaranty Agreement, dated as of March 15, 2006 (as amended, restated, supplemented or otherwise modified from time to time, the "Guaranty Agreement") in favor of the Administrative Agent for the benefit of the Guaranteed Creditors;

WHEREAS, the Credit Agreement requires the Additional Guarantor to become a party to the Guaranty Agreement; and

WHEREAS, the Additional Guarantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guaranty Agreement;

NOW, THEREFORE, IT IS AGREED:

1. Guaranty Agreement. By executing and delivering this Assumption Agreement, the Additional Guarantor, as provided in Section 6.13 of the Guaranty Agreement, hereby becomes a party to the Guaranty Agreement as an Guarantor thereunder with the same force and effect as if originally named therein as an Guarantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of an Guarantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in Schedules 1 and 2 to the Guaranty Agreement. The Additional Guarantor hereby represents and warrants that each of the representations and warranties contained in ARTICLE III of the Guaranty Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date.

2. Governing Law. This Assumption Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

Annex I - 3

IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written.

[ADDITIONAL GUARANTOR]

By:

Name:


Title:

Annex I - 2

EXHIBIT C-3
FORM OF PLEDGE AGREEMENT

EXHIBIT C-3

PLEDGE AGREEMENT

DATED AS OF
MARCH 15, 2006

MADE BY

LEGACY RESERVES LP,
AND
EACH OF THE OTHER PLEDGORS (AS DEFINED HEREIN)

IN FAVOR OF

BNP PARIBAS,
AS ADMINISTRATIVE AGENT

TABLE OF CONTENTS 

                                                                                                          Page

ARTICLE I DEFINITIONS.............................................................................................1
   Section 1.01         Definitions...............................................................................1
   Section 1.02         Other Definitional Provisions.............................................................3
   Section 1.03         Rules of Interpretation...................................................................3
ARTICLE II GRANT OF SECURITY INTEREST.............................................................................3
   Section 2.01         Grant of Security Interest................................................................3
   Section 2.02         Transfer of Pledged Securities............................................................4
ARTICLE III REPRESENTATIONS AND WARRANTIES........................................................................4
   Section 3.01         Representations in Credit Agreement.......................................................4
   Section 3.02         Title; No Other Liens.....................................................................4
   Section 3.03         Perfected First Priority Liens............................................................5
   Section 3.04         Pledgor and Issuer Information............................................................5
   Section 3.05         Pledged Securities........................................................................5
ARTICLE IV COVENANTS..............................................................................................5
   Section 4.01         Maintenance of Perfected Security Interest; Further Documentation.........................6
   Section 4.02         Changes in Locations, Name, Etc...........................................................6
   Section 4.03         Pledged Securities........................................................................7
ARTICLE V REMEDIAL PROVISIONS.....................................................................................8
   Section 5.01         Code and Other Remedies...................................................................8
   Section 5.02         Pledged Securities........................................................................9
   Section 5.03         Private Sales of Pledged Securities......................................................11
   Section 5.04         Waiver; Deficiency.......................................................................12
   Section 5.05         Non-Judicial Enforcement.................................................................12
ARTICLE VI THE ADMINISTRATIVE AGENT..............................................................................12
   Section 6.01         Administrative Agent's Appointment as Attorney-in-Fact, Etc..............................12
   Section 6.02         Duty of Administrative Agent.............................................................13
   Section 6.03         Execution of Financing Statements........................................................14
   Section 6.04         Authority of Administrative Agent........................................................14
ARTICLE VII MISCELLANEOUS........................................................................................15
   Section 7.01         Waiver...................................................................................15
   Section 7.02         Notices..................................................................................15
   Section 7.03         Payment of Expenses, Indemnities, Etc....................................................15
   Section 7.04         Amendments in Writing....................................................................15
   Section 7.05         Successors and Assigns...................................................................15
   Section 7.06         Survival; Revival; Reinstatement.........................................................16
   Section 7.07         Counterparts; Integration; Effectiveness.................................................16
   Section 7.08         Severability.............................................................................17
   Section 7.09         Set-Off..................................................................................17
   Section 7.10         Governing Law; Submission to Jurisdiction................................................17
   Section 7.11         Headings.................................................................................18

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   Section 7.12         Acknowledgments..........................................................................18
   Section 7.13         Releases.................................................................................19
   Section 7.14         Acceptance...............................................................................20


SCHEDULES:
Schedule 1        Description of Pledged Securities
Schedule 2        Filings and Other Actions Required to Perfect Security Interests
Schedule 3        Location of Jurisdiction of Organization and Chief Executive Office
Schedule 4        Notice Addresses of Pledgors

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This PLEDGE AGREEMENT, dated as of March 15, 2006, is made by LEGACY RESERVES LP, a Delaware limited partnership (the "Borrower"), and each of the signatories hereto (the Borrower and each of the signatories hereto, together with any other Subsidiary of the Borrower that becomes a party hereto from time to time after the date hereof, the "Pledgors"), in favor of BNP PARIBAS as administrative agent (in such capacity, together with its successors in such capacity, the "Administrative Agent"), for the banks and other financial institutions from time to time parties to the Credit Agreement dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lenders and the Administrative Agent, as well as their Affiliates that are parties to the Secured Swap Agreements (collectively, the "Lenders").

R E C I T A L S

It is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Pledgors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Lenders.

In consideration of the premises herein and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and the Secured Swap Agreements and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, the Pledgors hereby agree with the Administrative Agent, for the ratable benefit of the Lenders, as follows:

ARTICLE I
DEFINITIONS

Section 1.01 Definitions.

(a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein have the meanings given to them in the Credit Agreement, and all uncapitalized terms that are defined in the UCC on the date hereof are used herein as so defined.

(b) The following terms have the following meanings:

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

"Borrower Obligations" means the collective reference to the payment and performance of all Indebtedness and all obligations of the Borrower and its Subsidiaries under the Loan Documents, including, without limitation, the unpaid principal of and interest on the Loans and the LC Exposure, obligations under the Secured Swap Agreements and all other obligations and liabilities of the Borrower and its Subsidiaries (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and LC Exposure and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to

the Lenders, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Loan Documents, including the Secured Swap Agreements, whether on account of principal, interest, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Lenders that are required to be paid by the Pledgor pursuant to the terms of any Loan Documents).

"Collateral" has the meaning assigned such term in Section 2.01.

"Issuers" means the collective reference to each issuer of a Pledged Security.

"LLC" means, with respect to each Pledgor, each limited liability company described or referred to in Schedule 1 in which such Pledgor has an interest.

"LLC Agreement" means, with respect to each Pledgor, each operating agreement relating to an LLC, as each agreement has heretofore been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time.

"Partnership" means, with respect to each Pledgor, each partnership described or referred to in Schedule 1 in which such Pledgor has an interest.

"Partnership Agreement" means, with respect to each Pledgor, each partnership agreement governing a Partnership, as each such agreement has heretofore been, and may hereafter be, amended, restated, supplemented or otherwise modified.

"Pledged LLC Interests" means, with respect to each Pledgor, all right, title and interest of such Pledgor as a member of each LLC and all right, title and interest of any Pledgor in, to and under each LLC Agreement.

"Pledged Partnership Interests" means, with respect to each Pledgor, all right, title and interest of such Pledgor as a limited or general partner in all Partnerships and all right, title and interest of any Pledgor in, to and under the Partnership Agreements.

"Pledged Securities" means: (a) the Equity Interests described or referred to in Schedule 1 (as the same may be supplemented from time to time pursuant to a Supplement); and (b) (i) the certificates or instruments, if any, representing such Equity Interests, (ii) all dividends (cash, Equity Interests or otherwise), cash, instruments, rights to subscribe, purchase or sell and all other rights and Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities,
(iii) all replacements, additions to and substitutions for any of the Property referred to in this definition, including, without limitation, claims against third parties, (iv) the proceeds, interest, profits and other income of or on any of the Property referred to in this definition, (v) all security entitlements in respect of any of the foregoing, if any and (vi) all books and records relating to any of the Property referred to in this definition.

"Proceeds" means all "proceeds" as such term is defined in Section 9.102(64) of the Uniform Commercial Code in effect in the State of Texas on the date hereof and, in any event,

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shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto.

"Secured Swap Agreement" means any Swap Agreement between the Borrower or any of its Subsidiaries and any Lender or any Affiliate of any Lender while such Person (or, in the case of an Affiliate of a Lender, the Person affiliated therewith) is a Lender regardless of when such Swap Agreement was entered into. For the avoidance of doubt, a Swap Agreement ceases to be a Secured Swap Agreement if the Person that is the counterparty to the Borrower or one of its Subsidiaries under a Swap Agreement ceases to be a Lender under the Credit Agreement (or, in the case of an Affiliate of a Lender, the Person affiliated therewith ceases to be a Lender under the Credit Agreement).

"Securities Act" shall mean the Securities Act of 1933, as amended.

"UCC" means the Uniform Commercial Code as from time to time in effect in the State of Texas; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Administrative Agent's and the Lenders' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, the effect thereof or priority and for purposes of definitions related to such provisions.

Section 1.02 Other Definitional Provisions. Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Pledgor, refer to such Pledgor's Collateral or the relevant part thereof.

Section 1.03 Rules of Interpretation. Section 1.04 and Section 1.05 of the Credit Agreement are hereby incorporated herein by reference and shall apply to this Agreement, mutatis mutandis.

ARTICLE II
GRANT OF SECURITY INTEREST

Section 2.01 Grant of Security Interest. Each Pledgor hereby pledges, assigns and transfers to the Administrative Agent, and hereby grants to the Administrative Agent, for the benefit of the Administrative Agent and the Lenders, a security interest in all of the following property now owned or at any time hereafter acquired by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Pledgor's Obligations:

(1) all Pledged Securities;

(2) all books and records pertaining to the Collateral; and

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(3) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing.

Section 2.02 Transfer of Pledged Securities. To the extent the Pledge Securities constitute "securities" under Article 8 of the UCC, all certificates or instruments representing or evidencing such Pledged Securities shall be delivered to and held pursuant hereto by the Administrative Agent or a Person designated by the Administrative Agent and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, and accompanied by any required transfer tax stamps to effect the pledge of the Pledged Securities to the Administrative Agent. Notwithstanding the preceding sentence, at the Administrative Agent's reasonable discretion, to the extent the Pledge Securities constitute "securities" under Article 8 of the UCC, all such Pledged Securities must be delivered or transferred in such manner as to permit the Administrative Agent to be a "protected purchaser" to the extent of its security interest as provided in
Section 8.303 of the UCC (if the Administrative Agent otherwise qualifies as a protected purchaser). During the continuance of an Event of Default, the Administrative Agent shall have the right, at any time in its discretion and without notice, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in Section 5.03. In addition, during the continuance of an Event of Default, the Administrative Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Securities for certificates or instruments of smaller or larger denominations.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder and to induce the Lenders to enter into Secured Swap Agreements with the Borrower and its Subsidiaries, each Pledgor hereby represents and warrants to the Administrative Agent and each Lender that:

Section 3.01 Representations in Credit Agreement. The representations and warranties set forth in Article VII of the Credit Agreement as they relate to each Pledgor or to the Loan Documents to which such Pledgor is a party are true and correct in all material respects.

Section 3.02 Title; No Other Liens. Except for the security interest granted to the Administrative Agent for the benefit of the Administrative Agent and the Lenders pursuant to this Agreement, such Pledgor is the record and beneficial owner of its respective items of the Collateral free and clear of any and all Liens and has rights in or the power to transfer each item of the Collateral in which a Lien is granted by it hereunder, free and clear of any Lien. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Administrative Agent, for the benefit of the Administrative Agent and the Lenders, pursuant to this Agreement or the Security Instruments.

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Section 3.03 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) upon the completion of the filings and the other actions specified on Schedule 2 constitute valid perfected security interests in all of the Collateral in favor of the Administrative Agent, for the benefit of the Administrative Agent and the Lenders, as collateral security for such Pledgor's Obligations, enforceable in accordance with the terms hereof against all creditors of such Pledgor and any Persons purporting to purchase any Collateral from such Pledgor and (b) are prior to all other Liens on the Collateral in existence on the date hereof.

Section 3.04 Pledgor and Issuer Information. On the date hereof, the correct legal name of each Pledgor and Issuer, all names and trade names that such Pledgor or Issuer has used in the last five years, such Pledgor or Issuer's jurisdiction of organization and each jurisdiction of organization of such Pledgor or Issuer over the last five years, organizational number, taxpayer identification number, and the location(s) of such Pledgor or Issuer's chief executive office or sole place of business over the last five years are specified on Schedule 3.

Section 3.05 Pledged Securities.

(a) The Pledged Securities required to be pledged hereunder and under the Credit Agreement by such Pledgor are listed in Schedule 1. The shares of Pledged Securities pledged by such Pledgor hereunder constitute all the issued and outstanding shares of all classes of the Equity Interests of each Issuer owned by such Pledgor. All the shares of the Pledged Securities have been duly and validly issued and are fully paid and nonassessable; and such Pledgor is the record and beneficial owner of, and has good title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement, and has rights in or the power to transfer the Pledged Securities in which a Lien is granted by it hereunder, free and clear of any Lien.

(b) There are no restrictions on transfer (that have not been waived or otherwise consented to) in the LLC Agreement governing any Pledged LLC Interest and the Partnership Agreement governing any Pledged Partnership Interest or any other agreement relating thereto which would limit or restrict
(i) the grant of a security interest in the Pledged LLC Interests and the Pledged Partnership Interests, (ii) the perfection of such security interest or
(iii) the exercise of remedies in respect of such perfected security interest in the Pledged LLC Interests and the Pledged Partnership Interests, in each case, as contemplated by this Agreement. Upon the exercise of remedies in respect of the Pledged LLC Interests and the Pledged Partnership Interests, a transferee or assignee of a membership interest or partnership interest, as the case may be, of such LLC or Partnership, as the case may be, shall become a member or partner, as the case may be, of such LLC or Partnership, as the case may be, entitled to participate in the management thereof and, upon the transfer of the entire interest of such Pledgor, such Pledgor ceases to be a member or partner, as the case may be.

ARTICLE IV
COVENANTS

Each Pledgor covenants and agrees with the Administrative Agent and the Lenders that, from and after the date of this Agreement until the Borrower Obligations shall have been paid in

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full in cash, no Letter of Credit shall be outstanding and all of the Commitments shall have terminated:

Section 4.01 Maintenance of Perfected Security Interest; Further Documentation. Each Pledgor agrees that:

(a) it shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 3.03 and shall defend such security interest against the claims and demands of all Persons whomsoever.

(b) it will furnish to the Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail.

(c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of such Pledgor, it will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably deem necessary for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the delivery of certificated securities and the filing of any financing or continuation statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby.

Section 4.02 Changes in Locations, Name, Etc. Such Pledgor recognizes that financing statements pertaining to the Collateral have been or may be filed twhere such Pledgor maintains any Collateral or is organized. Without limitation of Section 8.01(m) of the Credit Agreement or any other covenant herein, such Pledgor will not cause or permit any change in its (a) corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its Properties, (b) the location of its chief executive office or principal place of business, (c) its identity or corporate structure or in the jurisdiction in which it is incorporated or formed, (d) its jurisdiction of organization or its organizational identification number in such jurisdiction of organization or (e) its federal taxpayer identification number, unless, in each case, such Pledgor shall have first (i) notified the Administrative Agent of such change at least thirty (30) days prior to the effective date of such change, and (ii) taken all action reasonably requested by the Administrative Agent for the purpose of maintaining the perfection and priority of the Administrative Agent's security interests under this Agreement. In any notice furnished pursuant to this Section 4.02, such Pledgor will expressly state in a conspicuous manner that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of the Administrative Agent's security interest in the Collateral. At the request of the Administrative Agent, on or prior to the occurrence of such event, the Borrower will provide to the Administrative Agent and the Lenders an opinion of counsel, in form and substance reasonably satisfactory to the Administrative Agent, to the effect that such event will not impair the validity of the security interests hereunder, the perfection and priority thereof, the enforceability of the Loan Documents, and such other matters as may be reasonably requested by the Administrative Agent.

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Section 4.03 Pledged Securities.

(a) If such Pledgor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Equity Interests of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Securities, or otherwise in respect thereof, such Pledgor shall accept the same as the agent of the Lenders, hold the same in trust for the Lenders, segregated from other Property of such Pledgor, and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by such Pledgor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Pledgor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Borrower Obligations.

(b) Without the prior written consent of the Administrative Agent, such Pledgor will not (i) unless otherwise expressly permitted hereby or under the other Loan Documents, vote to enable, or take any other action to permit, any Issuer to issue any Equity Interests of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any Equity Interests of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Pledgor or the Administrative Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof.

(c) In the case of each Pledgor that is a partner in a Partnership, such Pledgor hereby consents to the extent required by the applicable Partnership Agreement to the pledge by each other Pledgor, pursuant to the terms hereof, of the Pledged Partnership Interests in such Partnership and to the transfer of such Pledged Partnership Interests to the Administrative Agent or its nominee and to the substitution of the Administrative Agent or its nominee as a substituted partner in such Partnership with all the rights, powers and duties of a general partner or a limited partner, as the case may be. In the case of each Pledgor member of an LLC, such Pledgor hereby consents to the extent required by the applicable LLC Agreement to the pledge by each other Pledgor, pursuant to the terms hereof, of the Pledged LLC Interests in such LLC and to the transfer of such Pledged LLC Interests to the Administrative Agent or its nominee and to the substitution of the Administrative Agent or its nominee as a substituted member of the LLC with all the rights, powers and duties of a member of the LLC in question.

(d) Such Pledgor shall not agree to any amendment of a Partnership Agreement or LLC Agreement that in any way adversely affects the perfection of the security interest of the Administrative Agent in the Pledged Partnership Interests or Pledged LLC Interests pledged by such Pledgor hereunder, including any amendment electing to treat the

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membership interest or partnership interest of such Pledgor as a security under
Section 8-103 of the UCC.

(e) Each Pledgor shall furnish to the Administrative Agent such stock powers and other instruments as may be required by the Administrative Agent to assure the transferability of the Pledged Securities when and as often as may be reasonably requested by the Administrative Agent.

(f) The Pledged Securities will at all times constitute not less than 100% of the Equity Interests of the Issuer thereof owned by any Pledgor. Each Pledgor will not permit any Issuer of any of the Pledged Securities to issue any new shares of any class of Equity Interests of such Issuer without the prior written consent of the Administrative Agent.

ARTICLE V
REMEDIAL PROVISIONS

Section 5.01 Code and Other Remedies.

(a) Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement, the other Loan Documents and in any other instrument or agreement securing, evidencing or relating to the Borrower Obligations, all rights and remedies of a secured party under the UCC or any other applicable law or otherwise available at law or equity. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived and released. If applicable to any particular item of Collateral, each Pledgor further agrees, at the Administrative Agent's request, to assemble the Collateral and make it available to the Administrative Agent at places that the Administrative Agent shall reasonably select, whether at such Pledgor's premises or elsewhere. Any such sale or transfer by the Administrative Agent either to itself or to any other Person shall be absolutely free from any claim of right by Pledgor, including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted (and such Pledgor hereby waives any rights it may have in respect thereof). Upon any such sale or transfer, the Administrative Agent shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. The Administrative Agent shall apply the net proceeds of any

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action taken by it pursuant to this Section 5.01, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Borrower Obligations, in accordance with Section 10.02(c) of the Credit Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9.615 of the UCC, need the Administrative Agent account for the surplus, if any, to any Pledgor. To the extent permitted by applicable law, each Pledgor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder except to the extent caused by the gross negligence or willful misconduct of the Administrative Agent or such Lender or their respective agents. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

(b) In the event that the Administrative Agent elects not to sell the Collateral, the Administrative Agent retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Borrower Obligations. Each and every method of disposition of the Collateral described in this Agreement shall constitute disposition in a commercially reasonable manner.

(c) The Administrative Agent may appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer of the Collateral.

Section 5.02 Pledged Securities.

(a) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Pledgor of the Administrative Agent's intent to exercise its corresponding rights pursuant to Section 5.02(c), each Pledgor shall be permitted to receive all cash dividends paid in respect of the Pledged Securities paid in the normal course of business of the relevant Issuer (other than liquidating or distributing dividends), to the extent permitted in the Credit Agreement. Any sums paid upon or in respect of any Pledged Securities upon the liquidation or dissolution of any issuer of any Pledged Securities, any distribution of capital made on or in respect of any Pledged Securities or any property distributed upon or with respect to any Pledged Securities pursuant to the recapitalization or reclassification of the capital of any issuer of Pledged Collateral or pursuant to the reorganization thereof shall, unless otherwise subject to a perfected security interest in favor of the Administrative Agent, be delivered to the Administrative Agent to be held by it hereunder as additional collateral security for the Borrower Obligations. If any sum of money or property so paid or distributed in respect of any Pledged Securities shall be received by such Pledgor, such Pledgor shall, until such money or property is paid or delivered to the Administrative Agent, hold such money or property in trust for the Administrative Agent, segregated from other funds of such Pledgor, as additional security for the Borrower Obligations.

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(b) Unless an Event of Default shall have occurred and be continuing and the and the Administrative Agent shall have given notice to the relevant Pledgor of the Administrative Agent's intent to exercise its corresponding rights pursuant to Section 5.02(c), each Pledgor shall be entitled to exercise all voting, consent and corporate, partnership or limited liability rights with respect to the Pledged Securities; provided, however, that no vote shall be cast, consent given or right exercised or other action taken by such Pledgor that would impair the Collateral, be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document or, without the prior consent of the Administrative Agent and the Lenders, enable or permit any issuer of Pledged Collateral to issue any Equity Interest or to issue any other securities convertible into or granting the right to purchase or exchange for any Stock of any issuer of Pledged Collateral other than as permitted by the Credit Agreement.

(c) Upon the occurrence and during the continuance of an Event of Default, upon notice by the Administrative Agent of its intent to exercise such rights to the relevant Pledgor or Pledgors, (i) the Administrative Agent shall have the right to receive any and all cash dividends, payments, Property or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Borrower Obligations in accordance with Section 10.02(c) of the Credit Agreement, and (ii) any or all of the Pledged Securities shall be registered in the name of the Administrative Agent or its nominee, and (iii) the Administrative Agent or its nominee may exercise (A) all voting, consent, corporate, partnership or limited liability and other rights pertaining to such Pledged Securities at any meeting of shareholders, partners or members (or other equivalent body), as the case may be, of the relevant Issuer or Issuers or otherwise and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the organizational structure of any Issuer, or upon the exercise by any Pledgor or the Administrative Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for Property actually received by it, but the Administrative Agent shall have no duty to any Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

(d) Upon the occurrence and during the continuance of an Event of Default, in order to permit the Administrative Agent to exercise the voting and other consensual rights that it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions that it may be entitled to receive hereunder, (i) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to the Administrative Agent all such proxies, dividend payment orders and other instruments as the Administrative Agent may from time to time reasonably request and (ii) without limiting the effect of clause (i) above, such Pledgor hereby grants to the Administrative Agent an irrevocable proxy to vote all or any part of the Pledged Securities and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Securities would be entitled (including giving or withholding written consents of shareholders,

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partners or members, as the case may be, calling special meetings of shareholders, partners or members, as the case may be, and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Securities on the record books of the Issuer thereof) by any other Person (including the Issuer of such Pledged Collateral or any officer or agent thereof).

(e) Each Pledgor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Pledgor hereunder to (i) comply with any instruction received by it from the Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Pledgor, and each Pledgor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Securities directly to the Administrative Agent.

(f) Upon the occurrence and during the continuance of an Event of Default, if the Issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any Governmental Authority, then all rights of the Pledgor in respect thereof to exercise the voting and other consensual rights which such Pledgor would otherwise be entitled to exercise with respect to the Pledged Securities issued by such Issuer shall cease, and all such rights shall thereupon become vested in the Administrative Agent who shall thereupon have the sole right to exercise such voting and other consensual rights, but the Administrative Agent shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing.

Section 5.03 Private Sales of Pledged Securities.

(a) Each Pledgor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Securities, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise or may determine that a public sale is impracticable or not commercially reasonable and, accordingly, and may resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Securities for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

(b) Each Pledgor agrees to use commercially reasonable efforts to do or cause to be done all such other acts as may reasonably be necessary to make such sale or sales of all or any portion of the Pledged Securities pursuant to this Section 5.03 valid and binding and in compliance with any and all other applicable Governmental Requirements. Each Pledgor further agrees that a breach of any of the covenants contained in this Section 5.03 will cause irreparable

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injury to the Lenders, that the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.03 shall be specifically enforceable against such Pledgor, and such Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred or is continuing under the Credit Agreement.

Section 5.04 Waiver; Deficiency. Each Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency.

Section 5.05 Non-Judicial Enforcement. The Administrative Agent may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law, each Pledgor expressly waives any and all legal rights which might otherwise require the Administrative Agent to enforce its rights by judicial process.

ARTICLE VI
THE ADMINISTRATIVE AGENT

Section 6.01 Administrative Agent's Appointment as Attorney-in-Fact, Etc.

(a) Each Pledgor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor and in the name of such Pledgor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all reasonably appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Pledgor hereby gives the Administrative Agent the power and right, on behalf of such Pledgor, without notice to or assent by such Pledgor, to do any or all of the following:

(i) in the name of such Pledgor or its own name, or otherwise, take possession of and indorse and collect any check, draft, note, acceptance or other instrument for the payment of moneys due with respect to any Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any such moneys due with respect to any other Collateral whenever payable;

(ii) unless being disputed under Section 8.04 of the Credit Agreement, pay or discharge Taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement or any other Loan Document and pay all or any part of the premiums therefor and the costs thereof;

(iii) execute, in connection with any sale provided for in Section 5.01 or Section 5.03, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

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(iv) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (D) defend any suit, action or proceeding brought against such Pledgor with respect to any Collateral; (E) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; and (F) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent's option and such Pledgor's expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent's and the Lenders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do.

Anything in this Section 6.01(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 6.01(a) unless an Event of Default shall have occurred and be continuing.

(b) If any Pledgor fails to perform or comply with any of its agreements contained herein within the applicable grace periods, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

(c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 6.01, together with interest thereon at a rate per annum equal to the post-default rate specified in Section 3.02(c) of the Credit Agreement, but in no event to exceed the Highest Lawful Rate, from the date of payment by the Administrative Agent to the date reimbursed by the relevant Pledgor, shall be payable by such Pledgor to the Administrative Agent on demand.

(d) Each Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue and in compliance hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated.

Section 6.02 Duty of Administrative Agent. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9.207 of the UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar Property for its own account and shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral. Neither the Administrative Agent, any Lender nor any of their Related Parties shall be liable for failure to demand, collect or realize upon any of

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the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Lenders hereunder are solely to protect the Administrative Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Lender to exercise any such powers. The Administrative Agent and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their Related Parties shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. To the fullest extent permitted by applicable law, the Administrative Agent shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Borrower Obligations, or to take any steps necessary to preserve any rights against any Pledgor or other Person or ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not it has or is deemed to have knowledge of such matters. Each Pledgor, to the extent permitted by applicable law, waives any right of marshaling in respect of any and all Collateral, and waives any right to require the Administrative Agent or any Lender to proceed against any Pledgor or other Person, exhaust any Collateral or enforce any other remedy which the Administrative Agent or any Lender now has or may hereafter have against any Pledgor or other Person.

Section 6.03 Execution of Financing Statements. Pursuant to the UCC and any other applicable law, each Pledgor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Pledgor in such form and in such offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

Section 6.04 Authority of Administrative Agent. Each Pledgor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Pledgor, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Pledgor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

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ARTICLE VII
MISCELLANEOUS

Section 7.01 Waiver. No failure on the part of the Administrative Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity.

Section 7.02 Notices. All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 12.01 of the Credit Agreement; provided that any such notice, request or demand to or upon any Pledgor shall be addressed to such Pledgor at its notice address set forth on Schedule 4.

Section 7.03. Payment of Expenses, Indemnities, Etc

(a) Each Pledgor agrees to pay or reimburse each Lender and the Administrative Agent for all out-of-pocket expenses incurred by such Person, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement or any other Loan Document, including, without limitation, all costs and expenses incurred in enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Pledgor is a party.

(b) Each Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all Other Taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

(c) Each Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to Section 12.03 of the Credit Agreement.

Section 7.04 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 12.02 of the Credit Agreement.

Section 7.05 Successors and Assigns. The provisions of this Agreement shall be binding upon the Pledgor and their successors and assigns and shall inure to the benefit of the Administrative Agent and the Lenders and their respective successors and assigns; provided that

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except as set forth in Section 9.12 of the Credit Agreement, no Pledgor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and the Lenders, and any such purported assignment, transfer or delegation shall be null and void.

Section 7.06 Survival; Revival; Reinstatement.

(a) All covenants, agreements, representations and warranties made by any Pledgor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be considered to have been relied upon by the Administrative Agent, the Issuing Bank and the Lenders 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 the Credit 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 7.03 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.

(b) To the extent that 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 Borrower Obligations 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 other 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 7.07 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 (OTHER THAN THE LETTERS OF CREDIT AND THE LETTER OF CREIDT AGREEMENTS) REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND

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THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPERANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c) 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, the Lenders 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 7.08 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 7.09 Set-Off. 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 the Secured Swap Agreements) at any time owing by such Lender or Affiliate to or for the credit or the account of any Pledgor against any of and all the obligations of the Pledgor 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 7.09 are in addition to other rights and remedies (including other rights of setoff) that such Lender or its Affiliates may have.

Section 7.10 Governing Law; Submission to Jurisdiction.

(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT 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 OF THE PARTIES 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

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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) 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 OF THE CREDIT AGREEMENT (OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO SECTION 12.01 OF THE CREDIT AGREEMENT), 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 (1) 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; (2) 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; (3) 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 (4) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS Section 7.10.

Section 7.11 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 7.12 Acknowledgments. Each Pledgor hereby acknowledges that:

(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to any Pledgor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Pledgors, on the one hand,

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and the Administrative Agent and Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Pledgors and the Lenders.

(d) Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the Security Instruments 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 SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."

Section 7.13 Releases.

(a) Release Upon Payment in Full. The grant of a security interest hereunder and all of rights, powers and remedies in connection herewith shall remain in full force and effect until the Administrative Agent has (i) retransferred and delivered all Collateral in its possession to the Pledgors, and (ii) executed a written release or termination statement and reassigned to the Pledgors without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Borrower Obligations, the termination of all of the Commitments and the compliance by the Pledgors with all covenants and agreements hereof, the Administrative Agent, at the expense of the Borrower, will promptly release, reassign and transfer the Collateral to the Pledgors and declare this Agreement to be of no further force or effect.

(b) Partial Releases. If any of the Collateral shall be sold, transferred or otherwise disposed of by any Pledgor in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of such Pledgor, shall promptly execute and deliver to such Pledgor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral and the Equity Interests of the Issuer thereof.

(c) Retention in Satisfaction. Except as may be expressly applicable pursuant to Section 9.620 of the UCC, no action taken or omission to act by the Administrative Agent or the Lenders hereunder, including, without limitation, any exercise of voting or consensual rights

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or any other action taken or inaction, shall be deemed to constitute a retention of the Collateral in satisfaction of the Borrower Obligations or otherwise to be in full satisfaction of the Borrower Obligations, and the Borrower Obligations shall remain in full force and effect, until the Administrative Agent and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Borrower Obligations in the full amount then outstanding or until such subsequent time as is provided in Section 7.13(a).

Section 7.14 Acceptance. Each Pledgor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the Administrative Agent and the Lenders being conclusively presumed by their request for this Agreement and delivery of the same to the Administrative Agent.

[Remainder of page intentionally left blank; signature page follows]

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IN WITNESS WHEREOF, each of the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written.

PLEDGORS: LEGACY RESERVES LP

By: LEGACY RESERVES GP, LLC,
its general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

LEGACY RESERVES OPERATING GP LLC

By: LEGACY RESERVES LP,
its sole member

By: LEGACY RESERVES GP, LLC,
its general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

Signature Page - Borrower Pledge Agreement 

Acknowledged and Agreed to as
of the date hereof by:

ADMINISTRATIVE AGENT:                   BNP PARIBAS


                                        By:
                                            -----------------------------------
                                        Name:
                                        Title:


                                        By:
                                            -----------------------------------
                                        Name:

Title:

Signature Page - Borrower Pledge Agreement

Schedule 1

DESCRIPTION OF PLEDGED SECURITIES

Pledged Securities: 

                                         PERCENTAGE        PERCENTAGE       CLASS OF        NO. OF      CERTIFICATE
       OWNER              ISSUER           OWNED            PLEDGED         STOCK OR        SHARES          NO.
                                                                          OTHER EQUITY
                                                                            INTEREST
Legacy Reserves LP        Legacy           99.99%             100%         All of the        N/A            N/A
                         Reserves                                            limited
                       Operating LP                                          partner
                                                                            interests

Legacy Reserves LP        Legacy            100%              100%         All of the        N/A            N/A
                         Reserves                                            Limited
                       Operating GP                                         Liability
                           LLC                                               Company
                                                                            interests

Legacy Reserves LP        Legacy            100%              100%         All of the         1            1000
                         Reserves                                         common stock
                      Services, Inc.

  Legacy Reserves         Legacy           0.01%              100%         All of the        N/A            N/A
 Operating GP LLC        Reserves                                            general
                       Operating LP                                          partner
                                                                            interests

Schedule 1 - 1

Schedule 2

FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS

1. Filing of UCC-1 Financing Statements with respect to the Collateral with the Secretary of State of the State of Delaware and the State of Texas.

2. Delivery to the Administrative Agent of all Pledged Securities consisting of certificated securities, in each case properly endorsed for transfer or in blank.

Schedule 2 - 1

Schedule 3

LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE

Legal name: Legacy Reserves LP
Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves LP has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 16-1751069 Organizational number: 4038949

Legal name: Legacy Reserves Operating LP Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Operating LP has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 20-4307259 Organizational number: 4096664

Legal name: Legacy Reserves Operating GP LLC Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Operating GP LLC has used in the last five years: No other names
Jurisdiction of organization over the last five years: Delaware Current jurisdiction of organization: Delaware Taxpayer identification number: 20-4307209 Organizational number: 4096662

Legal name: Legacy Reserves Services, Inc. Address: 303 W. Wall Street, Suite 1600, Midland, TX 79701 All names and trade names that Legacy Reserves Services, Inc. has used in the last five years: No other names
Jurisdiction of organization over the last five years: Texas Current jurisdiction of organization: Texas Taxpayer identification number: 20-4442710 Organizational number: 800619799

Schedule 3 - 1

Schedule 4

NOTICE ADDRESSES OF PLEDGORS

Legacy Reserves LP and Legacy Reserves Operating GP LLC

303 West Wall Street, Suite 1600
Midland, Texas 79701

Attn: Steven H. Pruett, President and CFO Tel. 432-682-2516
Fax 432-682-4013
E-mail spruett@legacylp.com

Schedule 4 - 1

ACKNOWLEDGMENT AND CONSENT

The undersigned hereby acknowledges receipt of a copy of the Pledge Agreement dated as of March 15, 2006 (the "Pledge Agreement"), made by the Pledgors parties thereto for the benefit of BNP PARIBAS, as Administrative Agent. The undersigned agrees for the benefit of the Administrative Agent and the Lenders as follows:

1. The undersigned will be bound by the terms of the Pledge Agreement and will comply with such terms insofar as such terms are applicable to the undersigned.

2. The terms of Section 5.01(a) and Section 5.03 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 5.02(a) or Section 5.03 of the Pledge Agreement.

[Remainder of page intentionally left blank; signature page follows]

Acknowledgment

LEGACY RESERVES OPERATING LP

By: LEGACY RESERVES OPERATING GP
LLC, its general partner
By: LEGACY RESERVES LP, its sole
member
By: LEGACY RESERVES GP, LLC, its
general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

LEGACY RESERVES OPERATING GP LLC

By: LEGACY RESERVES LP, its sole
member
By: LEGACY RESERVES GP, LLC, its
general partner

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

LEGACY RESERVES SERVICES, INC.

By:

Steven H. Pruett President, Chief Financial Officer and Secretary

Signature Page - Acknowledgment

EXHIBIT D
[FORM OF] ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between
[Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

The Assignor named on the reverse hereof hereby sells and assigns, without recourse, to the Assignee named on the reverse hereof, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth on the reverse hereof, the interests set forth on the reverse hereof (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth on the reverse hereof in the Commitment of the Assignor on the Assignment Date and Loans owing to the Assignor which are outstanding on the Assignment Date, together with the participations in Letters of Credit and LC Disbursements held by the Assignor on the Assignment Date, but excluding accrued interest and fees to and excluding the Assignment Date. The Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the Assigned Interest, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the Assigned Interest, relinquish its rights and be released from its obligations under the Credit Agreement.

This Assignment and Assumption is being delivered to the Administrative Agent together with (i) if the Assignee is a Foreign Lender, any documentation required to be delivered by the Assignee pursuant to Section 5.03(e) of the Credit Agreement, duly completed and executed by the Assignee, and (ii) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignee/Assignor] shall pay the fee payable to the Administrative Agent pursuant to Section 12.04(b) of the Credit Agreement.

This Assignment and Assumption shall be governed by and construed in accordance with the laws of the State of Texas.

Date of Assignment: ____________________________

Legal Name of Assignor: ________________________

Legal Name of Assignee: ________________________

Assignee's Address for Notices: ________________

Effective Date of Assignment ___________________

("Assignment Date"): ___________________________

EXHIBIT D 

                                                        Percentage Assigned of
                                                       Facility/Commitment (set
                                                    forth, to at least 8 decimals,
                                                   as a percentage of the Facility
                                                    and the aggregate Commitments
Facility               Principal Amount Assigned      of all Lenders thereunder)
--------               -------------------------   -------------------------------
Commitment Assigned:          $___________                   ___________%
Loans:                         ___________                   ___________

The terms set forth above and on the reverse side hereof are hereby agreed to:

[Name of Assignor], as Assignor

By:
Name:
Title:

[Name of Assignee], as Assignee

By:
Name:
Title:

The undersigned hereby consent to the within assignment:(1) 

Legacy Reserves LP                      BNP Paribas,
                                        as Administrative Agent

By: Legacy Reserves GP, LLC,
    as General Partner


By:                                     By:
    ---------------------------------       ------------------------------------
Name:                                   Name:
      -------------------------------         ----------------------------------
Title:                                  Title:
       ------------------------------          ---------------------------------


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------

----------

(1) Consents to be included to the extent required by Section 12.04(b) of the Credit Agreement.

EXHIBIT D

LEGACY RESERVES LP
CREDIT AGREEMENT

STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in the Credit Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder,
(iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 8.01 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and

1

Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Texas.

2

SCHEDULE 7.05
LITIGATION

None

SCHEDULE 7.05 - 1

SCHEDULE 7.12
MATERIAL AGREEMENTS

None

SCHEDULE 7.12 - 1

SCHEDULE 7.15
SUBSIDIARIES

SUBSIDIARIES OF LEGACY RESERVES LP 

         ENTITY NAME             JURISDICTION OF        LOCATION OF CHIEF                 ORGANIZATIONAL
                                   ORGANIZATION         EXECUTIVE OFFICES                       ID
----------------------------- ---------------------- ------------------------------- ------------------------
Legacy Reserves Operating           Delaware         303 West Wall Street                    4096662
GP LLC                                               Suite 1600
                                                     Midland, Texas 79701
----------------------------- ---------------------- ------------------------------- ------------------------
Legacy Reserves Operating LP        Delaware         303 West Wall Street                    4096664
                                                     Suite 1600
                                                     Midland, Texas 79701
----------------------------- ---------------------- ------------------------------- ------------------------
Legacy Reserves Services,             Texas          303 West Wall Street                   800619799
Inc.                                                 Suite 1600
                                                     Midland, Texas 79701

SCHEDULE 7.15 - 1

SCHEDULE 7.18
GAS IMBALANCES

None

SCHEDULE 7.19 - 1

SCHEDULE 7.19
MARKETING CONTRACTS

None

SCHEDULE 7.19 - 1

SCHEDULE 7.20
SWAP AGREEMENTS

ANNEX 1

Moriah Properties, Ltd. 

-------------------------------------------------------------------------------------------------
TRADE NO.  TRADE DT B/S  LIVE QTY  COMMODITY    TRN. PRICING   PRICING  SETT./MATUR TRADE    CURR.
                                                GRP  START DT  END DT      DT       PRICE
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  02/01/06  02/28/06  03/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  03/01/06  03/31/06  04/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  04/01/06  04/30/06  05/05/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  05/01/0605/31/06    06/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  06/01/0606/30/06    07/10/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  07/01/0607/31/06    08/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  08/01/0608/31/06    09/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  09/01/0609/30/06    10/06/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  10/01/0610/31/06    11/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  11/01/0611/30/06    12/07/06   59.380   USD
-------------------------------------------------------------------------------------------------
  83040    05/25/05  B    21,000    WTI(1,0)    SWP  12/01/0612/31/06    01/08/07   59.380   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  01/01/0701/31/07    02/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  02/01/0702/28/07    03/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  03/01/0703/31/07    04/06/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  04/01/0704/30/07    05/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  05/01/0705/31/07    06/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  06/01/0706/30/07    07/09/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  07/01/0707/31/07    08/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  08/01/0708/31/07    09/10/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  09/01/0709/30/07    10/05/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  10/01/0710/31/07    11/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  11/01/0711/30/07    12/07/07   60.000   USD
-------------------------------------------------------------------------------------------------
  85478    07/05/05  B    18,000    WTI(1,0)    SWP  12/01/0712/31/07    01/08/08   60.000   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  01/01/0801/31/08    02/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  02/01/0802/29/08    03/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  03/01/0803/31/08    04/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  04/01/0804/30/08    05/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  05/01/0805/31/08    06/06/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  06/01/0806/30/08    07/08/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  07/01/0807/31/08    08/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  08/01/0808/31/08    09/05/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  09/01/0809/30/08    10/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  10/01/0810/31/08    11/07/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  11/01/0811/30/08    12/05/08   60.500   USD
-------------------------------------------------------------------------------------------------
  86935    08/01/05  B    16,924    WTI(1,0)    SWP  12/01/0812/31/08    01/07/09   60.500   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  02/22/0602/24/06    03/03/06   14.120   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    51,588    NG(1,0)     SWP  03/27/0603/29/06    04/05/06   11.200   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  04/24/0604/26/06    05/03/06   10.670   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    51,588    NG(1,0)     SWP  05/24/0605/26/06    06/02/06   10.680   USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 1 

-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  06/26/0606/28/06    07/06/06   10.710   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  07/25/0607/27/06    08/03/06   10.750   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    51,588    NG(1,0)     SWP  08/25/0608/29/06    09/05/06   10.720   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  09/25/0609/27/06    10/04/06   10.750   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    51,588    NG(1,0)     SWP  10/25/0610/27/06    11/03/06   11.170   USD
-------------------------------------------------------------------------------------------------
  90674    09/29/05  B    53,308    NG(1,0)     SWP  11/22/0611/28/06    12/05/06   11.560   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  12/22/06  12/27/06  01/04/07   11.830   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    43,649    NG(1,0)     SWP  01/25/07  01/29/07  02/05/07   11.740   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  02/22/07  02/26/07  03/05/07   11.440   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    46,767    NG(1,0)     SWP  03/26/07  03/28/07  04/04/07    9.390   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  04/24/07  04/26/07  05/03/07    9.040   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    46,767    NG(1,0)     SWP  05/24/07  05/29/07  06/05/07    9.080   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  06/25/07  06/27/07  07/05/07    9.120   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  07/25/07  07/27/07  08/03/07    9.160   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    46,767    NG(1,0)     SWP  08/27/07  08/29/07  09/06/07    9.130   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  09/24/07  09/26/07  10/03/07    9.170   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    46,767    NG(1,0)     SWP  10/25/07  10/29/07  11/05/07    9.590   USD
-------------------------------------------------------------------------------------------------
  90675    09/29/05  B    48,326    NG(1,0)     SWP  11/26/07  11/28/07  12/05/07   10.010   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  12/27/07  12/27/07  01/04/08   10.580   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    40,200    NG(1,0)     SWP  01/29/08  01/29/08  02/05/08   10.510   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  02/27/08  02/27/08  03/05/08   10.190   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    43,072    NG(1,0)     SWP  03/27/08  03/27/08  04/03/08    8.170   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  04/28/08  04/28/08  05/05/08    7.980   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    43,072    NG(1,0)     SWP  05/28/08  05/28/08  06/04/08    8.028   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  06/26/08  06/26/08  07/03/08    8.071   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  07/29/08  07/29/08  08/05/08    8.106   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    43,072    NG(1,0)     SWP  08/27/08  08/27/08  09/03/08    8.098   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  09/26/08  09/26/08  10/03/08    8.145   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    43,072    NG(1,0)     SWP  10/29/08  10/29/08  11/05/08    8.625   USD
-------------------------------------------------------------------------------------------------
  95193    12/02/05  B    44,507    NG(1,0)     SWP  11/24/08  11/24/08  12/01/08    9.100   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  12/24/08  12/29/08  01/05/09   10.172   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    37,716    NG(1,0)     SWP  01/26/09  01/28/09  02/04/09   10.162   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  02/23/09  02/25/09  03/04/09    9.952   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    40,410    NG(1,0)     SWP  03/25/09  03/27/09  04/03/09    8.152   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  04/24/09  04/28/09  05/05/09    7.947   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    40,410    NG(1,0)     SWP  05/22/09  05/27/09  06/03/09    8.007   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  06/24/09  06/26/09  07/03/09    8.062   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  07/27/09  07/29/09  08/05/09    8.107   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    40,410    NG(1,0)     SWP  08/25/09  08/27/09  09/03/09    8.122   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  09/24/09  09/28/09  10/05/09    8.172   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    40,410    NG(1,0)     SWP  10/26/09  10/28/09  11/04/09    8.737   USD
-------------------------------------------------------------------------------------------------
  98129    01/13/06  B    41,757    NG(1,0)     SWP  11/20/09  11/24/09  12/01/09    9.292   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  12/24/09  12/29/09  01/05/10    9.729   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    35,280    NG(1,0)     SWP  01/25/10  01/27/10  02/03/10    9.729   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  02/22/10  02/24/10  03/03/10    9.509   USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 2
CREDIT AGREEMENT 

-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    37,800    NG(1,0)     SWP  03/25/10  03/29/10  04/05/10    7.799   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  04/26/10  04/28/10  05/05/10    7.609   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    37,800    NG(1,0)     SWP  05/24/10  05/26/10  06/02/10    7.649   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  06/24/10  06/28/10  07/05/10    7.694   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  07/26/10  07/28/10  08/04/10    7.739   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    37,800    NG(1,0)     SWP  08/25/10  08/27/10  09/03/10    7.736   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  09/24/10  09/28/10  10/05/10    7.786   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    37,800    NG(1,0)     SWP  10/25/10  10/27/10  11/03/10    8.341   USD
-------------------------------------------------------------------------------------------------
  98130    01/13/06  B    39,060    NG(1,0)     SWP  11/22/10  11/24/10  12/01/10    8.881   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  01/01/09  01/31/09  02/06/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    15,820    WTI(1,0)    SWP  02/01/09  02/28/09  03/06/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  03/01/09  03/31/09  04/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    16,950    WTI(1,0)    SWP  04/01/09  04/30/09  05/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  05/01/09  05/31/09  06/05/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    16,950    WTI(1,0)    SWP  06/01/09  06/30/09  07/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  07/01/09  07/31/09  08/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  08/01/09  08/31/09  09/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    16,950    WTI(1,0)    SWP  09/01/09  09/30/09  10/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  10/01/09  10/31/09  11/06/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    16,950    WTI(1,0)    SWP  11/01/09  11/30/09  12/07/09   63.220   USD
-------------------------------------------------------------------------------------------------
  98135    01/13/06  B    17,515    WTI(1,0)    SWP  12/01/09  12/31/09  01/07/10   63.220   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  01/01/10  01/31/10  02/05/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    14,924    WTI(1,0)    SWP  02/01/10  02/28/10  03/05/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  03/01/10  03/31/10  04/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    15,990    WTI(1,0)    SWP  04/01/10  04/30/10  05/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  05/01/10  05/31/10  06/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    15,990    WTI(1,0)    SWP  06/01/10  06/30/10  07/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  07/01/10  07/31/10  08/06/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  08/01/10  08/31/10  09/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    15,990    WTI(1,0)    SWP  09/01/10  09/30/10  10/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  10/01/10  10/31/10  11/05/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    15,990    WTI(1,0)    SWP  11/01/10  11/30/10  12/07/10   61.900   USD
-------------------------------------------------------------------------------------------------
  98136    01/13/06  B    16,523    WTI(1,0)    SWP  12/01/10  12/31/10  01/07/11   61.900   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  03/01/06  03/31/06  04/07/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  04/01/06  04/30/06  05/05/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  05/01/06  05/31/06  06/07/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  06/01/06  06/30/06  07/10/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  07/01/06  07/31/06  08/07/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  08/01/06  08/31/06  09/08/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  09/01/06  09/30/06  10/06/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  10/01/06  10/31/06  11/07/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  11/01/06  11/30/06  12/07/06   68.000   USD
-------------------------------------------------------------------------------------------------
  98817    01/18/06  B    3,285     WTI(1,0)    SWP  12/01/06  12/31/06  01/08/07   68.000   USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 3
CREDIT AGREEMENT

ANNEX 1

Brothers Production Properties, Ltd. 

-----------------------------------------------------------------------------------------------------
  TRADE NO.  TRADE DT B/S   LIVE QTY    COMMODITY    TRN. PRICING  PRICING SETT./MATUR.TRADE   CURR.
                                                     GRP  START DT END DT      DT      PRICE
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  02/01/06  02/28/06  03/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  03/01/06  03/31/06  04/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  04/01/06  04/30/06  05/05/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  05/01/06  05/31/06  06/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  06/01/06  06/30/06  07/10/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  07/01/06  07/31/06  08/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  08/01/06  08/31/06  09/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  09/01/06  09/30/06  10/06/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  10/01/06  10/31/06  11/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  11/01/06  11/30/06  12/07/06  59.380   USD
-----------------------------------------------------------------------------------------------------
    83015    05/25/05 B     15,000      WTI(1,0)     SWP  12/01/06  12/31/06  01/08/07  59.380   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  01/01/07  01/31/07  02/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  02/01/07  02/28/07  03/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  03/01/07  03/31/07  04/06/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  04/01/07  04/30/07  05/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  05/01/07  05/31/07  06/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  06/01/07  06/30/07  07/09/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  07/01/07  07/31/07  08/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  08/01/07  08/31/07  09/10/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  09/01/07  09/30/07  10/05/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  10/01/07  10/31/07  11/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  11/01/07  11/30/07  12/07/07  60.000   USD
-----------------------------------------------------------------------------------------------------
    85499    07/05/05 B     13,000      WTI(1,0)     SWP  12/01/07  12/31/07  01/08/08  60.000   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  01/01/08  01/31/08  02/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  02/01/08  02/29/08  03/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  03/01/08  03/31/08  04/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  04/01/08  04/30/08  05/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  05/01/08  05/31/08  06/06/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  06/01/08  06/30/08  07/08/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  07/01/08  07/31/08  08/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  08/01/08  08/31/08  09/05/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  09/01/08  09/30/08  10/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  10/01/08  10/31/08  11/07/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  11/01/08  11/30/08  12/05/08  60.500   USD
-----------------------------------------------------------------------------------------------------
    86934    08/01/05 B     12,075      WTI(1,0)     SWP  12/01/08  12/31/08  01/07/09  60.500   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  02/22/06  02/24/06  03/03/06  14.120   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     36,356       NG(1,0)     SWP  03/27/06  03/29/06  04/05/06  11.200   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  04/24/06  04/26/06  05/03/06  10.670   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     36,356       NG(1,0)     SWP  05/24/06  05/26/06  06/02/06  10.680   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  06/26/06  06/28/06  07/06/06  10.710   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  07/25/06  07/27/06  08/03/06  10.750   USD
-----------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 4
CREDIT AGREEMENT 

-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     36,356       NG(1,0)     SWP  08/25/06  08/29/06  09/05/06  10.720   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  09/25/06  09/27/06  10/04/06  10.750   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     36,356       NG(1,0)     SWP  10/25/06  10/27/06  11/03/06  11.170   USD
-----------------------------------------------------------------------------------------------------
    90678    09/29/05 B     37,568       NG(1,0)     SWP  11/22/06  11/28/06  12/05/06  11.560   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  12/22/06  12/27/06  01/04/07  11.830   USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     30,761       NG(1,0)     SWP  01/25/07  01/29/07  02/05/07  11.740   USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  02/22/07  02/26/07  03/05/07  11.440   USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     32,958       NG(1,0)     SWP  03/26/07  03/28/07  04/04/07  9.390    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  04/24/07  04/26/07  05/03/07  9.040    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     32,958       NG(1,0)     SWP  05/24/07  05/29/07  06/05/07  9.080    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  06/25/07  06/27/07  07/05/07  9.120    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  07/25/07  07/27/07  08/03/07  9.160    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     32,958       NG(1,0)     SWP  08/27/07  08/29/07  09/06/07  9.130    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  09/24/07  09/26/07  10/03/07  9.170    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     32,958       NG(1,0)     SWP  10/25/07  10/29/07  11/05/07  9.590    USD
-----------------------------------------------------------------------------------------------------
    90679    09/29/05 B     34,057       NG(1,0)     SWP  11/26/07  11/28/07  12/05/07  10.010   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  12/27/07  12/27/07  01/04/08  10.580   USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     28,331       NG(1,0)     SWP  01/29/08  01/29/08  02/05/08  10.510   USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  02/27/08  02/27/08  03/05/08  10.190   USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     30,354       NG(1,0)     SWP  03/27/08  03/27/08  04/03/08  8.170    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  04/28/08  04/28/08  05/05/08  7.980    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     30,354       NG(1,0)     SWP  05/28/08  05/28/08  06/04/08  8.028    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  06/26/08  06/26/08  07/03/08  8.071    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  07/29/08  07/29/08  08/05/08  8.106    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     30,354       NG(1,0)     SWP  08/27/08  08/27/08  09/03/08  8.098    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  09/26/08  09/26/08  10/03/08  8.145    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     30,354       NG(1,0)     SWP  10/29/08  10/29/08  11/05/08  8.625    USD
-----------------------------------------------------------------------------------------------------
    95163    12/02/05 B     31,366       NG(1,0)     SWP  11/24/08  11/24/08  12/01/08  9.100    USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  01/01/09  01/31/09  02/06/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     11,144      WTI(1,0)     SWP  02/01/09  02/28/09  03/06/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  03/01/09  03/31/09  04/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     11,940      WTI(1,0)     SWP  04/01/09  04/30/09  05/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  05/01/09  05/31/09  06/05/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     11,940      WTI(1,0)     SWP  06/01/09  06/30/09  07/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  07/01/09  07/31/09  08/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  08/01/09  08/31/09  09/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     11,940      WTI(1,0)     SWP  09/01/09  09/30/09  10/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  10/01/09  10/31/09  11/06/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     11,940      WTI(1,0)     SWP  11/01/09  11/30/09  12/07/09  63.220   USD
-----------------------------------------------------------------------------------------------------
    98133    01/13/06 B     12,338      WTI(1,0)     SWP  12/01/09  12/31/09  01/07/10  63.220   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  01/01/10  01/31/10  02/05/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     10,500      WTI(1,0)     SWP  02/01/10  02/28/10  03/05/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  03/01/10  03/31/10  04/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,250      WTI(1,0)     SWP  04/01/10  04/30/10  05/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  05/01/10  05/31/10  06/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 5
CREDIT AGREEMENT 

-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,250      WTI(1,0)     SWP  06/01/10  06/30/10  07/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  07/01/10  07/31/10  08/06/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  08/01/10  08/31/10  09/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,250      WTI(1,0)     SWP  09/01/10  09/30/10  10/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  10/01/10  10/31/10  11/05/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,250      WTI(1,0)     SWP  11/01/10  11/30/10  12/07/10  61.900   USD
-----------------------------------------------------------------------------------------------------
    98134    01/13/06 B     11,625      WTI(1,0)     SWP  12/01/10  12/31/10  01/07/11  61.900   USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  12/24/08  12/29/08  01/05/09  10.172   USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     26,572       NG(1,0)     SWP  01/26/09  01/28/09  02/04/09  10.162   USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  02/23/09  02/25/09  03/04/09  9.952    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     28,470       NG(1,0)     SWP  03/25/09  03/27/09  04/03/09  8.152    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  04/24/09  04/28/09  05/05/09  7.947    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     28,470       NG(1,0)     SWP  05/22/09  05/27/09  06/03/09  8.007    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  06/24/09  06/26/09  07/03/09  8.062    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  07/27/09  07/29/09  08/05/09  8.107    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     28,470       NG(1,0)     SWP  08/25/09  08/27/09  09/03/09  8.122    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  09/24/09  09/28/09  10/05/09  8.172    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     28,470       NG(1,0)     SWP  10/26/09  10/28/09  11/04/09  8.737    USD
-----------------------------------------------------------------------------------------------------
    98138    01/13/06 B     29,419       NG(1,0)     SWP  11/20/09  11/24/09  12/01/09  9.292    USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  12/24/09  12/29/09  01/05/10  9.729    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     24,864       NG(1,0)     SWP  01/25/10  01/27/10  02/03/10  9.729    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  02/22/10  02/24/10  03/03/10  9.509    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     26,640       NG(1,0)     SWP  03/25/10  03/29/10  04/05/10  7.799    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  04/26/10  04/28/10  05/05/10  7.609    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     26,640       NG(1,0)     SWP  05/24/10  05/26/10  06/02/10  7.649    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  06/24/10  06/28/10  07/05/10  7.694    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  07/26/10  07/28/10  08/04/10  7.739    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     26,640       NG(1,0)     SWP  08/25/10  08/27/10  09/03/10  7.736    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  09/24/10  09/28/10  10/05/10  7.786    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     26,640       NG(1,0)     SWP  10/25/10  10/27/10  11/03/10  8.341    USD
-----------------------------------------------------------------------------------------------------
    98139    01/13/06 B     27,528       NG(1,0)     SWP  11/22/10  11/24/10  12/01/10  8.881    USD
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  03/01/06  03/31/06  04/07/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  04/01/06  04/30/06  05/05/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  05/01/06  05/31/06  06/07/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  06/01/06  06/30/06  07/10/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  07/01/06  07/31/06  08/07/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  08/01/06  08/31/06  09/08/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  09/01/06  09/30/06  10/06/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  10/01/06  10/31/06  11/07/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  11/01/06  11/30/06  12/07/06  68.000   USD
-----------------------------------------------------------------------------------------------------
    98382    01/18/06 B      2,315      WTI(1,0)     SWP  12/01/06  12/31/06  01/08/07  68.000   USD
-----------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 6
CREDIT AGREEMENT

ANNEX 1

MBN Properties, LP 

-------------------------------------------------------------------------------------------------
  TRADE NO.  TRADE DT B/S   LIVE QTY  COMMODITY  TRN. PRICING  PRICING SETT./MATUR. TRADE  CURR.
                                                 GRP  START DT END DT      DT       PRICE
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  12/24/07 12/27/07 01/04/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    41,945    NG(1,0)    SWP  01/25/08 01/29/08 02/05/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  02/25/08 02/27/08 03/05/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    43,392    NG(1,0)    SWP  03/25/08 03/27/08 04/03/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  04/24/08 04/28/08 05/05/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    43,392    NG(1,0)    SWP  05/23/08 05/28/08 06/04/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  06/24/08 06/26/08 07/03/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  07/25/08 07/29/08 08/05/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    43,392    NG(1,0)    SWP  08/25/08 08/27/08 09/03/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  09/24/08 09/26/08 10/03/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    43,392    NG(1,0)    SWP  10/27/08 10/29/08 11/05/08   8.300   USD
-------------------------------------------------------------------------------------------------
    89712    09/14/05  B    44,838    NG(1,0)    SWP  11/20/08 11/24/08 12/01/08   8.300   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  12/24/08 12/29/08 01/05/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    36,692    NG(1,0)    SWP  01/26/09 01/28/09 02/04/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  02/23/09 02/25/09 03/04/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    39,313    NG(1,0)    SWP  03/25/09 03/27/09 04/03/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  04/24/09 04/28/09 05/05/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    39,313    NG(1,0)    SWP  05/22/09 05/27/09 06/03/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  06/24/09 06/26/09 07/03/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  07/27/09 07/29/09 08/05/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    39,313    NG(1,0)    SWP  08/25/09 08/27/09 09/03/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  09/24/09 09/28/09 10/05/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    39,313    NG(1,0)    SWP  10/26/09 10/28/09 11/04/09   7.770   USD
-------------------------------------------------------------------------------------------------
    89713    09/14/05  B    40,623    NG(1,0)    SWP  11/20/09 11/24/09 12/01/09   7.770   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  12/24/09 12/29/09 01/05/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    33,360    NG(1,0)    SWP  01/25/10 01/27/10 02/03/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  02/22/10 02/24/10 03/03/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    35,743    NG(1,0)    SWP  03/25/10 03/29/10 04/05/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  04/26/10 04/28/10 05/05/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    35,743    NG(1,0)    SWP  05/24/10 05/26/10 06/02/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  06/24/10 06/28/10 07/05/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  07/26/10 07/28/10 08/04/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    35,743    NG(1,0)    SWP  08/25/10 08/27/10 09/03/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  09/24/10 09/28/10 10/05/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    35,743    NG(1,0)    SWP  10/25/10 10/27/10 11/03/10   7.370   USD
-------------------------------------------------------------------------------------------------
    89714    09/14/05  B    36,934    NG(1,0)    SWP  11/22/10 11/24/10 12/01/10   7.370   USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    11,859    WTI(1,0)   SWP  02/01/06 02/28/06 03/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    13,048    WTI(1,0)   SWP  03/01/06 03/31/06 04/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,549    WTI(1,0)   SWP  04/01/06 04/30/06 05/05/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,868    WTI(1,0)   SWP  05/01/06 05/31/06 06/07/06   66.350  USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 7
CREDIT AGREEMENT 

-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,340    WTI(1,0)   SWP  06/01/06 06/30/06 07/10/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,638    WTI(1,0)   SWP  07/01/06 07/31/06 08/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,522    WTI(1,0)   SWP  08/01/06 08/31/06 09/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,011    WTI(1,0)   SWP  09/01/06 09/30/06 10/06/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,305    WTI(1,0)   SWP  10/01/06 10/31/06 11/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    11,803    WTI(1,0)   SWP  11/01/06 11/30/06 12/07/06   66.350  USD
-------------------------------------------------------------------------------------------------
    89734    09/14/05  B    12,073    WTI(1,0)   SWP  12/01/06 12/31/06 01/08/07   66.350  USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  01/01/07 01/31/07 02/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  02/01/07 02/28/07 03/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  03/01/07 03/31/07 04/06/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  04/01/07 04/30/07 05/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  05/01/07 05/31/07 06/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  06/01/07 06/30/07 07/09/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  07/01/07 07/31/07 08/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  08/01/07 08/31/07 09/10/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  09/01/07 09/30/07 10/05/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  10/01/07 10/31/07 11/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  11/01/07 11/30/07 12/07/07   64.150  USD
-------------------------------------------------------------------------------------------------
    89735    09/14/05  B    11,115    WTI(1,0)   SWP  12/01/07 12/31/07 01/08/08   64.150  USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  01/01/08 01/31/08 02/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  02/01/08 02/29/08 03/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  03/01/08 03/31/08 04/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  04/01/08 04/30/08 05/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  05/01/08 05/31/08 06/06/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  06/01/08 06/30/08 07/08/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  07/01/08 07/31/08 08/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  08/01/08 08/31/08 09/05/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  09/01/08 09/30/08 10/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  10/01/08 10/31/08 11/07/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  11/01/08 11/30/08 12/05/08   62.250  USD
-------------------------------------------------------------------------------------------------
    89736    09/14/05  B    9,802     WTI(1,0)   SWP  12/01/08 12/31/08 01/07/09   62.250  USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  01/01/09 01/31/09 02/06/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  02/01/09 02/28/09 03/06/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  03/01/09 03/31/09 04/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  04/01/09 04/30/09 05/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  05/01/09 05/31/09 06/05/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  06/01/09 06/30/09 07/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  07/01/09 07/31/09 08/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  08/01/09 08/31/09 09/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  09/01/09 09/30/09 10/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  10/01/09 10/31/09 11/06/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  11/01/09 11/30/09 12/07/09   61.050  USD
-------------------------------------------------------------------------------------------------
    89737    09/14/05  B    8,778     WTI(1,0)   SWP  12/01/09 12/31/09 01/07/10   61.050  USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  01/01/10 01/31/10 02/05/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  02/01/10 02/28/10 03/05/10   60.150  USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 8
CREDIT AGREEMENT 

-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  03/01/10 03/31/10 04/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  04/01/10 04/30/10 05/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  05/01/10 05/31/10 06/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  06/01/10 06/30/10 07/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  07/01/10 07/31/10 08/06/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  08/01/10 08/31/10 09/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  09/01/10 09/30/10 10/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  10/01/10 10/31/10 11/05/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  11/01/10 11/30/10 12/07/10   60.150  USD
-------------------------------------------------------------------------------------------------
    89738    09/14/05  B    7,938     WTI(1,0)   SWP  12/01/10 12/31/10 01/07/11   60.150  USD
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  03/01/06 03/31/06 04/07/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  04/01/06 04/30/06 05/05/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  05/01/06 05/31/06 06/07/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  06/01/06 06/30/06 07/10/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  07/01/06 07/31/06 08/07/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  08/01/06 08/31/06 09/08/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  09/01/06 09/30/06 10/06/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  10/01/06 10/31/06 11/07/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  11/01/06 11/30/06 12/07/06   68.000  USD
-------------------------------------------------------------------------------------------------
    98816    01/18/06  B    3,000     WTI(1,0)   SWP  12/01/06 12/31/06 01/08/07   68.000  USD
-------------------------------------------------------------------------------------------------

SCHEDULE 7.20 - 9
CREDIT AGREEMENT 

MBN PROPERTIES LP
----------------------------------------------------------------------------------------------
                                                                            Hedge for tax
                                                                 SECTION 475(B)2 AND 1221(A)7)
----------------------------------------------------------------------------------------------
HEDGING  #:                MUR 436067
----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
INCEPTION OF HEDGE:         9/14/05
----------------------------------------------------------------------------------------------

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

----------------------------------------------------------------------------------------------
HEDGED ITEM (PHYSICAL):
----------------------------------------------------------------------------------------------
         1,249,439 MMBtu natural gas to be produced during calendar years of 2006 and 2007
         -------------------------------------------------------------------------------------


         -------------------------------------------------------------------------------------
         Exposure ID:                                                    Natural Gas
         -------------------------------------------------------------------------------------
         Counterparty:                                                   Bank of America, N.A.
         -------------------------------------------------------------------------------------
         Contract Date:                                                  9/14/2005
         -------------------------------------------------------------------------------------
         Underlying Good:                                                Natural Gas
         -------------------------------------------------------------------------------------
         Total number of units:                                          1,249,439 MMBtu
         -------------------------------------------------------------------------------------
         Price basis or index per unit:                                   NYMEX-Henry Hub
                                                                          Natural Gas
         -------------------------------------------------------------------------------------
                                                                         Each calendar month
         Date the transaction is expected to occur:                      during 2006 and 2007
         -------------------------------------------------------------------------------------
         Other terms (describe):                                         N/A
         -------------------------------------------------------------------------------------
         Rationale for the assumption that forecasted                    Hedging a % of
         transaction is probable:                                        our production
                                                                         which mngt.
                                                                         deemed
                                                                         necessary to
                                                                         manage our
                                                                         price risk.

----------------------------------------------------------------------------------------------
ACCOUNTING TREATMENT FOR OCI (DESCRIBE PROCESS):
----------------------------------------------------------------------------------------------
         OCI Reclassification approximately 30 - 45 days after gas purchased,
         reflecting normal production cycle.
         -------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
NATURE OF RISK BEING HEDGED:
----------------------------------------------------------------------------------------------
         The variability of cash flows in the sales price of natural gas.
         -------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
HEDGING DERIVATIVE: NATURAL GAS FUTURES CONTRACTS (FINANCIAL)
----------------------------------------------------------------------------------------------
         Derivative ID:                                                  MUR 436067
         -------------------------------------------------------------------------------------
         Futures contracts:                                              Natural Gas
         -------------------------------------------------------------------------------------
         Contract size:                                                  1,249,439 MMBtu
         -------------------------------------------------------------------------------------
         Exchange:                                                       NYMEX
         -------------------------------------------------------------------------------------
         MUR 436067                                                      Bank of America, N.A.
         -------------------------------------------------------------------------------------
         Trade Date:                                                     9/14/2005
         -------------------------------------------------------------------------------------
         Purchase                                                        Yes
         -------------------------------------------------------------------------------------
         Expiration/futures price/quantity                Month/Yr  Price  Quantity MMBtu Per
                                                                                Month
         -------------------------------------------------------------------------------------

                                                          Jan-06    $ 12.4000     59,406
----------------------------------------------------------------------------------------------

                                                          Feb-06    $ 12.2640     53,091
----------------------------------------------------------------------------------------------

                                                          Mar-06    $ 11.9390     58,171
----------------------------------------------------------------------------------------------

                                                          Apr-06    $  9.7390     55,703
----------------------------------------------------------------------------------------------
                                                          May-06    $  9.3990     56,964
----------------------------------------------------------------------------------------------
                                                          Jun-06    $  9.4190     54,556
----------------------------------------------------------------------------------------------
                                                          Jul-06    $  9.4540     55,780
----------------------------------------------------------------------------------------------
                                                          Aug-06    $  9.4890     55,219
----------------------------------------------------------------------------------------------

                                                          Sep-06    $  9.4640     52,917
----------------------------------------------------------------------------------------------

                                                          Oct-06    $  9.4940     54,153
----------------------------------------------------------------------------------------------
                                                          Nov-06    $  9.8640     51,887
----------------------------------------------------------------------------------------------
                                                          Dec-06    $ 10.2140     53,088
----------------------------------------------------------------------------------------------
RISK MANAGEMENT STRATEGY AND HEDGE OBJECTIVE:
----------------------------------------------------------------------------------------------
         To offset the changes in price of sales of Natural Gas during the specified time
         horizon.
         -------------------------------------------------------------------------------------
METHOD OF MEASURING INEFFECTIVENESS:
----------------------------------------------------------------------------------------------
         Changes in the price of NYMEX natural gas futures are compared against prices on
         pipelines used as indexes for the
         -------------------------------------------------------------------------------------
         Company's natural gas sales.
         -------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
         Is the hedge relationship consistent with the Company's risk    Y
         management policy? Y/N
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         Prepared by:
                                              --------------------------
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         Approved by:
                                              --------------------------
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SCHEDULE 7.20 - 10
CREDIT AGREEMENT 

MBN PROPERTIES LP
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                                                                            Hedge for tax
                                                                   SECTION 475(B)2 AND 1221(A)7
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HEDGING #:             MUR 436067
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INCEPTION OF HEDGE:    9/14/05
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HEDGED ITEM (PHYSICAL):
          -------------------------------------------------------------------------------------
          1,249,439 MMBtu natural gas to be produced during calendar years of 2006 and 2007
-----------------------------------------------------------------------------------------------

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          Exposure ID:                                                    Natural Gas
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          Counterparty:                                                   Bank of America, N.A.
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          Contract Date:                                                  9/14/2005
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          Underlying Good:                                                Natural Gas
-----------------------------------------------------------------------------------------------
          Total number of units:                                          1,249,439 MMBtu
          -------------------------------------------------------------------------------------
          Price basis or index per unit:                                  NYMEX- Henry Hub
                                                                          Natural Gas
          -------------------------------------------------------------------------------------
          Date the transaction is expected to occur:                      Each calendar month
                                                                          during 2006 and 2007
          -------------------------------------------------------------------------------------
          Other terms (describe):                                         N/A
          -------------------------------------------------------------------------------------
          Rationale for the assumption that forecasted                    Hedging a % of
          transaction is probable:                                        our production
                                                                          which mngt.
                                                                          deemed necessary
                                                                          to manage our
                                                                          price risk.
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ACCOUNTING TREATMENT FOR OCI (DESCRIBE
PROCESS):
-----------------------------------------------------------------------------------------------

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          OCI Reclassification approximately 30 - 45 days after gas purchased, reflecting normal
          production cycle.
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NATURE OF RISK BEING HEDGED:
-----------------------------------------------------------------------------------------------

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          The variability of cash flows in the sales price of natural gas.
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HEDGING DERIVATIVE: NATURAL GAS FUTURES CONTRACTS (FINANCIAL)
          -------------------------------------------------------------------------------------
          Derivative ID:                                                  MUR 436067
          -------------------------------------------------------------------------------------
          Futures contracts:                                              Natural Gas
          -------------------------------------------------------------------------------------
          Contract size:                                                  1,249,439 MMBtu
          -------------------------------------------------------------------------------------
          Exchange:                                                       NYMEX
          -------------------------------------------------------------------------------------
          MUR 436067                                                      Bank of America, N.A.
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          Trade Date:                                                     9/14/2005
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          Purchase                                                        Yes
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          Expiration /futures price/ quantity            Month/Yr Price   Quantity MMBtu Per
                                                                          Month
-----------------------------------------------------------------------------------------------
                                                          Jan-07 $ 9.0200 49,042
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                                                          Feb-07 $ 9.0200 49,042
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                                                          Mar-07 $ 9.0200 49,042
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                                                          Apr-07 $ 9.0200 49,042
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                                                          May-07 $ 9.0200 49,042
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                                                          Jun-07 $ 9.0200 49,042
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                                                          Jul-07 $ 9.0200 49,042
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                                                          Aug-07 $ 9.0200 49,042
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                                                          Sep-07 $ 9.0200 49,042
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                                                          Oct-07 $ 9.0200 49,042
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                                                          Nov-07 $ 9.0200 49,042
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                                                          Dec-07 $ 9.0200 49,042
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RISK MANAGEMENT STRATEGY AND HEDGE OBJECTIVE:
          -------------------------------------------------------------------------------------
          To offset the changes in price of sales of Natural Gas during the specified time
          horizon.
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METHOD OF MEASURING INEFFECTIVENESS:
          -------------------------------------------------------------------------------------
          Changes in the price of NYMEX natural gas futures are compared
          against prices on pipelines used as indexes for the
-----------------------------------------------------------------------------------------------
          Company's natural gas sales.
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          Is the hedge relationship consistent with the Company's risk    Y
          managemnt policy? Y/N
-----------------------------------------------------------------------------------------------

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

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          Prepared by:
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-----------------------------------------------------------------------------------------------

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          Approved by:
-----------------------------------------------------------------------------------------------

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SCHEDULE 7.20 - 11
CREDIT AGREEMENT

Exhibit 10.2

Execution Copy

CONTRIBUTION, CONVEYANCE AND
ASSUMPTION AGREEMENT

This Contribution, Conveyance and Assumption Agreement, dated as of March 15, 2006 is entered into by and among LEGACY RESERVES LP, a Delaware limited partnership (the "Partnership"), LEGACY RESERVES OPERATING LP, a Delaware limited partnership (the "OLP"), LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "GP"), LEGACY RESERVES OPERATING GP LLC, a Delaware limited liability company (the "OLP GP"), MORIAH PROPERTIES, LTD., a Texas limited partnership ("Moriah Properties"), DAB RESOURCES, LTD., a Texas limited partnership ("DAB Resources"), BROTHERS PRODUCTION PROPERTIES, LTD., a Texas limited partnership ("Brothers"), BROTHERS PRODUCTION COMPANY, INC., a Texas corporation ("Brothers Production"), BROTHERS OPERATING COMPANY, INC., a Texas corporation ("Brothers Operating"), J&W MCGRAW PROPERTIES, LTD., a Texas limited partnership ("J&W Properties"), H2K HOLDINGS, LTD., a Texas limited partnership ("H2K Holdings"), MBN PROPERTIES LP, a Delaware limited partnership ("MBN Properties"), CHARITIES SUPPORT FOUNDATION, INC., a Texas nonprofit corporation ("CSFI"), MORIAH FOUNDATION, a Texas nonprofit corporation ("Moriah Foundation"), and CARY BROWN FAMILY FOUNDATION, a Texas nonprofit corporation ("CB Foundation"). The foregoing shall be referred to individually as a "Party" and collectively as the "Parties".

RECITALS:

WHEREAS, Moriah Properties, DAB Resources, Brothers, Brothers Production, Brothers Operating, J&W Properties, H2K Holdings and MBN Properties have formed the GP pursuant to the Delaware Limited Liability Company Act (the "Delaware LLC Act");

WHEREAS, the GP and Moriah Properties have formed the Partnership pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Delaware Limited Partnership Act"), for the purpose of acquiring, owning and operating certain oil and natural gas properties located in the Permian Basin of West Texas and Southeast New Mexico;

WHEREAS, the Partnership has formed the OLP GP pursuant to the Delaware LLC Act;

WHEREAS, the Partnership and the OLP GP have formed the OLP pursuant to the Delaware Limited Partnership Act.

NOW, THEREFORE, in consideration of their mutual undertakings and agreements hereunder, the Parties undertake and agree as follows:

ARTICLE I
DEFINITIONS AND SCHEDULES

1.1 Definitions. The following capitalized terms have the meanings given below:

-1-

(a) "Acts" shall mean collectively the Delaware Limited Partnership Act, the Delaware LLC Act, and the Delaware Corporation Act.

(b) "Affiliate" has the meaning assigned to such term in the Partnership Agreement.

(c) "Agreement" means this Contribution, Conveyance and Assumption Agreement.

(d) "Assets" has the meaning assigned to such term in Section 4.1.

(e) "Beneficial Owner" has the meaning assigned to such term in
Section 7.2.

(f) "Brothers" has the meaning assigned to such term in the first paragraph of this Agreement.

(g) "Brothers Assets" shall mean the assets described on Schedule 2.3.

(h) "Brothers Liabilities" means all obligations and liabilities associated with the Brothers Assets.

(i) "Brothers Operating" has the meaning assigned to such term in the first paragraph of this Agreement.

(j) "Brothers Operating Assets" shall mean the assets described on Schedule 2.5.

(k) "Brothers Operating Liabilities" means all obligations and liabilities associated with the Brothers Operating Assets.

(l) "Brothers Production" has the meaning assigned to such term in the first paragraph of this Agreement.

(m) "Brothers Production Assets" shall mean the assets described on Schedule 2.4.

(n) "Brothers Production Liabilities" means all obligations and liabilities associated with the Brothers Production Assets.

(o) "CB Foundation" has the meaning assigned to such term in the first paragraph of this Agreement.

(p) "CB Foundation Assets" shall mean the assets described on Schedule 2.11.

(q) "CB Foundation Liabilities" means all obligations and liabilities associated with the CB Foundation Assets.

(r) "Contributing Party" has the meaning assigned to such term in
Section 6.12.

-2-

(s) "Credit Facility" means the Credit Agreement dated the Effective Date among Legacy Reserves LP, as borrower, the various lenders that are parties thereto and BNP Paribas, as administrative agent for the lenders, providing for a $300,000,000 revolving credit facility.

(t) "CSFI" has the meaning assigned to such term in the first paragraph of this Agreement.

(u) "CSFI Assets" shall mean the assets described on Schedule 2.9.

(v) "CSFI Liabilities" means all obligations and liabilities associated with the CSFI Assets.

(w) "DAB Resources" has the meaning assigned to such term in the first paragraph of this Agreement.

(x) "DAB Resources Assets" shall mean the assets described on Schedule 2.2.

(y) "DAB Resources Liabilities" means all obligations and liabilities associated with the DAB Resources Assets.

(z) "Delaware Corporation Act" means the Delaware General Corporation Law.

(aa) "Delaware LLC Act" has the meaning assigned to such term in the Recitals of this Agreement.

(bb) "Delaware Limited Partnership Act" has the meaning assigned to such term in the Recitals to this Agreement.

(cc) "Effective Date" means March 15, 2006.

(dd) "Effective Time" means 12:01 a.m. Eastern Standard Time on the Effective Date.

(ee) "Extended Closing Time" has the meaning assigned to such term in the Purchase/Placement Agreement.

(ff) "Founders Assets" means collectively, the Moriah Properties Assets, the DAB Resources Assets, the Brothers Assets, the Brothers Production Assets, the Brothers Operating Assets, the J&W Properties Assets, the H2K Holdings Assets and the MBN Properties Assets.

(gg) "H2K Holdings" has the meaning assigned to such term in the first paragraph of this Agreement.

(hh) "H2K Holdings Assets" shall mean the assets described on Schedule 2.7.

-3-

(ii) "H2K Holdings Liabilities" means all obligations and liabilities associated with the H2K Holdings Assets.

(jj) "Individual Assignments" has the meaning assigned to such term in
Section 2.15.

(kk) "Initial Purchaser/Placement Agent" means Friedman, Billings, Ramsey & Co., Inc.

(ll) "GP" has the meaning assigned to such term in the first paragraph of this Agreement.

(mm) "J&W Properties" has the meaning assigned to such term in the first paragraph of this Agreement.

(nn) "J&W Properties Assets" shall mean the assets described on Schedule 2.6.

(oo) "J&W Properties Liabilities" means all obligations and liabilities associated with the J&W Properties Assets.

(pp) "Laws" means any and all laws, statutes, ordinances, rules or regulations promulgated by a governmental authority, orders of a governmental authority, judicial decisions, decisions of arbitrators or determinations of any governmental authority or court.

(qq) "MBN Properties" has the meaning assigned to such term in the first paragraph of this Agreement.

(rr) "MBN Properties Assets" shall mean the assets described on Schedule 2.8.

(ss) "MBN Properties Liabilities" means all obligations and liabilities associated with the MBN Properties Assets.

(tt) "Moriah Foundation" has the meaning assigned to such term in the first paragraph of this Agreement.

(uu) "Moriah Foundation Assets" shall mean the assets described on Schedule 2.10.

(vv) "Moriah Foundation Liabilities" means all obligations and liabilities associated with the Moriah Foundation Assets.

(ww) "Moriah Properties" has the meaning assigned to such term in the first paragraph of this Agreement.

(xx) "Moriah Properties Assets" shall mean the assets described on Schedule 2.1.

-4-

(yy) "Moriah Properties Liabilities" means all obligations and liabilities associated with the Moriah Properties Assets.

(zz) "Offering" means the offering of Units to be made pursuant to the Offering Memorandum.

(aaa) "Offering Memorandum" means the private offering memorandum dated March 6, 2006 relating to the private offering of Units of the Partnership.

(bbb) "OLP" has the meaning assigned to such term in the first paragraph of this Agreement.

(ccc) "Omnibus Agreement" means the Omnibus Agreement dated of even date herewith, by and among the Partnership, the GP and the other parties thereto.

(ddd) "Option Closing Time" has the meaning assigned to such term in the Purchase/Placement Agreement.

(eee) "Option Units" has the meaning assigned to such term in the Purchase/Placement Agreement.

(fff) "Partnership Agreement" means the Agreement of Limited Partnership of the Partnership, as it may be amended and restated from time to time.

(ggg) "Party and Parties" have the meanings assigned to such terms in the first paragraph of this Agreement.

(hhh) "Purchase/Placement Agreement" means the Purchase/Placement Agreement dated March 6, 2006, by and among the Initial Purchaser/Placement Agent, the Partnership, and the other parties thereto.

(iii) "Receiving Party" has the meaning assigned to such term in
Section 6.12.

(jjj) "Redeeming Entities" means collectively, Moriah Properties, DAB Resources, Brothers, Brothers Production, Brothers Operating, J&W Properties and H2K Holdings.

(kkk) "Redemption Percentage" means the percentage for each of the Redeeming Entities as follows: 

Moriah Properties ................................   33.42%
DAB Resources ....................................    7.84%
Brothers .........................................   46.48%
Brothers Production ..............................    2.47%
Brothers Operating ...............................   0.49%

-5- 
J&W Properties ..........................................    8.55%
H2K Holdings ............................................    0.75%

(lll) "Restriction" has the meaning assigned to such term in Section 7.2.

(mmm) "Restriction Asset" has the meaning assigned to such term in
Section 7.2.

(nnn) "Selling Parties" means CSFI, Moriah Foundation and CB Foundation.

(ooo) "Units" has the meaning assigned to such term in the Partnership Agreement.

1.2 Schedules. The following schedules are attached hereto:

Schedule 2.1 - Description of Moriah Properties Assets;

Schedule 2.2 - Description of DAB Resources Assets;

Schedule 2.3 - Description of Brothers Assets;

Schedule 2.4 - Description of Brothers Production Assets;

Schedule 2.5 - Description of Brothers Operating Assets;

Schedule 2.6 - Description of J&W Properties Assets;

Schedule 2.7 - Description of H2K Holdings Assets;

Schedule 2.8 - Description of MBN Properties Assets;

Schedule 2.9 - Description of CSFI Assets;

Schedule 2.10 - Description of Moriah Foundation Assets; and

Schedule 2.11 - Description of CB Foundation Assets

ARTICLE II
CLOSING TRANSACTIONS

2.1 Contribution of Moriah Assets to Partnership and GP. Moriah Properties hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the Moriah Properties Assets, for its and their own use forever.

TO HAVE AND TO HOLD the Moriah Properties Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and

-6-

singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

Moriah Properties acknowledges receipt of 7,334,070 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the Moriah Properties Assets.

2.2 Contribution of DAB Resources Assets to Partnership and GP. DAB Resources hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the DAB Resources Assets, for its and their own use forever.

TO HAVE AND TO HOLD the DAB Resources Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

DAB Resources acknowledges receipt of 859,703 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the DAB Resources Assets.

2.3 Contribution of Brothers Assets to Partnership and GP. Brothers hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the Brothers Assets, for its and their own use forever.

TO HAVE AND TO HOLD the Brothers Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

Brothers acknowledges receipt of 4,968,945 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the Brothers Assets.

2.4 Contribution of Brothers Production Assets to Partnership and GP. Brothers Production hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the Brothers Production Assets, for its and their own use forever.

TO HAVE AND TO HOLD the Brothers Production Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

Brothers Production acknowledges receipt of 264,305 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the Brothers Production Assets.

-7-

2.5 Contribution of Brothers Operating Assets to Partnership and GP. Brothers Operating hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the Brothers Operating Assets, for its and their own use forever.

TO HAVE AND TO HOLD the Brothers Operating Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

Brothers Operating acknowledges receipt of 52,861 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the Brothers Operating Assets.

2.6 Contribution of J&W Properties Assets to Partnership and GP. J&W Properties hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the J&W Properties Assets, for its and their own use forever.

TO HAVE AND TO HOLD the J&W Properties Assets unto the Partnership and the GP, their respective successors and assigns in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

J&W Properties acknowledges receipt of 914,246 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the J&W Properties Assets.

2.7 Contribution of H2K Holdings Assets to Partnership and GP. H2K Holdings hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the H2K Holdings Assets, for its and their own use forever.

TO HAVE AND TO HOLD the H2K Holdings Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

H2K Holdings acknowledges receipt of 83,499 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the H2K Holdings Assets.

2.8 Contribution of MBN Properties Assets to Partnership and GP. MBN Properties hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, a 99.9% undivided interest and to the GP, its successors and assigns, a .1% undivided interest in the MBN Properties Assets, for its and their own use forever.

-8-

TO HAVE AND TO HOLD the MBN Properties Assets unto the Partnership and the GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

MBN Properties acknowledges receipt of 3,162,438 Units from the Partnership and the continuation of its membership interest in the GP as consideration for the contributions of undivided interests in the MBN Properties Assets, and acknowledges the payment by the Partnership of $65,300,000.00, said cash payment to be treated for all purposes as though the Partnership assumed all of the outstanding indebtedness of MBN Properties with respect to the MBN Properties Assets immediately followed by the discharge by the Partnership of such indebtedness with any cash received by MBN Properties for such purpose to be held as agent for the lenders, who shall immediately be paid such cash in repayment of the debt assumed.

2.9 Conveyance and Sale of CSFI Assets to the OLP. CSFI hereby grants, contributes, transfers, assigns and conveys to the OLP, its successors and assigns, for its and their own use forever, all right, title and interest in and to the CSFI Assets.

TO HAVE AND TO HOLD the CSFI Assets unto the OLP, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in the Individual Assignments forever.

CSFI acknowledges receipt of $209,106.00 from the OLP as consideration for the sale of the CSFI Assets.

2.10 Conveyance and Sale of Moriah Foundation Assets to the OLP. Moriah Foundation hereby grants, contributes, transfers, assigns and conveys to the OLP, its successors and assigns, for its and their own use forever, all right, title and interest in and to the Moriah Foundation Assets.

TO HAVE AND TO HOLD the Moriah Foundation Assets unto the OLP, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in the Individual Assignments forever.

Moriah Foundation acknowledges receipt of $3,736,874.00 from the OLP as consideration for the sale of the Moriah Foundation Assets.

2.11 Conveyance and Sale of the CB Foundation Assets to the OLP. CB Foundation hereby grants, contributes, transfers, assigns and conveys to the OLP, its successors and assigns, for its and their own use forever, all right, title and interest in and to the CB Foundation Assets.

TO HAVE AND TO HOLD the CB Foundation Assets unto the OLP, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in the Individual Assignments forever.

-9-

CB Foundation acknowledges receipt of $3,736,874.00 from the OLP as consideration for the sale of the CB Foundation Assets.

2.12 GP Contribution to Partnership of Interest in Founders Assets. The GP hereby grants, contributes, transfers, assigns and conveys to the Partnership, its successors and assigns, for its and their own use forever, a .1% undivided interest in the Founders Assets.

TO HAVE AND TO HOLD said undivided interest in the Founders Assets unto the Partnership, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

The GP acknowledges receipt of a .1% general partner interest in the Partnership as consideration for the contribution of said undivided interest in the Founders Assets.

2.13 Partnership Contribution of Founders Assets to OLP and OLP GP. The Partnership hereby grants, contributes, transfers, assigns and conveys to the OLP, its successors and assigns, a 99.99% undivided interest and to the OLP GP, its successors and assigns, a .01% undivided interest in the Founders Assets, for its and their own use forever.

TO HAVE AND TO HOLD said undivided interest in the Founders Assets unto the OLP and the OLP GP, their respective successors and assigns, in such undivided interests, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

The Partnership acknowledges the continuation of its 99.99% limited partner interest in the OLP and the continuation of its 100% membership interest in the OLP GP as consideration for the contribution of the respective undivided interests in the Founders Assets.

2.14 OLP GP Contribution of Undivided Interest in Founders Assets to OLP. The OLP GP hereby contributes and conveys to the OLP, its successors and assigns, a .01% undivided interest in the Founders Assets, for its and their own use forever.

TO HAVE AND TO HOLD said undivided interest in the Founders Assets unto the OLP, its successors and assigns, for its and their own use forever, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement forever.

The OLP GP acknowledges the continuation of its .01% general partner interest in the OLP as consideration for the contribution of such undivided interest in the Founders Assets.

2.15 Individual Assignments. To further evidence the contributions of the Assets reflected in this Agreement, each Party making such contribution may have executed and delivered to the Party receiving such contribution certain conveyance, assignment and bill of sale instruments (the "Individual Assignments"). The Individual Assignments shall evidence and perfect such contributions and conveyances made by this Agreement and shall not constitute a second conveyance of any assets or interests therein and are not intended to modify, and shall not modify, any of the terms, covenants and conditions set forth in this Agreement.

-10-

2.16 Borrowing Under Credit Facility. The Partnership shall borrow $65,800,000.00 under the Credit Facility and contribute such borrowing to the OLP and the OLP will use such amount together with net proceeds of the Offering to, among other things, pay the Selling Parties and MBN Properties the cash amounts set forth for such Parties above.

2.17 Redemption of Units. Subject to contribution of the Founders Assets, the receipt by the Contributing Parties of the Units set forth above and the issuance of Units pursuant to the Offering, the Partnership shall redeem from the Redeeming Entities 4,400,000 Units (4,650,00 Units if the all the Option Units are issued), in the aggregate, at a price of $15.895 per Unit for total consideration of $69,938,000.00 ($73,911,750.00 if all of the Option Units are issued). The Partnership shall redeem from the Redeeming Entities, pro rata, in accordance with their Redemption Percentage, (a) on the Effective Date and on the Extended Closing Time (if applicable), a total of 4,400,000 Units and (b) at the Option Closing Time, if any, a number of Units equal to the Option Units delivered by the Partnership to the purchasers thereof.

ARTICLE III
ASSUMPTION OF CERTAIN LIABILITIES

3.1 Assumption of Moriah Properties Liabilities by the OLP. In connection with the contribution of the Moriah Properties Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the Moriah Properties Liabilities, to the full extent that Moriah Properties has been heretofore or would have been in the future obligated to pay, perform and discharge the Moriah Properties Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the Moriah Properties Liabilities shall not (a) increase the obligation of the OLP with respect to the Moriah Properties Liabilities beyond that of Moriah Properties, (b) waive any valid defense that was available to Moriah Properties with respect to the Moriah Properties Liabilities or (c) enlarge any rights or remedies of any third party under any of the Moriah Properties Liabilities.

3.2 Assumption of DAB Resources Liabilities by the OLP. In connection with the contribution of the DAB Resources Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the DAB Resources Liabilities, to the full extent that DAB Resources has been heretofore or would have been in the future obligated to pay, perform and discharge the DAB Resources Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the DAB Resources Liabilities shall not (a) increase the obligation of the OLP with respect to the DAB Resources Liabilities beyond that of DAB Resources, (b) waive any valid defense that was available to DAB Resources with respect to the DAB Resources Liabilities or (c) enlarge any rights or remedies of any third party under any of the DAB Resources Liabilities.

3.3 Assumption of Brothers Liabilities by the OLP. In connection with the contribution of the Brothers Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the Brothers Liabilities, to the full extent that Brothers has been heretofore or would have been in the future obligated to pay, perform and discharge the Brothers Liabilities were it not for such contribution and the execution and delivery

-11-

of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the Brothers Liabilities shall not (a) increase the obligation of the OLP with respect to the Brothers Liabilities beyond that of Brothers, (b) waive any valid defense that was available to Brothers with respect to the Brothers Liabilities or (c) enlarge any rights or remedies of any third party under any of the Brothers Liabilities.

3.4 Assumption of Brothers Production Liabilities by the OLP. In connection with the contribution of the Brothers Production Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the Brothers Production Liabilities, to the full extent that Brothers Production has been heretofore or would have been in the future obligated to pay, perform and discharge the Brothers Production Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the Brothers Production Liabilities shall not (a) increase the obligation of the OLP with respect to the Brothers Production Liabilities beyond that of Brothers Production, (b) waive any valid defense that was available to Brothers Production with respect to the Brothers Production Liabilities or (c) enlarge any rights or remedies of any third party under any of the Brothers Production Liabilities.

3.5 Assumption of Brothers Operating Liabilities by the OLP. In connection with the contribution of the Brothers Operating Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the Brothers Operating Liabilities, to the full extent that Brothers Operating has been heretofore or would have been in the future obligated to pay, perform and discharge the Brothers Operating Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the Brothers Operating Liabilities shall not (a) increase the obligation of the OLP with respect to the Brothers Operating Liabilities beyond that of Brothers Operating, (b) waive any valid defense that was available to Brothers Operating with respect to the Brothers Operating Liabilities or (c) enlarge any rights or remedies of any third party under any of the Brothers Operating Liabilities.

3.6 Assumption of J&W Properties Liabilities by the OLP. In connection with the contribution of the J&W Properties Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the J&W Properties Liabilities, to the full extent that J&W Properties has been heretofore or would have been in the future obligated to pay, perform and discharge the J&W Properties Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the J&W Properties Liabilities shall not (a) increase the obligation of the OLP with respect to the J&W Properties Liabilities beyond that of J&W Properties, (b) waive any valid defense that was available to J&W Properties with respect to the J&W Properties Liabilities or (c) enlarge any rights or remedies of any third party under any of the J&W Properties Liabilities.

3.7 Assumption of H2K Holdings Liabilities by the OLP. In connection with the contribution of the H2K Holdings Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the H2K Holdings Liabilities, to the full extent that H2K Holdings has been heretofore or would have been in the future obligated

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to pay, perform and discharge the H2K Holdings Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the H2K Holdings Liabilities shall not (a) increase the obligation of the OLP with respect to the H2K Holdings Liabilities beyond that of H2K Holdings, (b) waive any valid defense that was available to H2K Holdings with respect to the H2K Holdings Liabilities or (c) enlarge any rights or remedies of any third party under any of the H2K Holdings Liabilities.

3.8 Assumption of MBN Properties Liabilities by the OLP. In connection with the contribution of the MBN Properties Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the MBN Properties Liabilities, to the full extent that MBN Properties has been heretofore or would have been in the future obligated to pay, perform and discharge the MBN Properties Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the MBN Properties Liabilities shall not (a) increase the obligation of the OLP with respect to the MBN Properties Liabilities beyond that of MBN Properties, (b) waive any valid defense that was available to MBN Properties with respect to the MBN Properties Liabilities or (c) enlarge any rights or remedies of any third party under any of the MBN Properties Liabilities.

3.9 Assumption of CSFI Liabilities by the OLP. In connection with the contribution of the CSFI Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the CSFI Liabilities, to the full extent that CSFI has been heretofore or would have been in the future obligated to pay, perform and discharge the CSFI Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the CSFI Liabilities shall not (a) increase the obligation of the OLP with respect to the CSFI Liabilities beyond that of CSFI, (b) waive any valid defense that was available to CSFI with respect to the CSFI Liabilities or (c) enlarge any rights or remedies of any third party under any of the CSFI Liabilities.

3.10 Assumption of Moriah Foundation Liabilities by the OLP. In connection with the contribution of the Moriah Foundation Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the Moriah Foundation Liabilities, to the full extent that Moriah Foundation has been heretofore or would have been in the future obligated to pay, perform and discharge the Moriah Foundation Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the Moriah Foundation Liabilities shall not (a) increase the obligation of the OLP with respect to the Moriah Foundation Liabilities beyond that of Moriah Foundation, (b) waive any valid defense that was available to Moriah Foundation with respect to the Moriah Foundation Liabilities or (c) enlarge any rights or remedies of any third party under any of the Moriah Foundation Liabilities.

3.11 Assumption of CB Foundation Liabilities by the OLP. In connection with the contribution of the CB Foundation Assets to the OLP, as set forth above, the OLP hereby assumes and agrees to duly and timely pay, perform and discharge all of the CB Foundation Liabilities, to the full extent that CB Foundation has been heretofore or would have been in the

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future obligated to pay, perform and discharge the CB Foundation Liabilities were it not for such contribution and the execution and delivery of this Agreement; provided, however, that said assumption and agreement to duly and timely pay, perform and discharge the CB Foundation Liabilities shall not (a) increase the obligation of the OLP with respect to the CB Foundation Liabilities beyond that of CB Foundation, (b) waive any valid defense that was available to CB Foundation with respect to the CB Family Foundation Liabilities or (c) enlarge any rights or remedies of any third party under any of the CB Foundation Liabilities.

3.12 General Provisions. Notwithstanding anything to the contrary contained in this Agreement including, without limitation, the terms and provisions of this Article III, none of the parties shall be deemed to have assumed, and none of the Assets have been or are being contributed subject to any liens or security interests securing consensual indebtedness covering any of the assets, except to the extent set forth on a schedule to this Agreement, and all such liens and security interests shall be deemed to be excluded from the assumptions of liabilities made under this Article III.

ARTICLE IV
TITLE MATTERS

4.1 Encumbrances.

(a) Except to the extent provided in Section 3.12 or any other document executed in connection with this Agreement or the Offering including, without limitation, the Omnibus Agreement, the contribution and conveyance (by operation of law or otherwise) of the various physical assets as reflected in this Agreement (collectively, the "Assets") are made expressly subject to all recorded encumbrances, agreements, defects, restrictions, and adverse claims covering the respective Assets (other than liens not shown on any of the schedules to this Agreement) and all laws, rules, regulations, ordinances, judgments and orders of governmental authorities or tribunals having or asserting jurisdiction over the Assets and operations conducted thereon or therewith, in each case to the extent the same are valid and enforceable and affect the Assets, including, without limitation, (i) all matters that a current on the ground survey, title insurance commitment or policy, or visual inspection of the Assets would reflect, (ii) the applicable liabilities assumed in Article III, and
(iii) all matters contained in the Individual Assignments.

(b) To the extent that certain jurisdictions in which the Assets are located may require that documents be recorded in order to evidence the transfers of title reflected in this Agreement, then the provisions set forth in Section 4.1(a) immediately above shall also be applicable to the conveyances under such documents.

4.2 Disclaimer of Warranties; Subrogation; Waiver of Bulk Sales Laws.

(a) EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE OFFERING INCLUDING, WITHOUT LIMITATION THE OMNIBUS AGREEMENT, THE PARTIES ACKNOWLEDGE AND AGREE THAT

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NONE OF THE PARTIES HAS MADE, DOES NOT MAKE, AND EACH SUCH PARTY SPECIFICALLY NEGATES AND DISCLAIMS, ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY, ORAL OR WRITTEN, PAST OR PRESENT, REGARDING (A) THE VALUE, NATURE, QUALITY OR CONDITION OF THE ASSETS INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL, GEOLOGY OR ENVIRONMENTAL CONDITION OF THE ASSETS GENERALLY, INCLUDING THE PRESENCE OR LACK OF HAZARDOUS SUBSTANCES OR OTHER MATTERS ON THE ASSETS, (B) THE INCOME TO BE DERIVED FROM THE ASSETS, (C) THE SUITABILITY OF THE ASSETS FOR ANY AND ALL ACTIVITIES AND USES THAT MAY BE CONDUCTED THEREON, (D) THE COMPLIANCE OF OR BY THE ASSETS OR THEIR OPERATION WITH ANY LAWS (INCLUDING WITHOUT LIMITATION ANY ZONING, ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS), OR (E) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE ASSETS. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE OFFERING INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT, THE PARTIES ACKNOWLEDGE AND AGREE THAT EACH HAS HAD THE OPPORTUNITY TO INSPECT THE RESPECTIVE ASSETS, AND EACH IS RELYING SOLELY ON ITS OWN INVESTIGATION OF THE RESPECTIVE ASSETS AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY ANY OF THE PARTIES. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE OFFERING INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT, NONE OF THE PARTIES IS LIABLE OR BOUND IN ANY MANNER BY ANY VERBAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE ASSETS FURNISHED BY ANY AGENT, EMPLOYEE, SERVANT OR THIRD PARTY. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE OFFERING INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT, EACH OF THE PARTIES ACKNOWLEDGES THAT TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE CONTRIBUTION OF THE ASSETS AS PROVIDED FOR HEREIN IS MADE IN AN "AS IS", "WHERE IS" CONDITION WITH ALL FAULTS, AND THE ASSETS ARE CONTRIBUTED AND CONVEYED SUBJECT TO ALL OF THE MATTERS CONTAINED IN THIS SECTION. THIS SECTION SHALL SURVIVE SUCH CONTRIBUTION AND CONVEYANCE OR THE TERMINATION OF THIS AGREEMENT. THE PROVISIONS OF THIS
SECTION HAVE BEEN NEGOTIATED BY THE PARTIES AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE ASSETS THAT MAY ARISE PURSUANT TO ANY LAW NOW OR HEREAFTER IN

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EFFECT, OR OTHERWISE, EXCEPT AS SET FORTH IN THIS AGREEMENT OR ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE OFFERING, INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT.

(b) To the extent that certain jurisdictions in which the Assets are located may require that documents be recorded in order to evidence the transfers of title reflected in this Agreement, then the disclaimers set forth in Section 4.2(a) immediately above shall also be applicable to the conveyances under such documents.

(c) The contributions of the Assets made under this Agreement are made with full rights of substitution and subrogation of the respective parties receiving such contributions, and all persons claiming by, through and under such parties, to the extent assignable, in and to all covenants and warranties by the predecessors-in-title of the parties contributing the Assets, and with full subrogation of all rights accruing under applicable statutes of limitation and all rights of action of warranty against all former owners of the Assets.

(d) Each of the Parties agrees that the disclaimers contained in this
Section 4.2 are "conspicuous" disclaimers. Any covenants implied by statute or law by the use of the words "grant," "convey," "bargain," "sell," "assign," "transfer," "deliver," or "set over" or any of them or any other words used in this Agreement or any exhibits hereto are hereby expressly disclaimed, waived or negated.

Each of the Parties hereby waives compliance with any applicable bulk sales law or any similar law in any applicable jurisdiction in respect of the transactions contemplated by this Agreement.

ARTICLE V
FURTHER ASSURANCES

5.1 Further Assurances. From time to time after the date hereof, and without any further consideration, the Parties agree to execute, acknowledge and deliver all such additional deeds, assignments, bills of sale, conveyances, instruments, notices, releases, acquittances and other documents, and will do all such other acts and things, all in accordance with applicable law, as may be necessary or appropriate (a) more fully to assure that the applicable Parties own all of the properties, rights, titles, interests, estates, remedies, powers and privileges granted by this Agreement, or which are intended to be so granted (b) more fully and effectively to vest in the applicable Parties and their respective successors and assigns beneficial and record title to the interests contributed and assigned by this Agreement or intended so to be and to more fully and effectively carry out the purposes and intent of this Agreement.

5.2 Other Assurances. From time to time after the date hereof, and without any further consideration, each of the Parties shall execute, acknowledge and deliver all such additional instruments, notices and other documents, and will do all such other acts and things, all in accordance with applicable law, as may be necessary or appropriate to more fully and effectively carry out the purposes and intent of this Agreement. Without limiting the generality of the

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foregoing, the Parties acknowledge that the Parties have used their good faith efforts to attempt to identify all of the assets being contributed to the GP, the Partnership, the OLP GP and the OLP as required in connection with the Offering. However, due to the age of some of those assets and the difficulties in locating appropriate data with respect to some of the assets it is possible that assets intended to be contributed to the GP, the Partnership, the OLP GP and the OLP were not identified and therefore are not included in the assets so contributed. It is the express intent of the Parties that the Partnership and the OLP own all assets necessary to operate the assets that are identified in this Agreement and in the Offering Memorandum. To the extent any assets were not identified but are necessary to the operation of assets that were identified, then the intent of the Parties is that all such unidentified assets are intended to be conveyed to the Partnership and the OLP. To the extent such assets are identified at a later date, the Parties shall take the appropriate actions required in order to convey all such assets to the Partnership or the OLP. Likewise, to the extent that assets are identified at a later date that were not intended by the Parties to be conveyed as reflected in the Offering Memorandum, the Parties shall take the appropriate actions required in order to convey all such assets to the appropriate party.

ARTICLE VI
POWERS OF ATTORNEY

6.1 Moriah Properties. Moriah Properties hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of Moriah Properties and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the Moriah Properties Assets and to execute in the name of Moriah Properties and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of Moriah Properties for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the Moriah Properties Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the Moriah Properties Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. Moriah Properties hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of Moriah Properties or its successors or assigns or by operation of law.

6.2 DAB Resources. DAB Resources hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of DAB Resources and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the DAB Resources Assets and to execute in the name of DAB Resources and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of DAB Resources for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and

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to the DAB Resources Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the DAB Resources Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. DAB Resources hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of DAB Resources or its successors or assigns or by operation of law.

6.3 Brothers. Brothers hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of Brothers and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the Brothers Assets and to execute in the name of Brothers and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of Brothers for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the Brothers Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the Brothers Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. Brothers hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of Brothers or its successors or assigns or by operation of law.

6.4 Brothers Production. Brothers Production hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of Brothers Production and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the Brothers Production Assets and to execute in the name of Brothers Production and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of Brothers Production for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the Brothers Production Assets,
(ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the Brothers Production Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. Brothers Production hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of Brothers Production or its successors or assigns or by operation of law.

6.5 Brothers Operating. Brothers Operating hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of Brothers Operating and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive

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from time to time the Brothers Operating Assets and to execute in the name of Brothers Operating and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of Brothers Operating for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the Brothers Operating Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the Brothers Operating Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. Brothers Operating hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of Brothers Operating or its successors or assigns or by operation of law.

6.6 J&W Properties. J&W Properties hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of J&W Properties and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the J&W Properties Assets and to execute in the name of J&W Properties and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of J&W Properties for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the J&W Properties Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the J&W Properties Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. J&W Properties hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of J&W Properties or its successors or assigns or by operation of law.

6.7 H2K Holdings. H2K Holdings hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of H2K Holdings and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the H2K Holdings Assets and to execute in the name of H2K Holdings and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of H2K Holdings for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the H2K Holdings Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the H2K Holdings Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. H2K Holdings hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and

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shall not be terminated by any act of H2K Holdings or its successors or assigns or by operation of law.

6.8 MBN Properties. MBN Properties hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of MBN Properties and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the MBN Properties Assets and to execute in the name of MBN Properties and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of MBN Properties for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the MBN Properties Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the MBN Properties Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. MBN Properties hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of MBN Properties or its successors or assigns or by operation of law.

6.9 CSFI. CSFI hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of CSFI and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the CSFI Assets and to execute in the name of CSFI and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of CSFI for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the CSFI Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the CSFI Assets, and
(iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. CSFI hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of CSFI or its successors or assigns or by operation of law.

6.10 Moriah Foundation. Moriah Foundation hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of Moriah Foundation and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the Moriah Foundation Assets and to execute in the name of Moriah Foundation and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of Moriah Foundation for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims,

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rights or titles of any kind in and to the Moriah Foundation Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the Moriah Foundation Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. Moriah Foundation hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of Moriah Foundation or its successors or assigns or by operation of law.

6.11 CB Foundation. CB Foundation hereby constitutes and appoints the OLP and its successors and assigns, its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of CB Foundation and its successors and assigns, and for the benefit of the OLP and its successors and assigns, to demand and receive from time to time the CB Foundation Assets and to execute in the name of CB Foundation and its successors and assigns, instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of CB Foundation for the benefit of the OLP as may be appropriate, any and all proceedings at law, in equity or otherwise which the OLP and its successors and assigns, may deem proper in order (i) to collect, assert or enforce any claims, rights or titles of any kind in and to the CB Foundation Assets, (ii) to defend and compromise any and all actions, suits or proceedings in respect of any of the CB Foundation Assets, and (iii) to do any and all such acts and things in furtherance of this Agreement as the OLP or its successors or assigns shall deem advisable. CB Foundation hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of CB Foundation or its successors or assigns or by operation of law.

6.12 Contributing Parties. In addition to the specific powers of attorney granted in the other sections of this Article VI, each of the Parties that has contributed the Assets as reflected by this Agreement (each a "Contributing Party") hereby constitutes and appoints the party to whom the respective Assets were contributed and its successors and assigns (the "Receiving Party"), its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of the applicable Contributing Party and its successors and assigns, and for the benefit of the applicable Receiving Party and its successors and assigns, to demand and receive from time to time the applicable Assets contributed and to execute in the name of the applicable Contributing Party and its successors and assigns instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of the applicable Contributing Party for the benefit of the applicable Receiving Party as may be appropriate, any and all proceedings at law, in equity or otherwise which the applicable Receiving Party and its successors and assigns, may deem proper in order to (a) collect, assert or enforce any claims, rights or titles of any kind in and to the applicable Assets, (b) defend and compromise any and all actions, suits or proceedings in respect of any of the applicable Assets, and (c) do any and all such acts and things in furtherance of this Agreement as the applicable Receiving Party or its successors or assigns shall deem advisable. Each Contributing Party hereby declares that the appointments hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of any Contributing Party or its successors or assigns or by operation of law.

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ARTICLE VII
MISCELLANEOUS

7.1 Order of Completion of Transactions. The transactions provided for in Article II (except as otherwise noted) and Article III of this Agreement shall be completed in the following order:

First, the transactions provided for in Article II, other than those transactions provided for in Section 2.17, shall be completed in the order set forth therein;

Second, the transactions provided for in Article III shall be completed in the order set forth therein; and

Third, the transactions provided for in Article II, Section 2.17 shall be completed in the order set forth therein.

7.2 Consents; Restriction on Assignment. If there are prohibitions against or conditions to the contribution and conveyance of one or more of the Assets without the prior written consent of third parties, including, without limitation, governmental agencies (other than consents of a ministerial nature which are normally granted in the ordinary course of business), which if not satisfied would result in a breach of such prohibitions or conditions or would give an outside party the right to terminate rights of the Party to whom the applicable Assets were intended to be conveyed (the "Beneficial Owner") with respect to such portion of the Assets (herein called a "Restriction"), then any provision contained in this Agreement to the contrary notwithstanding, the transfer of title to or interest in each such portion of the Assets (herein called the "Restriction Asset") pursuant to this Agreement shall not become effective unless and until such Restriction is satisfied, waived or no longer applies. When and if such a Restriction is so satisfied, waived or no longer applies, to the extent permitted by applicable law and any applicable contractual provisions, the assignment of the Restriction Asset subject thereto shall become effective automatically as of the Effective Time, without further action on the part of any Party. Each of the applicable Parties that were involved with the conveyance of a Restriction Asset agree to use their reasonable best efforts to obtain on a timely basis satisfaction of any Restriction applicable to any Restriction Asset conveyed by or acquired by any of them. The description of any portion of the Assets as a "Restriction Asset" shall not be construed as an admission that any Restriction exists with respect to the transfer of such portion of the Assets. In the event that any Restriction Asset exists, the applicable Party agrees to continue to hold such Restriction Asset in trust for the exclusive benefit of the applicable Party to whom such Restriction Asset was intended to be conveyed and to otherwise use its reasonable best efforts to provide such other Party with the benefits thereof, and the party holding such Restriction Asset will enter into other agreements, or take such other action as it may deem necessary, in order to ensure that the applicable Party to whom such Restriction Asset was intended to be conveyed has the assets and concomitant rights necessary to enable the applicable Party to operate such Restriction Asset in all material respects as it was operated prior to the Effective Time.

7.3 Costs. The OLP shall pay all sales, use and similar taxes arising out of the contributions, conveyances and deliveries to be made hereunder, and shall pay all documentary, filing, recording, transfer, deed, and conveyance taxes and fees required in connection therewith. In addition, the OLP shall be responsible for all costs, liabilities and expenses (including court costs

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and reasonable attorneys' fees) incurred in connection with the satisfaction or waiver of any Restriction pursuant to Section 7.2 to the extent such Restriction was disclosed to the OLP on or before the Effective Date.

7.4 Headings; References; Interpretation. All Article and Section headings in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any of the provisions hereof. The words "hereof," "herein" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole, including without limitation, all Schedules attached hereto, and not to any particular provision of this Agreement. All references herein to Articles, Sections, and Schedules shall, unless the context requires a different construction, be deemed to be references to the Articles, Sections and Schedules of this Agreement, respectively, and all such Schedules attached hereto are hereby incorporated herein and made a part hereof for all purposes. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders, and the singular shall include the plural and vice versa. The use herein of the word "including" following any general statement, term or matter shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limiting language (such as "without limitation," "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement, term or matter.

7.5 Successors and Assigns. The Agreement shall be binding upon and inure to the benefit of the parties signatory hereto and their respective successors and assigns.

7.6 No Third Party Rights. The provisions of this Agreement are intended to bind the Parties signatory hereto as to each other and are not intended to and do not create rights in any other person or confer upon any other person any benefits, rights or remedies and no person is or is intended to be a third party beneficiary of any of the provisions of this Agreement.

7.7 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one agreement binding on the Parties hereto.

7.8 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas applicable to contracts made and to be performed wholly within such state without giving effect to conflict of law principles thereof, except to the extent that it is mandatory that the law of some other jurisdiction, wherein the Assets are located, shall apply.

7.9 Severability. If any of the provisions of this Agreement are held by any court of competent jurisdiction to contravene, or to be invalid under, the laws of any political body having jurisdiction over the subject matter hereof, such contravention or invalidity shall not invalidate the entire Agreement. Instead, this Agreement shall be construed as if it did not contain the particular provision or provisions held to be invalid, and an equitable adjustment shall be made and necessary provision added so as to give effect to the intention of the Parties as expressed in this Agreement at the time of execution of this Agreement.

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7.10 Deed; Bill of Sale; Assignment. To the extent required and permitted by applicable law, this Agreement shall also constitute a "deed," "bill of sale" or "assignment" of the Assets.

7.11 Amendment or Modification. This Agreement may be amended or modified from time to time only by the written agreement of all the Parties hereto and affected thereby.

7.12 Integration. This Agreement and the instruments referenced herein supersede all previous understandings or agreements among the Parties, whether oral or written, with respect to its subject matter. This Agreement and such instruments contain the entire understanding of the Parties with respect to the subject matter hereof and thereof. No understanding, representation, promise or agreement, whether oral or written, is intended to be or shall be included in or form part of this Agreement unless it is contained in a written amendment hereto executed by the parties hereto after the date of this Agreement.

IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first written above.

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MORIAH PROPERTIES, LTD.

By: Moriah Resources, Inc.,
its general partner 

By: /s/ Dale A. Brown
    ------------------------------------
Name: Dale A. Brown
Title: President

DAB RESOURCES, LTD.

By: DAB 1999 Corp., its general partner 

By: /s/ Dale A. Brown
    ------------------------------------
Name: Dale A. Brown
Title: President

BROTHERS PRODUCTION PROPERTIES, LTD.

By: Brothers Production Company, Inc.,
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

BROTHERS PRODUCTION COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

BROTHERS OPERATING COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

J&W MCGRAW PROPERTIES, LTD.

By: Wanda J. McGraw Management, LLC,
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

MBN PROPERTIES LP

By: MBN Management, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President

H2K HOLDINGS, LTD.

By: H2K Management, LLC,
its general partner 

By: /s/ Paul T. Horne
    ------------------------------------
Name: Paul T. Horne
Title: President

CHARITIES SUPPORT FOUNDATION, INC. 

By: /s/ Valerie Cornelius
    ------------------------------------
Name: Valerie Cornelius
Title: Treasurer

MORIAH FOUNDATION 

By: /s/ Dale A. Brown
    ------------------------------------
Name: Dale A. Brown
Title: President

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CARY BROWN FAMILY FOUNDATION 

By: /s/ Cary D. Brown
    ------------------------------------
Name: Cary D. Brown
Title: President

LEGACY RESERVES GP, LLC 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

LEGACY RESERVES LP

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

LEGACY RESERVES OPERATING GP LLC

By: Legacy Reserves LP, its sole member

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
    Steven H. Pruett
    President, Chief Financial Officer
    and Secretary

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LEGACY RESERVES OPERATING LP

By: Legacy Reserves Operating GP LLC,
its general partner

By: Legacy Reserves LP, its sole member

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

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Exhibit 10.3

OMNIBUS AGREEMENT

THIS OMNIBUS AGREEMENT is entered into on, and effective as of, the Closing Date, among MORIAH PROPERTIES, LTD., a Texas limited partnership ("Moriah"), DAB RESOURCES, LTD., a Texas limited partnership ("DAB Resources"), BROTHERS PRODUCTION PROPERTIES, LTD., a Texas limited partnership ("Brothers"), BROTHERS PRODUCTION COMPANY, INC., a Texas corporation ("Brothers Production"), BROTHERS OPERATING COMPANY, INC., a Texas corporation ("Brothers Operating"), J&W MCGRAW PROPERTIES, LTD., a Texas limited partnership ("J&W Properties"), MBN PROPERTIES LP, a Delaware limited partnership ("MBN Properties"), MBN MANAGEMENT, LLC, a Delaware limited liability company ("MBN Management"), H2K HOLDINGS, LTD., a Texas limited partnership ("H2K"), NEWSTONE GROUP PARTNERS, a Texas general partnership ("Newstone Partners"), NEWSTONE CAPITAL, LP, a Texas limited partnership ("Newstone"), BLACKSTONE INVESTMENTS I, LP, a Texas limited partnership ("Blackstone I"), BLACKSTONE INVESTMENTS II, LP, a Texas limited partnership ("Blackstone II"), TRINITY EQUITY PARTNERS I, LP, a Texas limited partnership ("Trinity"), SHP CAPITAL LP, a Texas limited partnership ("SHP"), LEGACY RESERVES LP, a Delaware limited partnership (the "Partnership"), and LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "General Partner"), for itself and on behalf of the Partnership in its capacity as general partner. The above-named entities are sometimes referred to in this Agreement each as a "Party" and collectively as the "Parties."

RECITALS:

The Parties desire by their execution of this Agreement to evidence their understanding and agreement with respect to certain matters relating to the formation and governance of the General Partner and the Partnership as more fully set forth in this Agreement.

In consideration of the premises and the covenants, conditions, and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

ARTICLE 1
DEFINITIONS

1.1 DEFINITIONS.

(a) Capitalized terms used herein but not defined shall have the meanings given them in the Partnership Agreement.

(b) As used in this Agreement, the following terms shall have the respective meanings set forth below:

"Agreement" means this Omnibus Agreement, as it may be amended, modified, or supplemented from time to time in accordance with the terms hereof.

"Base Units" means that number of Units issued to the Legacy Founders in exchange for the contribution of the Legacy Founders Assets having an aggregate value equal to the Base Value. For purposes hereof, the value of a Unit will be equal to 93.5% of the Offering Price.

"Base Value" means five (5) times the Initial Period Property Level Cash Flow determined without regard to the Foundation Assets.

"Blackstone I" has the meaning given such term in the introduction to this Agreement.

"Blackstone II" has the meaning given such term in the introduction to this Agreement.

"Board" means the board of directors of the General Partner.

"Brothers" has the meaning given such term in the introduction to this Agreement.

"Brothers Group" means Brothers, Brothers Production, Brothers Operating, J&W Properties and each of their respective permitted transferees.

"Brothers Founders" means Brothers Founders, Ltd., a Texas Limited Partnership.

"Brothers Operating" has the meaning given such term in the introduction to this Agreement.

"Brothers Production" has the meaning given such term in the introduction to this Agreement.

"Change of Control" means, with respect to any Person (the "Applicable Person"), any of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the Applicable Person's assets to any other Person, unless immediately following such sale, lease, exchange or other transfer such assets are owned, directly or indirectly, by the Applicable Person; (ii) the dissolution or liquidation of the Applicable Person; (iii) the consolidation or merger of the Applicable Person with or into another Person pursuant to a transaction in which the outstanding Voting Securities of the Applicable Person are changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Securities of the Applicable Person are changed into or exchanged for Voting Securities of the surviving corporation or its parent and (b) the holders of the Voting Securities of the Applicable Person immediately prior to such transaction own, directly or indirectly, not less than a majority of the outstanding Voting Securities of the surviving corporation or its parent immediately after such transaction; and (iv) a "person" or "group" (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) being or becoming the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of all of the then outstanding Voting Securities of the Applicable Person, except in a merger or consolidation that would not constitute a Change of Control under clause (iii) above.

"Closing Date" means the date of the closing of the private placement of Units.

"Company Agreement" means the Amended and Restated Company Agreement of Legacy Reserves GP, LLC

"Conflicts Committee" has the meaning given such term in the Partnership Agreement.

"Contributing Parties" means the parties contributing assets to the Partnership wholly or partially in exchange for Units as set forth in the Contribution Agreement.

"Contribution Agreement" is defined in Section 2.1.

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"DAB Resources" has the meaning given such term in the introduction to this Agreement.

"Director" means a member of the Board.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

"FBR" means Friedman, Billings, Ramsey & Co., Inc.

"Foundation Assets" means the assets acquired by the Partnership in connection with the Offering from the Foundations.

"Foundations" means Charities Support Foundation, Inc., Moriah Foundation, Inc. and Cary Brown Family Foundation, Inc.

"Founders Assets" has the meaning given to such term in the Contribution Agreement.

"Founders Indemnification Obligation" has the meaning given such term in
Section 6.2.

"Founding Investor" has the meaning given to such term in the Partnership Agreement.

"General Partner" has the meaning given such term in the introduction to this Agreement.

"H2K" has the meaning given such term in the introduction to this Agreement.

"Independent Director" shall have the meaning ascribed to such term in NASD Rule 4200(a)(15).

"Initial Period Property Level Cash Flow" means the 12 month pro forma amount of property level cash flow from the Legacy Founder Assets and the Foundation Assets as determined in the projections, based on the LaRoche Petroleum Consultants proved developed producing reserve report used in the Offering Memorandum.

"J&W Properties" has the meaning given such term in the introduction to this Agreement.

"Legacy Founders" means those Persons actually contributing properties to the Partnership in connection with the Offering, but excluding MBN Properties.

"Legacy Founders Assets" means the properties contributed to the Partnership by the Legacy Founders.

"Limited Partners" means limited partners of the Partnership.

"LTIP" means the Legacy Reserves LP Long-Term Incentive Plan to be adopted by the Partnership on the Closing Date.

"Marketing Materials" has the meaning given to such term in the Purchase/Placement Agreement.

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"Market Value" means, when used with respect to the Units referred to in
Section 4.1(b), the product of (i) the number of such Units multiplied by (ii) the Offering Price per Unit.

"MBN Management" has the meaning given such term in the introduction to this Agreement.

"MBN Properties" has the meaning given such term in the introduction to this Agreement. 

     "Member" has the meaning given such term in Section 5.1.

     "Moriah" has the meaning given such term in the introduction to this
Agreement.

"Moriah Group" means Moriah, DAB Resources and each of their respective permitted transferees.

"Moriah Founders" means Moriah Founders, Ltd., a Texas limited Partnership.

"Newstone Group" means Newstone, Newstone Partners, Blackstone I, Blackstone II, Trinity, SHP and each of their respective permitted transferees.

"Newstone Member" means a member of the Newstone Group.

"Newstone Partners" has the meaning given such term in the introduction to this Agreement.

"Offering" means the offering of Units by the Partnership pursuant to the Offering Memorandum.

"Offering Memorandum" means the Offering Memorandum of the Partnership, dated March 6, 2006, relating to the offer and sale of up to 5,250,000 Units.

"Offering Price" means the gross price at which a Unit is sold in the Offering.

"Operating Partnership" means Legacy Reserves Operating LP, a Delaware limited partnership, and any successors thereto.

"Operating Partnership Agreement" means the Limited Partnership Agreement of the Operating Partnership, as it may be amended, supplemented or restated from time to time.

"Operating Partnership GP" means Legacy Reserves Operating GP LLC, a Delaware limited liability company, and any successors thereto.

"Partnership" has the meaning given such term in the introduction to this Agreement.

"Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of the Closing Date, as such agreement is in effect on the Closing Date, to which reference is hereby made for all purposes of this Agreement. An amendment or modification to the Partnership Agreement subsequent to the Closing Date shall be given effect for the purposes of this Agreement only if it has received the approval of the Conflicts Committee that would be required, if any, pursuant to Section 7.5 hereof if such amendment or modification were an amendment or modification of this Agreement.

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"Partnership Entities" means the General Partner and each member of the Partnership Group.

"Partnership Group" means the Partnership, the Operating Partnership and the Operating Partnership GP.

"Person" means an individual, corporation, partnership, joint venture, trust, limited liability company, unincorporated organization or any other entity.

"Phantom Units" has the meaning given such term in Section 2.2(c).

"Primary Units" means Units issued directly by the Partnership in exchange for cash contributions made in connection with the closing of the Offering.

"Projected Distributed Cash" means the estimated total cash to be distributed to holders of Units over the initial 12 month period as set forth in the Offering Memorandum.

"Purchase/Placement Agreement" means the Purchase/Placement Agreement dated March 6, 2006, by and among FBR, the Partnership and the other parties thereto.

"PV-10 Value" means the value of the Founders Assets based on total proved reserves as set forth in the engineering report prepared by LaRoche Petroleum Consultants, Ltd. for the period ended as of September 30, 2005.

"Reimbursement Ratio" means, with respect to any Founding Investor holding Units, the percentage that such Units bears to the number of Units equal to Total Units minus the Restricted Units.

"Residual Units" means all Units other than (i) Primary Units and (ii) Restricted Units.

"Restricted Units" means 52,616 Units to be issued to members of management or other employees of the Partnership or its affiliates under the LTIP in connection with the closing of the Offering.

"SHP" has the meaning given such term in the introduction to this Agreement

"Total Units" has the meaning given such term in Section 2.2(a).

"Trinity" has the meaning given such term in the introduction to this Agreement.

"Unit" has the meaning given such term in the Partnership Agreement.

"Voting Securities" means securities of any class of a Person entitling the holders thereof to vote in the election of, or to appoint, members of the board of directors or other similar governing body of the Person.

ARTICLE 2
CONTRIBUTION AGREEMENT; ISSUANCE OF UNITS

2.1 CONTRIBUTION AGREEMENT. Subject to the consummation of the Offering, each of the Parties agrees to enter into, the Contribution, Conveyance and Assumption Agreement among the General Partner, the Partnership, the Operating Partnership GP, the Operating

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Partnership and the other parties named therein, substantially in the form attached hereto as Exhibit A (the "Contribution Agreement"), with the number of Units to be issued to each Contributing Party thereunder to be determined as set forth below.

2.2 DETERMINATION OF TOTAL UNITS AND ALLOCATION OF UNITS AMONG CONTRIBUTING PARTIES. The following procedure will be used for purposes of determining the number of Units to be issued to each Contributing Party.

(a) On the Closing Date, the number of total Units to be issued by the Partnership upon the closing of the Offering ("Total Units") will be determined and will be equal to the result of (i) Projected Distributed Cash divided by
(ii) the projected per Unit distributions to be paid annually, in each case as set forth in the Offering Memorandum.

(b) Residual Units will then be determined and will be equal to the difference between (i) Total Units minus (ii) the sum of (A) the Primary Units and (B) the Restricted Units.

(c) For purposes of determining the number of Residual Units to be issued to each Contributing Party, Residual Units will be tentatively increased by a number of phantom Units ("Phantom Units") equal to the result of (i) the total cash being paid to MBN Properties for its properties pursuant to the Contribution Agreement (equal to the total amount of third party and subordinated debt owed by MBN Properties) divided by (ii) the Offering Price per Unit. This tentative number of Units will then be apportioned among the Contributing Parties in proportion to the PV-10 Value of the Founders Assets being contributed by each Contributing Party. The number of Residual Units to be issued to each Contributing Party will be the number of Units apportioned as provided in the previous sentence, except that in the case of MBN Properties, the number of Units determined for it will be reduced by the number of Phantom Units.

ARTICLE 3
FOUNDERS REGISTRATION RIGHTS AGREEMENT

Subject to the consummation of the Offering, each of the Parties agrees to enter into, the Founders Registration Rights Agreement substantially in the form attached hereto as Exhibit B.

ARTICLE 4
RESTRICTIONS ON TRANSFER OF UNITS

4.1 RESTRICTIONS ON TRANSFER OF UNITS. Notwithstanding the other provisions of this Agreement, each Newstone Member agrees to hold fifty percent (50%) of the total Units owned by it immediately following the closing of the Offering for not less than 30 months following such Closing Date; provided, that, prior to the expiration of such 30 month period:

(a) if any of Cary D. Brown, Dale A. Brown, Kyle A. McGraw or their respective affiliates, sell all or any portion of their Units in excess of that number of Units equal to the Base Units attributable to them, each Newstone Member may sell all or a portion of its Units in the same proportion without regard to the fifty percent (50%) limitation on transfer;

(b) each Newstone Member may dispose of a portion of its Units provided that at the time of such disposition it retains ownership of Units having an aggregate fair market value at such time of not less than fifty percent (50%) of the Market Value of the Units owned by it as of the Closing Date;

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(c) if a representative of the Newstone Group is removed from the Board or the other representative(s) on the Board accept the resignation of the Newstone Group representative from the Board, the Newstone Members will be free to dispose of all of such Units; and

(d) notwithstanding the foregoing, each Newstone Member will be entitled to margin or otherwise pledge all Units held by it.

With respect to the remaining fifty percent (50%) of the Units held by each Newstone Member, such Units will be freely transferable, subject only to applicable securities laws restrictions or any agreement with any underwriter restricting transfer of such Units.

The provisions of this Article 4 shall terminate upon a Change of Control of the General Partner or the Partnership.

ARTICLE 5
VOTING OF INTERESTS IN GENERAL PARTNER

5.1 ELECTION OF DIRECTORS. Until the occurrence of an Initial Public Offering (as such term is defined in the Partnership Agreement), each Party hereto that holds an interest in the General Partner ("Member") agrees on behalf of itself and any transferee or assignee of any such interests that it will vote all of such interests for the election of Directors as follows:

(a) For the election of two individuals as designated by the Moriah Group;

(b) For the election of one individual designated by the Brothers Group; and

(c) For the election of one individual designated by the Newstone Group.

The parties hereto agree that the initial Directors will be as set forth in the Company Agreement.

All remaining Directors to be elected by the Members will be Independent Directors. To the extent that the total number of Directors to be elected by the Members are less than four (4), the Moriah Group and the Brothers Group will collectively be entitled to designate 2/3 of such number of Directors and the Newstone Group will be entitled to designate 1/3 of such number of Directors, in each case rounded down to the nearest whole number of Directors.

A group's right to designate an individual will terminate at such time as no members of such group existing on the date hereof hold any Units.

ARTICLE 6
REIMBURSEMENT OF EXPENSES

6.1 FORMATION EXPENSES

Pursuant to the Partnership Agreement, the General Partner is entitled to be reimbursed for all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership Group. In anticipation of the formation of the Partnership, the parties agreed to fund expenses relating to such formation through MBN Management on the condition that the Partnership agree to reimburse MBN Management for such expenses upon formation. Accordingly, the Partnership hereby agrees to reimburse MBN Management promptly following closing of the

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Offering for all expenses it has incurred in connection with the formation of the Partnership and the Offering in the same manner and to the same extent as if incurred by the General Partner.

6.2 FOUNDERS INDEMNIFICATION OBLIGATION EXPENSES

Pursuant to the Sections 7(b) and 7(h) of the Purchase/Placement Agreement, Moriah Founders and Brothers Founders, jointly and severally, agree to indemnify FBR and its affiliates, and other related Persons for certain losses, expenses, liabilities or claims that arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or Marketing Materials for a period of six months form the Closing Date (the "Founders Indemnification Obligation") with the Indemnification Obligation limited to $17,000,000 and subject to a deductible of $5,000,000. Each of the Parties agrees to reimburse Moriah Founders and Brothers Founders for any payments made by either of them pursuant to the Founders Indemnification Obligation in an amount such that the aggregate amount paid by each Party hereunder with respect to the Founders Indemnification Obligation is in proportion to such Party's Reimbursement Ratio multiplied by the total amounts paid by all parties with respect to the Founders Indemnification Obligations. The Parties agree to cause any transferee of Units who constitutes a Founding Investor but is not a Party to this Agreement to assume the obligations set forth in this Section 6.2

ARTICLE 7
MISCELLANEOUS

7.1 CHOICE OF LAW; SUBMISSION TO JURISDICTION. This Agreement shall be subject to and governed by the laws of the State of Texas, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Agreement to the laws of another state. Each Party hereby submits to the jurisdiction of the state and federal courts in the State of Texas and to venue in Texas.

7.2 NOTICE. All notices or requests or consents provided for or permitted to be given pursuant to this Agreement must be in writing and must be given by depositing same in the United States mail, addressed to the Person to be notified, postpaid, and registered or certified with return receipt requested or by delivering such notice in person or by telecopier or telegram to such Party. Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient's normal business hours, or at the beginning of the recipient's next business day after receipt if not received during the recipient's normal business hours. All notices to be sent to a Party pursuant to this Agreement shall be sent to the address set forth below such Party's name on the signature page hereto.

7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the Parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein.

7.4 EFFECT OF WAIVER OR CONSENT. No waiver or consent, express or implied, by any Party to or of any breach or default by any Person in the performance by such Person of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such Person of the same or any other obligations of such Person hereunder. Failure on the part of a Party to complain of any act of any Person or to declare any Person in default, irrespective of how long such failure continues, shall not

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constitute a waiver by such Party of its rights hereunder until the applicable statute of limitations period has run.

7.5 AMENDMENT OR MODIFICATION. This Agreement may be amended or modified from time to time only by the written agreement of all the Parties; provided, however, that the Partnership may not, without the prior approval of the Conflicts Committee, agree to any amendment or modification of this Agreement that, in the reasonable discretion of the General Partner, will adversely affect the holders of Units. Each such instrument shall be reduced to writing and shall be designated on its face an "Amendment" or an "Addendum" to this Agreement.

7.6 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Except as otherwise provided herein, no Party shall have the right to assign its rights or obligations under this Agreement without the consent of the other Parties. Each of the Parties hereto specifically intends that each entity comprising the Limited Partners, the Partnership Entities or the Newstone Group, as applicable, whether or not a Party to this Agreement, shall be entitled to assert rights and remedies hereunder as third-party beneficiaries hereto with respect to those provisions of this Agreement affording a right, benefit or privilege to any such entity.

7.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all signatory Parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument.

7.8 SEVERABILITY. If any provision of this Agreement or the application thereof to any Person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

7.9 GENDER, PARTS, ARTICLES AND SECTIONS. Whenever the context requires, the gender of all words used in this Agreement shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. All references to Article numbers and Section numbers refer to Articles and Sections of this Agreement.

7.10 FURTHER ASSURANCES. In connection with this Agreement and all transactions contemplated by this Agreement, each Party agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions.

7.11 WITHHOLDING OR GRANTING OF CONSENT. Each Party may, with respect to any consent or approval that it is entitled to grant pursuant to this Agreement, grant or withhold such consent or approval in its sole and uncontrolled discretion, with or without cause, and subject to such conditions as it shall deem appropriate.

7.12 LAWS AND REGULATIONS. Notwithstanding any provision of this Agreement to the contrary, no Party shall be required to take any act, or fail to take any act, under this Agreement if the effect thereof would be to cause such Party to be in violation of any applicable law, statute, rule or regulation.

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7.13 NO RECOURSE AGAINST OFFICERS OR DIRECTORS. For the avoidance of doubt, the provisions of this Agreement shall not give rise to any right of recourse against any officer or director of any Limited Partner, Newstone Member or any Partnership Entity.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the Parties have executed this Agreement on, and effective as of, the Closing Date.

MORIAH PROPERTIES, LTD.

By: Moriah Resources, Inc.,
its general partner 

By: /s/ Dale A. Brown
    ------------------------------------
Name: Dale A. Brown
Title: President

Address for notice:

303 W. Wall Street, Suite 1500 Midland, Texas 79701

DAB RESOURCES, LTD.

By: DAB 1999 Corp., its general partner 

By: /s/ Dale A. Brown
    ------------------------------------
Name: Dale A. Brown
Title: President

Address for notice:

303 W. Wall Street, Suite 1500 Midland, Texas 79701

BROTHERS PRODUCTION PROPERTIES, LTD.

By: Brothers Production Company, Inc.,
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

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BROTHERS PRODUCTION COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

BROTHERS OPERATING COMPANY, INC. 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

J&W MCGRAW PROPERTIES, LTD.

By: Wanda J. McGraw Management, LLC,
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name: Kyle A. McGraw
Title: President

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

MBN PROPERTIES LP

By: MBN Management, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President and Chief
       Financial Officer

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

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MBN MANAGEMENT, LLC 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President and Chief
       Financial Officer

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

H2K HOLDINGS, LTD.

By: H2K Management, LLC,
its general partner 

By: /s/ Paul T. Horne
    ------------------------------------
Name: Paul T. Horne
Title: President

Address for notice:

303 W. Wall Street, Suite 1500 Midland, Texas 79701

NEWSTONE GROUP PARTNERS

By: Newstone Capital, LP
its managing general partner

By: T&W Management, LLC
its general partner 

By: /s/ S. Wil VanLoh, Jr.
    ------------------------------------
    S. Wil VanLoh, Jr., President

NEWSTONE CAPITAL, LP

By: T&W Management, LLC,
its general partner 

By: /s/ S. Wil VanLoh, Jr.
    ------------------------------------
Name: S. Wil VanLoh, Jr.
Title: President

Address for notice:

777 Walker, Suite 2530 Houston, Texas 77002

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BLACKSTONE INVESTMENTS I, LP

By: Skytop Holdings, LLC,
its general partner 

By: /s/ Toby R. Neugebauer
    ------------------------------------
Name: Toby R. Neugebauer
Title: President

Address for notice:

2106 Vicksburg Ave.

Lubbock, Texas 79407

BLACKSTONE INVESTMENTS II, LP

By: Skytop Holdings, LLC,
its general partner 

By: /s/ Toby R. Neugebauer
    ------------------------------------
Name: Toby R. Neugebauer
Title: President

Address for notice:

2106 Vicksburg Ave.

Lubbock, Texas 79407

TRINITY CAPITAL PARTNERS I, LP

By: Trinity Equity Holdings, LLC,
its general partner 

By: /s/ S. Wil VanLoh, Jr.
    ------------------------------------
Name: S. Wil VanLoh, Jr.
Title: President

Address for notice:

777 Walker, Suite 2530 Houston, Texas 77002

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SHP CAPITAL LP

By: SHP Capital Management, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President

Address for notice:

2727 Carolina Way Houston, Texas 77005

LEGACY RESERVES GP, LLC 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

LEGACY RESERVES LP

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

Address for notice:

303 W. Wall Street, Suite 1600 Midland, Texas 79701

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Exhibit 10.4

LEGACY RESERVES LP
PURCHASE/PLACEMENT AGREEMENT

March 6, 2006

Friedman, Billings, Ramsey & Co., Inc.
600 Travis Street
Suite 6070
Houston, Texas 77002

Ladies and Gentlemen:

Legacy Reserves LP, a Delaware limited partnership (the "PARTNERSHIP"), proposes to issue and sell to you, Friedman, Billings, Ramsey & Co., Inc.
("FBR"), as initial purchaser, up to 5,000,000 units (the "INITIAL 144A UNITS")
representing limited partner interests in the Partnership (the "COMMON UNITS").

FBR will also act as the Partnership's exclusive placement agent in connection with the Partnership's sale to certain "accredited investors" (as such term is defined in Regulation D under the Securities Act of 1933, as amended (the "SECURITIES ACT") ("REGULATION D")) (the "ACCREDITED INVESTORS"), which may include FBR and its affiliates, of that number of Common Units equal to the difference between 5,000,000 and the number of Initial 144A Units (the "INITIAL PRIVATE PLACEMENT UNITS" and, together with the Initial 144A Units, the "INITIAL UNITS"), as set forth in the Final Memorandum (as defined herein) under the heading "Plan of Distribution."

In addition, the Partnership proposes to grant to you the option described in Section 1(c) to purchase with respect to all or any part of 250,000 additional Common Units (the "OPTION UNITS" and, together with the Initial Units, the "UNITS"), solely to cover either over allotments in the case of sales under Rule 144A (the "OPTION 144A UNITS" and, together with the Initial 144A Units, the "144A UNITS") or sales of Units subscribed for on the date hereof in the case of placements under Regulation D (the "OPTION PRIVATE PLACEMENT UNITS" and, together with the Initial Private Placement Units, the "PRIVATE PLACEMENT UNITS"), if any. The offer and sale of the Private Placement Units is referred to herein as the "PRIVATE PLACEMENT."

The offer and sale of the Units to you and to the Accredited Investors, respectively, will be made without registration under the Securities Act, and the rules and regulations thereunder (the "SECURITIES ACT REGULATIONS"), in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof. You have advised the Partnership that you will make offers and sales ("EXEMPT RESALES") of the 144A Units purchased by you hereunder on the terms set forth in the Final Memorandum (as defined herein), as soon as you deem advisable after this Agreement has been executed and delivered.

In connection with the sale of the Units, the Partnership has prepared (i) a preliminary offering memorandum, subject to completion, dated February 13, 2006, as supplemented by Exhibit A to Annexes I-III (references in this Agreement to such Annexes will be deemed to refer to such Annexes as supplemented with such Exhibit A) to the offering memorandum (including all documents and financial statements annexed thereto and all information

incorporated by reference therein, the "PRELIMINARY MEMORANDUM"), and (ii) a final offering memorandum, dated the date hereof (including all documents and financial statements annexed thereto and all information incorporated by reference therein, the "FINAL MEMORANDUM" and, together with the Preliminary Memorandum, the "OFFERING MEMORANDUM"). The Offering Memorandum sets forth certain information concerning the Partnership and the Units. The Partnership hereby confirms that it has authorized the use of the Preliminary Memorandum and the Final Memorandum in connection with (i) the offering and resale of the 144A Units by FBR and by all dealers to whom 144A Units may be sold and (ii) the Private Placement. Any references herein to the Preliminary Memorandum and Final Memorandum (or either Offering Memorandum) shall be deemed to include all information incorporated by reference therein and all annexes and exhibits thereto, all of which shall be deemed a part of the Offering Memorandum.

Legacy Reserves GP, LLC, a Delaware limited liability company (the "GENERAL PARTNER"), is the Partnership's sole general partner. Legacy Reserves Operating GP LLC, a Delaware limited liability company and a wholly owned subsidiary of the Partnership ("OPERATING GP"), is the sole general partner of Legacy Reserves Operating LP, a Delaware limited partnership (the "OPERATING PARTNERSHIP" and, together with the General Partner, the Partnership and the Operating GP, the "LEGACY PARTIES" and, together with the direct and indirect subsidiaries of the Partnership (collectively, the "SUBSIDIARIES") listed on Schedule 1, the "PARTNERSHIP ENTITIES").

All or some of the Partnership Entities have entered into, at or prior to the date hereof, or will enter into, as of the Closing Time, the following agreements (the "FORMATION DOCUMENTS") with respect to the transactions contemplated by the Offering Memorandum: (i) the Amended and Restated Agreement of Limited Partnership governing the Partnership (the "PARTNERSHIP AGREEMENT"),
(ii) the Amended and Restated Limited Liability Company Agreement governing the General Partner (the "GP LLC AGREEMENT"), (iii) the Agreement of Limited Partnership governing the Operating Partnership (the "OPERATING PARTNERSHIP AGREEMENT"), (iv) the Limited Liability Company Agreement governing the Operating GP (the "OPERATING GP AGREEMENT"), (v) the Founders Registration Rights Agreement (the "FOUNDERS REGISTRATION RIGHTS AGREEMENT"), (vi) the Omnibus Agreement pursuant to which, among other things, certain of the Parties (as defined therein) agree to make certain contributions to the Partnership and be granted the opportunity to enter into the Founders Registration Rights Agreement (the "OMNIBUS AGREEMENT"), and (vii) the Contribution, Conveyance and Assumption Agreement pursuant to which certain assets are to be contributed to the Partnership (the "CONTRIBUTION AGREEMENT").

It is understood and acknowledged that holders (including subsequent transferees) of the Units will have the registration rights set forth in the registration rights agreement between the Partnership and FBR, which shall be in substantially the form attached as Exhibit A and dated as of the Closing Time (as defined herein) (the "REGISTRATION RIGHTS AGREEMENT" and, together with this Agreement, the "TRANSACTION DOCUMENTS"), for so long as such securities constitute "Registrable Units" (as defined in the Registration Rights Agreement).

Each of the Partnership and FBR agree as follows:

1. Sale and Purchase of the Units.

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(a) 144A Units. Upon the basis of the warranties and representations and other terms and conditions herein set forth, the Partnership agrees to issue and sell to FBR the Initial 144A Units, and FBR agrees to purchase from the Partnership the 144A Units at a purchase price of $15.81 per Unit (the "144A PURCHASE PRICE"), reflecting an initial purchaser's discount of $1.19 per Unit on the initial offering price set forth in the Final Memorandum of the 144A Units (the "INITIAL PURCHASER'S DISCOUNT"); provided, however, that FBR shall reimburse the Partnership, at the Closing Time, an amount equal to 1.0% of the aggregate Initial Purchaser's Discount hereunder.

(b) Private Placement Units. The Partnership agrees to issue and sell the Initial Private Placement Units for which the Accredited Investors have subscribed pursuant to the terms and conditions set forth in the form of subscription agreement substantially in the form attached to the Offering Memorandum as Annex II or Annex III, as applicable (each a "SUBSCRIPTION AGREEMENT"). The Initial Private Placement Units will be sold by the Partnership pursuant to this Agreement at a price of $17.00 per Unit (the "PRIVATE PLACEMENT PURCHASE PRICE"); provided, however, that the Private Placement Purchase Price per Unit sold to FBR and its affiliates (excluding any employees of FBR and its affiliates) shall be $15.98. As compensation for the services to be provided by FBR in connection with the Private Placement, the Partnership shall pay to FBR at the Closing Time an amount equal to $1.19 per Private Placement Unit sold (other than those Units sold to FBR and its affiliates at a price of $15.98 per Unit) at such time (the "PLACEMENT FEE"); provided, however, that FBR shall reimburse the Partnership, at the Closing Time, an amount equal to 1.0% of the aggregate Placement Fees incurred hereunder. No such reimbursement shall be required with respect to those Units purchased by FBR and its affiliates at the $15.98 per Unit Private Placement Purchase Price.

(c) Option Units. Upon the basis of the representations and warranties and subject to the other terms and conditions herein set forth, the Partnership hereby grants an option to FBR to purchase from, or place on behalf of, the Partnership up to an aggregate of 250,000 Option Units at the 144A Purchase Price or the Private Placement Purchase Price, per Unit, as applicable (provided that FBR shall reimburse the Partnership at the Option Closing Time (as defined herein) in an amount equal to 1% of the aggregate Placement Fees incurred and Initial Purchaser Discount hereunder, as applicable). The option granted hereby will expire 14 days after the Closing Time and may be exercised one time only before the 15th day after the Closing Time for the purpose of covering sales of Units initially subscribed for at the offering price set forth in the Final Memorandum, upon written notice by FBR to the Partnership setting forth (i) the number of Option Units as to which FBR is then exercising the option, (ii) the names and denominations in which the Option Units exercised are to be delivered in book-entry form through the facilities of The Depository Trust Company ("DTC") if available, (iii) the time and date of payment for and delivery of such Option Units, and (iv) the allocation of Option Units between Option 144A Units and Option Private Placement Units. Such time and date of delivery shall be determined by FBR, but shall not be later than five full business days nor earlier than two full business days after the exercise of said option, nor in any event before the Closing Time.

(d) Payment and Delivery.

(i) 144A Units. The closing of FBR's purchase of the Initial 144A Units shall be held at the Houston office of Andrews Kurth LLP (unless another place shall be

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agreed upon by FBR and the Partnership). At the closing, subject to the satisfaction or waiver of the closing conditions set forth herein, FBR shall pay to the Partnership the aggregate purchase price for the Initial 144A Units sold by the Partnership by wire transfer of immediately available funds to accounts previously designated by the Partnership in writing against delivery by the Partnership of the certificates for the 144A Units in book entry form through the facilities of DTC in such denominations and registered in such names as FBR shall specify. Such payment and delivery shall be made at 10:30 a.m., Central time, on the seventh business day after the date hereof (unless another time shall be agreed to by FBR and the Partnership). The time at which such payment and delivery are actually made is hereinafter sometimes called the "CLOSING TIME."

(ii) Private Placement Units. At the Closing Time, subject to the satisfaction or waiver of the closing conditions set forth herein, FBR shall cause the escrow agent (the "ESCROW AGENT") holding funds required to purchase Initial Private Placement Units to pay the Partnership the aggregate applicable purchase price for the Private Placement Units placed by FBR (net of any Placement Fee, if the Placement Fee is withheld as provided herein) against the Partnership's delivery of the Initial Private Placement Units to the purchasers thereof, in book-entry form through the facilities of DTC.

At FBR's option, it may delay the placement of up to 3% of Initial Private Placement Units (the "EXTENDED PRIVATE PLACEMENT UNITS") for an additional five business days after the Closing Time (the "EXTENDED PRIVATE PLACEMENT CLOSING Date") at which time FBR shall cause Escrow Agent, to the extent it has available funds transferred to it by Accredited Investors, to pay the Partnership the aggregate applicable purchase price for the Extended Private Placement Units placed by FBR (net of any Placement Fee, if the Placement Fee is withheld as provided herein) against the Partnership's delivery of the Extended Private Placement Units to the purchasers thereof, in book-entry form through the facilities of DTC. Extended Private Placement Units may only be placed with Accredited Investors who have committed to purchase Private Placement Units before the Closing Date. The time at which payment and delivery on an Extended Private Placement Closing Date is actually made is hereinafter sometimes called the "EXTENDED CLOSING TIME."

At the Closing Time or any Extended Closing Time, as applicable, unless FBR has caused the Escrow Agent to pay FBR such amount from the applicable funds transferred by the Escrow Agent to the Partnership with respect to the Private Placement Units placed by FBR on such date, the Partnership shall pay to FBR, by wire transfer of immediately available funds to an account or accounts designated by FBR, any Placement Fee amount payable with respect to the Private Placement Units for which the Partnership shall have received the purchase price.

(iii) Option Units. The closing of FBR's purchase or placement of the Option Units shall occur at the Houston office of Andrews Kurth LLP (unless another place shall be agreed upon by FBR and the Partnership). At the Option Closing Time (as defined below), subject to the satisfaction or waiver of the closing conditions set forth herein, FBR shall pay or cause the Escrow Agent to pay to the Partnership the aggregate 144A Purchase Price or

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Private Placement Purchase Price per Unit, as applicable, for the Option Units then purchased or placed by FBR by wire transfer of immediately available funds against the Partnership's delivery of the Option Units. Such payment and delivery shall be made at 10:30 a.m., Central time, on the Option Closing Time. The Option Units shall be delivered in book-entry form through the facilities of DTC in such names and in such denominations as FBR shall specify. The time at which payment by FBR or the Escrow Agent for and delivery by the Partnership of any Option Units is actually made is referred to herein as the "OPTION CLOSING TIME".

2. Representations and Warranties of the Partnership. The Legacy Parties jointly and severally represent and warrant to FBR that, as of the date of this Agreement:

(a) The Preliminary Memorandum does not contain, and the Final Memorandum, in the form used by FBR to confirm sales, and at the Closing Time and the Option Closing Time, will not contain, any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Offering Memorandum based upon information relating to FBR furnished to the Partnership in writing by FBR to the Partnership expressly for use therein (as indicated in the last sentence of
Section 7(c)).

(b) The statistical, market-related, customer-related, and production-related data and estimates included in the Preliminary Memorandum and the Final Memorandum are based on or derived from sources that the Partnership reasonably believes to be reliable and accurate.

(c) Each Partnership Entity has been duly formed or incorporated, is validly existing as a limited partnership, limited liability company, corporation or other business entity, in good standing under the laws of the state of its formation or incorporation, has the power and authority to own its property and to conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing could not, individually or in the aggregate, reasonably be expected to cause a material adverse effect on the financial condition, results of operations, partners', members' or stockholders' equity, as applicable, properties or business of the Legacy Parties, taken as a whole, or subject the Partnership's limited partners to any material liability or disability (a "MATERIAL ADVERSE EFFECT").

(d) At the Closing Time, the Partnership Entities will conduct their business as described in the Offering Memorandum. All of the equity interests of each Subsidiary of the Partnership have been duly and validly authorized and issued, the equity interests are fully paid and non-assessable (except as such non-assessability may be limited by (x) Sections 17-303 or 17-607 of the Delaware Revised Uniform Limited Partnership Act (the "DELAWARE LP ACT"), (y)
Section 18-607 of the Delaware Limited Liability Company Act (the "DELAWARE LLC ACT") and (z) as otherwise described in the Offering Memorandum), are owned directly or indirectly by the Partnership, free and clear of all liens, encumbrances, mortgages, security interests, pledges, equities or claims (collectively, "LIENS"), except for the pledge of the equity interests under the Credit Agreement, to be dated as of or prior to the Closing Time, between the Partnership and

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BNP Paribas, and the various financial institutions party thereto, as amended from time to time (the "CREDIT FACILITY"), and the related applicable Security Instruments (as defined therein), and have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of partners, equity holders or members, as the case may be, arising by operation of law, under the organizational documents of such Subsidiary, or under any agreement to which such Subsidiary is a party. The Partnership does not own or control, directly or indirectly, any corporation, association or other entity other than the Subsidiaries.

(e) Entity Ownership:

(i) At the Closing Time, after giving effect to the transactions contemplated hereby Moriah Properties, Ltd., DAB Resources, Ltd., Brothers Production Properties, Ltd., Brothers Production Company, Inc., Brothers Operating Company, Inc., J&W McGraw Properties, Ltd., MBN Properties LP, and H2K Holdings, Ltd. will own 100% of the issued and outstanding membership interests in the General Partner; such membership interests have been duly authorized and validly issued in accordance with the GP LLC Agreement, and are fully paid and non-assessable (except as such non-assessability may be limited by Section 18-607 of the Delaware LLC Act); and such persons and entities own such membership interests free and clear of all Liens.

(ii) The General Partner is the sole general partner of the Partnership with a 0.1% general partner interest in the Partnership; such general partner interest has been duly authorized and validly issued in accordance with the Partnership Agreement, and is fully paid; and the General Partner owns such general partner interest free and clear of all Liens; the General Partner owns no assets and has no business other than with respect to, its 0.1% general partner interest in the Partnership.

(iii) At the Closing Time, after giving effect to the transactions contemplated hereby and the offering contemplated hereby (including the redemption of a portion of the Units issued in exchange for the contribution of property to the Partnership) (assuming the option to purchase Option Units is not exercised), the persons listed on Schedule 2 (the "EXISTING UNITHOLDERS") will own 13,292,683 Units, representing collectively a 72.6% limited partner interest in the Partnership (the "EXISTING UNITHOLDER RETAINED UNITS"). At the Closing Time, all of the issued and outstanding Existing Unitholder Retained Units, and the limited partner interests represented thereby, will be duly authorized and validly issued in accordance with the Partnership Agreement, and will be fully paid (to the extent required under the Partnership Agreement) and non-assessable (except as such non-assessability may be affected by (a) the matters described in the Offering Memorandum under the captions "The Partnership Agreement--Limited Liability," "Risk Factors--Risks Related to this Offering and Our Limited Partnership Structure--Your liability may not be limited if a court finds that unitholder action constitutes control of our business" and "Risk Factors--Risks Related to this Offering and Our Limited Partnership Structure--

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Unitholders may have liability to repay distributions that were wrongfully distributed to them" and (b) Sections 17-303 and 17-607 of the Delaware LP Act).

(iv) The Units to be issued and sold by the Partnership hereunder, and the limited partner interests represented thereby, will be duly authorized in accordance with the Partnership Agreement and, when issued and delivered to the purchaser thereof against payment therefor in accordance with the terms of this Agreement, will be validly issued, fully paid (to the extent required under the Partnership Agreement) and non-assessable (except as such non-assessability may be affected by (a) the matters described in the Offering Memorandum under the captions "The Partnership Agreement--Limited Liability," "Risk Factors--Risks Related to this Offering and Our Limited Partnership Structure--Your liability may not be limited if a court finds that unitholder action constitutes control of our business" and "Risk Factors--Risks Related to this Offering and Our Limited Partnership Structure--Unitholders may have liability to repay distributions that were wrongfully distributed to them" and (b) Sections 17-303 and 17-607 of the Delaware LP Act).

(f) The Partnership owns 100% of the membership interests in the Operating GP; such membership interests have been duly authorized and validly issued in accordance with the Operating GP Agreement, and are fully paid and non-assessable (except as such non-assessability may be limited by Section 18-607 of the Delaware LLC Act); and the Partnership owns such membership interests free and clear of all Liens, except for the pledge of such membership interests under the Credit Facility.

(g) (i) The Operating GP is the sole general partner of the Operating Partnership with a 0.1% general partner interest in the Operating Partnership; such general partner interest has been duly authorized and validly issued in accordance with the Operating Partnership Agreement, and is fully paid; and the Operating GP owns such general partner interest free and clear of all Liens, except for the pledge of such general partner interest under the Credit Facility; and (ii) the Partnership is the sole limited partner of the Operating Partnership with a 99.9% limited partner interest in the Operating Partnership; such limited partner interest has been duly authorized and validly issued in accordance with the Operating Partnership Agreement and is fully paid (to the extent required under the Operating Partnership Agreement) and non-assessable (except as such non-assessability may be limited by Sections 17-303 or 17-607 of the Delaware LP Act and as otherwise described in the Offering Memorandum); and the Partnership owns such limited partner interest free and clear of all Liens, except for the pledge of such limited partner interest under the Credit Facility.

(h) This Agreement has been duly authorized, executed and delivered by the Legacy Parties and is a valid and binding agreement of the Legacy Parties, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights and remedies generally and equitable principles of general applicability (whether applied by a court of law or equity) and except as rights to indemnification and contribution hereunder may be limited under applicable law and by an implied covenant of good faith and fair dealing (such limitations on enforceability being referred to herein collectively as "ENFORCEABILITY LIMITATIONS").

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(i) The Legacy Parties have full right, power and authority to execute and deliver each Transaction Document to which they are a party and perform their respective obligations thereunder.

(j) At the Closing Time:

(i) each Formation Document will be duly and validly authorized, executed and delivered by the applicable parties thereto and will be a valid and legally binding agreement of such parties, enforceable against such parties in accordance with its terms;

(ii) the Registration Rights Agreement will be duly and validly authorized, executed and delivered by the General Partner and the Partnership and, assuming the due authorization, execution and delivery thereof by FBR, will be a valid and legally binding agreement of the General Partner and the Partnership, enforceable against the General Partner and the Partnership in accordance with its terms; and

(iii) the Credit Facility will be duly and validly authorized, executed and delivered by the Partnership Entities who are parties thereto and, assuming the due authorization, execution and delivery thereof by the other parties thereto, will be a valid and legally binding agreement of each of the Partnership Entities who are parties thereto, enforceable against each of them in accordance with its terms;

except, with respect to each agreement described in this Section 2(j), as the enforceability thereof may be limited by the Enforceability Limitations.

(k) The Contribution Agreement and related documents will be legally sufficient to transfer or convey to the Partnership all assets as contemplated by the Offering Memorandum, subject to the conditions, reservations and limitations contained in the Contribution Agreement and those set forth in the Offering Memorandum. The Partnership, upon execution and delivery of the Contribution Agreement and related documents will succeed in all material respects to the properties and assets contributed thereunder as reflected in the pro forma consolidated financial statements of the Partnership included in the Offering Memorandum, except as otherwise disclosed in the Offering Memorandum and the Contribution Agreement.

(l) The Registration Rights Agreement, the Partnership Agreement, the Credit Facility, the Omnibus Agreement and the Founders Registration Rights Agreement, and the terms of the Contribution Agreement, conform to the descriptions thereof contained in the Offering Memorandum.

(m) The statements set forth in the Offering Memorandum under the captions "Description of the Units," and "Cash Distribution Policy and Restrictions on Distributions" insofar as they purport to constitute a summary of the terms of the Units and under the captions "Notice to Investors Regarding Restrictions on Ownership and Transfer," "Material Tax Consequences," "Certain Relationships and Related Transactions," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financing Activities,"

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"Business and Properties," "Registration Rights," "Investment in Our Company by Employee Benefit Plans," "Plan of Distribution" and "Private Placement," insofar as they purport to describe the provisions of the laws and documents referred to therein, are fair summaries in all material respects.

(n) The execution and delivery by the Partnership Entities of, and the performance by the Partnership Entities of their respective obligations under the Transaction Documents and the Formation Documents, will not contravene any provision of (i) applicable law, (ii) the Formation Documents, (iii) or implicate any right of first refusal or preference right with respect to, any agreement or other instrument binding upon any Partnership Entity or its properties (including properties received under any Formation Document) or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over any Partnership Entity except, in the case of the foregoing clauses (i), (iii) and (iv), if contravention (other than with respect to the issuance and sale of the Units) would not, singly or in the aggregate, have a Material Adverse Effect or affect the validity of the Units or the legal authority of the Partnership Entities to comply with the terms of the Transaction Documents and the Formation Documents, and, assuming the accuracy of the representations of FBR set forth in Section 3, no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Partnership Entities of their respective obligations under the Transaction Documents and the Formation Documents except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer, issuance and sale of the Units, by federal and state securities laws with respect to the Legacy Party's obligations under the Registration Rights Agreement or will be obtained prior to the Closing Date.

(o) Except as disclosed in the Final Memorandum, no Partnership Entity is in violation of its limited partnership agreement, limited liability company agreement or other organizational documents and no Partnership Entity is (i) in default, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (ii) in violation of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject (including those relating to transactions with affiliates, safety or similar laws, federal or state laws relating to discrimination in the hiring, promotion or pay of employees, federal or state wages and hours law), except, in the case of each of clause (i) and (ii), for any default or violation that would not have a Material Adverse Effect.

(p) The financial statements, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Partnership and its consolidated subsidiaries at the dates indicated and their results of operations, stockholders' equity and cash flows for the periods specified, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States ("GAAP") applied on a consistent basis throughout the periods involved. The financial information contained in the Offering Memorandum under the headings "Summary Historical and Pro Forma Consolidated Financial Data", "Selected Historical and Pro Forma Consolidated Financial Data" and "Pro Forma Consolidated Statement of Operations" is derived from the accounting records of the Partnership and its subsidiaries and fairly presents the information purported to be shown

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thereby. The summary pro forma financial statements included in the Offering Memorandum present fairly the information contained therein, have been prepared in accordance with the rules and guidelines of the Securities and Exchange Commission (the "COMMISSION") with respect to pro forma financial statements and have been properly presented on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.

(q) Each accounting firm that certified the financial statements and supporting schedules, if any, included in the Offering Memorandum is an independent registered public accounting firm with respect to the Partnership and its subsidiaries within the meaning of the Securities Act and the applicable published rules and regulations thereunder.

(r) As of the date hereof, LaRoche Petroleum Consultants Ltd. (the "RESERVOIR ENGINEER"), whose report is referenced in the Offering Memorandum (the "RESERVE REPORT") are the Partnership's independent reserve engineers. No information has come to the attention of the Partnership or, to the Partnership's knowledge, to the Reservoir Engineer, that could reasonably be expected to cause the Reservoir Engineer to withdraw its Reserve Report.

(s) The information underlying the estimates of the Partnership's proved reserves that was supplied to the Reservoir Engineer for the purposes of preparing the Reserve Report and estimates of the proved reserves of the Partnership disclosed in the Offering Memorandum, including, production, costs of operation, and, to the Partnership Entities' knowledge, future operations and sales of production, was true and correct in all material respects on the dates such information was provided, and such information was supplied and was prepared in accordance with customary industry practices; and the estimates of such reserves and PV-10 thereof as described in the Offering Memorandum and reflected in the Reserve Report referenced therein have been prepared in a manner that complies with the applicable requirements of the Securities Act Regulations. Other than normal production of the reserves, product price fluctuations, and fluctuations of demand for such products, and except as disclosed in the Offering Memorandum, no Partnership Entity is aware of any facts or circumstances that would result in a materially adverse change in the reserves in the aggregate, or the aggregate present value of the future net cash flows therefrom as described in the Offering Memorandum and as reflected in the Reserve Report.

(t) Each of the Partnership Entities has (i) legal, valid and defensible title to the interests in Oil and Gas Properties supporting the estimates of its net proved reserves contained in the Offering Memorandum, (ii) good and marketable title in fee simple to all real property other than Oil and Gas Properties covered by clause (i), and (iii) good and marketable title to all personal property owned by them, in each case free and clear of all Liens except such as are described in the Offering Memorandum or such as do not materially affect the value of the property of the Partnership Entities, taken as a whole, and do not materially interfere with the use made and proposed to be made of such property by any of the Partnership Entities; all real property and buildings held under lease by any of the Partnership Entities are held by them under valid, subsisting and enforceable leases, with such exceptions as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by any of the Partnership Entities. The Working Interests derived from the Oil and Gas Properties evidence in all material respects the right of the Partnership Entities to

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explore, develop and produce hydrocarbons from such Hydrocarbon Interests, and the acquisition and procurement of such oil and gas leases, options to lease, drilling rights and concessions or other property interests was generally consistent with standard industry practices in the areas in which the Partnership Entities operate for acquiring or procuring oil and gas leases and interests therein to explore, develop or produce hydrocarbons. "WORKING INTEREST" means each Partnership Entity's undivided operating and expense-bearing interest under a Hydrocarbon Interest. "OIL AND GAS PROPERTIES" means all of the Partnership's Hydrocarbon Interests; personal property and/or real property now or hereafter pooled or unitized with Hydrocarbon Interests; currently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including all units created under orders, regulations and rules of any governmental body having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests; pipelines, gathering lines, compression facilities, tanks and processing plants; oil wells, gas wells, water wells, injection wells, platforms, spars or other offshore facilities, casings, rods, tubing, pumping units and engines, Christmas trees, derricks, separators, gun barrels, flow lines, gas systems (for gathering, dehydration, treating and compression), and water systems (for treating, disposal and injection); interests held in royalty trusts whether currently existing or hereafter created; hydrocarbons in and under and which may be produced, saved, processed or attributable to the Hydrocarbon Interests, the lands covered thereby and all hydrocarbons in pipelines, gathering lines, tanks and processing plants and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; tenements, hereditaments, appurtenances and personal property and/or real property in any way appertaining, belonging, affixed or incidental to the Hydrocarbon Interests, and all rights, titles, interests and estates described or referred to above, including any and all real property, now owned or hereafter acquired, used or held for use in connection with the operating, working or development of any of such Hydrocarbon Interests or personal property and/or real property and including any and all surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing. "HYDROCARBON INTERESTS" means all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases (including subleases), oil, gas and casinghead gas leases, or other liquid or gaseous hydrocarbon leases, mineral fee or lease interests, other oil, gas and mineral leasehold fee or term interests, farm outs, overriding royalty and royalty interests, net profits interests, net revenue interests, carried interests, oil payments, production payment interests and similar mineral interests, including any reserved, reversionary or residual interest of whatever nature.

(u) There has not occurred any material adverse change, or any development that would reasonably be expected to result in a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Partnership Entities, taken as a whole, from that set forth in the Preliminary Memorandum provided to prospective purchasers of the Units.

(v) There are no legal or governmental proceedings pending or threatened to which any Partnership Entity is a party or to which any of the properties of any Partnership Entity is subject other than proceedings accurately described in all material respects in the Offering Memorandum and proceedings that would not have a Material Adverse Effect or a material adverse effect on the power or ability of the Partnership Entities to perform their obligations under the Transaction Documents or to consummate the transactions contemplated by the Final

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Memorandum. The Partnership has not received notice of any order or decree preventing the use of the Offering Memorandum or any amendment or supplement thereto, or any order asserting that the transactions contemplated by this Agreement are subject to the registration requirements of the Securities Act, has been issued and no proceeding for that purpose has commenced or is pending or, to its knowledge, is contemplated.

(w) Except as described in the Final Memorandum, the Partnership Entities
(i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are and have been in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(x) Except as described in the Final Memorandum, there are no costs or liabilities associated with Environmental Laws (including any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(y) No Partnership Entity is, and after giving effect to the offering and sale of the Units and the application of the proceeds thereof as described in the Offering Memorandum will be required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended.

(z) The Partnership Entities have timely filed all material federal, state, local and foreign tax returns required to be filed through the date hereof (taking into account any extension of time to file granted or obtained on behalf of any Partnership Entity) and have paid all taxes shown to be due thereon, except in each case where the failure to so file or pay would not have a Material Adverse Effect or which are being contested in good faith and for which adequate reserves have been established in accordance with GAAP. Since the date of most recent audited financial statements, the Partnership Entities have not incurred any liability for taxes other than in the ordinary course of their business and there is no tax lien, whether imposed by any federal, state, foreign or other taxing authority, outstanding against the assets, properties or business of any Partnership Entity which, in either case, has had or could have, individually or in the aggregate, a Materially Adverse Effect.

(aa) Except as described in the Offering Memorandum, subsequent to the respective dates as of which information is given in the Offering Memorandum,
(i) no Partnership Entity has incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) there has not been any material change in the partner interests, short-term debt or long-term debt of the Partnership and its Subsidiaries; and (iii) no dividend or distribution of any kind has been declared, paid or made by

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the Partnership on any class of partner interest, or any purchase by the Partnership of any of its outstanding partner interests.

(bb) The Partnership Entities own or possess adequate rights to use all material patents, know how (including trade secrets and other patented or unpatentable proprietary or confidential information, systems or procedures), patent rights, licenses, inventions, copyrights, trademarks, service marks and trade names necessary for the conduct of the business now operated by them, except where the failure to own or possess any of the foregoing would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect, and no Partnership Entity has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect.

(cc) No material labor dispute with the employees of any Partnership Entity exists or, to the knowledge of any Partnership Entity, is imminent; and no Partnership Entity is aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a Material Adverse Effect.

(dd) Except as described in the Offering Memorandum, the Partnership Entities are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as, in management's judgment, are prudent and customary in the businesses in which they are engaged; no Partnership Entity has been refused any material insurance coverage sought or applied for; and no Partnership Entity has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

(ee) Except as described in the Offering Memorandum, the Partnership and each of its Subsidiaries possess all licenses, certificates, authorizations and permits (collectively, "GOVERNMENTAL LICENSES") issued by, and have made all declarations and filings with, the appropriate federal, state, foreign or other regulatory agencies or bodies, which are necessary for the ownership of their respective properties or the conduct of their respective businesses now operated by them, in all material respects, except where the failure to possess or make the same would not, singularly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect; and no Partnership Entity has received notification of any proceeding relating to the revocation or modification of any such Governmental Licenses or has any reason to believe that any such Governmental Licenses will not be renewed in the ordinary course, except where such revocation, modification or nonrenewal, would not singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(ff) Except with respect to FBR and Lehman Brothers Inc., no Partnership Entity has incurred any liability for finder's fees or similar payments in connection with the transactions contemplated by the Transaction Documents.

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(gg) There are no, and as of the Closing Time there will not be any, persons or entities with registration or other similar rights to have any securities registered by the Partnership or any of its subsidiaries except as disclosed in the Offering Memorandum.

(hh) The Offering Memorandum contains all information specified in, and meets the requirements of, Rule 144A(d)(4).

(ii) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "CODE")) has occurred with respect to any employee benefit plan of any Partnership Entity, excluding transactions effected pursuant to a statutory or administrative exemption, which could reasonably be expected to have a Material Adverse Effect; each such employee benefit plan is in compliance with applicable law, including ERISA and the Code, except where such noncompliance, individually or in the aggregate, would not have a Material Adverse Effect; no Partnership Entity, or any entity that was at any time required to be treated as a single employer together with the Partnership under Section 414(b),(c),(m) or (o) of the Code or
Section 4001(a)(l4) of ERISA has incurred or reasonably expects to incur any liability under Section 302 of ERISA, Section 412 of the Code or Title IV of ERISA that could reasonably be expected to have a Material Adverse Effect; and each such pension plan that is intended to be qualified under Section 401(a) of the Code is so qualified, except as could not reasonably be expected to have a Material Adverse Effect, and, to the best knowledge of the Partnership, nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

(jj) None of the Partnership, or any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of the Partnership has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be expected to be integrated with the sale of the Units in a manner that would require the registration under the Securities Act of the Units, (ii) offered, solicited offers to buy or sold the Units by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act, (iii) distributed any other offering material in connection with the offer and sale of the Units, other than as described in the Offering Memorandum, or (iv) authorized anyone other than FBR to make representations regarding the offer and sale of the Units.

(kk) Assuming the accuracy of FBR's representations and warranties and compliance with its agreements set forth in Section 3, the issuance and sale of the 144A Units and the Private Placement Units pursuant hereto and the initial resale of the 144A Units pursuant to the Exempt Resales, are exempt from the registration requirements of the Securities Act.

(ll) The copies of all material contracts, agreements, instruments and other documents (including governmental licenses, authorizations, permits, consents and approvals and all amendments or waivers relating to any of the foregoing) relating to the Partnership Entities that have been previously furnished to FBR or its counsel are complete and genuine.

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(mm) FBR or its counsel have been provided with complete and genuine copies (or, to the extent not executed as of the date hereof, current drafts) of all material contracts, agreements, instruments and other documents of the Partnership that would be required at the Closing Time to be described in a prospectus included in, or included as an exhibit to, a registration statement with respect to the Partnership's securities on Form S-1 under the Securities Act, and the copies of all such material contracts, agreements, instruments and other documents (including governmental licenses, authorizations, permits, consents and approvals and all amendments or waivers relating to any of the foregoing) that have been previously furnished to FBR or its counsel are complete and genuine.

(nn) The Partnership has not taken, directly or indirectly, any action designed to cause or which has constituted or which might reasonably be expected to cause or result, under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or otherwise, in the stabilization or manipulation of the price of any security of the Partnership to facilitate the offering and sale of the Units.

(oo) No Partnership Entity is required to register as a "broker" or "dealer" in accordance with the provisions of the Exchange Act or the rules and regulations thereunder.

(pp) No Partnership Entity has relied upon FBR or legal counsel to FBR for any legal, tax or accounting advice in connection with the offering and sale of the Units.

Any certificate signed by any officer of the Partnership and delivered to FBR or counsel for FBR in connection with the offering of the Units shall be deemed a representation and warranty by the Partnership as to matters covered thereby to FBR.

3. Offering of the Units; Restrictions on Transfer.

(a) FBR represents and warrants to and agrees with the Partnership that (i) it is an Accredited Investor with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Units; (ii) it is not acquiring any Units with any present intention of offering or selling any of the Units in a transaction that would violate the Securities Act or the securities laws of any state of the United States or any other applicable jurisdiction; (iii) it has not solicited and will not solicit any offer to buy, and has not and will not make any offer to sell, the Units by means of any form of general solicitation or general advertising (within the meaning of Regulation D), including advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;
(iv) it has solicited and will solicit offers to buy the 144A Units only from, and has offered and will offer, sell and deliver the 144A Units only to, persons who it reasonably believes to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) ("QIBS" or "ELIGIBLE PURCHASERS") or, if any such person is buying for one or more institutional accounts for which such person is acting as fiduciary or agent, only when such person has represented to it that each such account is a QIB to whom notice has been given that such sale or delivery is being made in reliance on Rule 144A, and, in each case, in transactions under Rule 144A and who provide to it a fully completed and executed certificate substantially in the form of Annex I to the Preliminary

15

Memorandum or Final Memorandum; and (v) as placement agent with respect to the Private Placement Units, (1) it has not solicited and will not solicit offers to buy any Private Placement Units from any prospective investors, other than a limited number of persons it reasonably believes are Accredited Investors with whom it had a preexisting relationship, each of whom was offered the Private Placement Units at private sale for investment, (2) immediately prior to soliciting any offer in connection with the Private Placement Units, it had reasonable grounds to believe and did believe that each such prospective investor had such knowledge and experience in financial and business matters that it was capable of evaluating the merits and risks of its prospective investment in the Private Placement Units and (3) it will deliver the Private Placement Units only to those Accredited Investors who have provided to FBR and the Partnership a fully completed and executed Subscription Agreement in the form of Annex II or Annex III, as applicable, to the Preliminary Memorandum or Final Memorandum.

(b) The Partnership represents and warrants to and agrees with FBR that it (together with its affiliates) has not solicited and will not solicit any offer to buy, and it (together with its affiliates) has not offered and will not offer to sell, the Units by means of any form of general solicitation or general advertising (within the meaning of Regulation D), including advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, and it has solicited and will solicit offers to buy the Private Placement Units only from, and has offered and will offer, sell or deliver the Units only to a limited number of Accredited Investors or Eligible Purchasers and prospective investors present at meetings attended by both the Partnership and FBR. The Partnership also represents and warrants and agrees that it will sell the Private Placement Units only to persons that have provided to the Partnership a fully completed and executed Subscription Agreement in the form of Annex II or Annex III, as applicable, to the Preliminary Memorandum or Final Memorandum.

(c) FBR represents and warrants that it has not offered or sold, nor will it offer or sell, any 144A Units in a jurisdiction outside of the United States except in compliance with all applicable laws, regulations and rules of those countries.

(d) Each of FBR and the Partnership represents and warrants to the other that no action is being taken by it or is contemplated that would permit an offering or sale of the Units or possession or distribution of the Preliminary Memorandum or the Final Memorandum or any other offering material relating to the Units in any jurisdiction where, or in any other circumstances in which, action for those purposes is required (other than in jurisdictions where such action has been duly taken by counsel for FBR).

(e) FBR may purchase Units for its own account and/or arrange (i) for the private offer and sale of a portion of the 144A Units to a limited number of Eligible Purchasers (which may include affiliates of FBR), and (ii) for the private offer and sale of the Private Placement Units by the Partnership to Accredited Investors (which may include affiliates of FBR), in each case under restrictions and other circumstances designed to preclude a distribution of the Units that would require registration of the Units under the Securities Act.

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(f) FBR and the Partnership agree that the Units may be resold or otherwise transferred by the holders thereof only if the offer and sale of such Units are registered under the Securities Act or if an exemption from registration is available. FBR hereby establishes and agrees that it has observed and will observe the following procedures in connection with offers, sales and subsequent resales or other transfers of any Units placed by FBR:

(i) Sales only to Eligible Purchasers. Initial offers and sales of the 144A Units will be made only in Exempt Resales by FBR to investors that FBR reasonably believes to be Eligible Purchasers, and who have delivered to the Partnership and FBR a fully completed and executed purchaser's letter in the form of Annex I to the Preliminary Memorandum.

(ii) No General Solicitation. The Units will be offered only by approaching on an individual basis prospective purchasers with whom FBR has an existing relationship. No general solicitation or general advertising within the meaning of Regulation D under the Securities Act will be used in connection with the offering of the Units (including advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising).

(iii) Restrictions on Transfer. The Preliminary Memorandum and the Final Memorandum shall state that the offer and sale of the Units have not been and will not be registered (other than pursuant to the Registration Rights Agreement) under the Securities Act, and that no resale or other transfer of any Units or any interest therein prior to the date that is two years (or such shorter period as is prescribed by Rule 144(k) under the Securities Act as then in effect) after the later of the original issuance of such Units and the last date on which the Partnership or any "affiliate" (as defined in Rule 144 under the Securities Act) of the Partnership was the owner of such Units may be made by a purchaser of such Units except as follows:

(A) to the Partnership or any subsidiary thereof;

(B) pursuant to a registration statement that has been declared effective under the Securities Act;

(C) for so long as the Units are eligible for resale pursuant to Rule 144A under the Securities Act, in a transaction complying with the requirements of Rule 144A to a person who such purchaser reasonably believes is a QIB that purchases for its own account or for the account of a QIB and to whom notice is given that the offer, resale, pledge or transfer is being made in reliance on Rule 144A; or

(D) pursuant to any other available exemption from the registration requirements of the Securities Act, in each case in accordance with any applicable federal securities laws and the securities laws of any state of the United States or other jurisdiction.

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(g) FBR and the Partnership agree that each initial resale of 144A Units by FBR (and each purchase of 144A Units from the Partnership by FBR) in accordance with this Section 3 shall be deemed to have been made on the basis of and in reliance on the representations, warranties, covenants and agreements (including agreements with respect to indemnification and contribution) of the Legacy Parties herein contained.

(h) FBR understands that the Partnership and, for the purposes of the opinions to be delivered to FBR pursuant to Section 5, counsel to the Partnership and counsel to FBR will rely upon the accuracy and the truth of the forgoing representations and FBR hereby consents to such reliance.

(i) Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the global certificates representing the Private Placement Units and the 144A Units respectively (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend (along with such other legends as FBR and its counsel deem necessary):

"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE AND HAVE BEEN OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH STATE LAWS. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND, UNTIL THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, THEY MAY NOT BE TRANSFERRED OR RESOLD EXCEPT (A) TO US OR ANY OF OUR SUBSIDIARIES, (B) TO A PERSON THAT THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" THAT IS PURCHASING SUCH UNITS FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHOM NOTICE IS GIVEN THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE UPON RULE 144A OF THE SECURITIES ACT, OR (C) TO OTHER INVESTORS WITH RESPECT TO WHICH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE, AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AS CONFIRMED TO THE ISSUER BY AN OPINION OF COUNSEL THAT IS REASONABLY ACCEPTABLE TO THE ISSUER."

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4. Certain Covenants of the Partnership. The Partnership hereby agrees as follows:

(a) subject to Section 4(b), to furnish such information as may be reasonably required and otherwise to cooperate in qualifying the Units for offer and sale under the securities or blue sky laws of such states and other jurisdictions as FBR may reasonably designate or as required for the offer and sale of the Units and to maintain such qualifications in effect as long as required by such laws for the distribution of the Units;

(b) to cooperate with FBR and its counsel in arranging for the qualification or registration of the Units for offering and sale under, or establishing an exemption from such qualification or registration under, the securities or blue sky laws of such jurisdictions as FBR may designate; provided, that in no event shall any Legacy Party be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Units, in any jurisdiction where it is not now so subject;

(c) to prepare the Final Memorandum in a form reasonably approved by FBR and to furnish promptly (and with respect to the initial delivery of such Final Memorandum, not later than 8:30 a.m. (Central time) on the third day following the execution and delivery of this Agreement) to FBR as many copies of the Final Memorandum (and any amendments or supplements thereto) as FBR may reasonably request for the purposes contemplated by this Agreement;

(d) to advise FBR promptly, confirming the general nature of such advice in writing, of (i) the happening of any event known to the Partnership prior to the date on which all of the 144A Units have been sold by FBR, which, in the reasonable judgment of the Partnership, would require the making of any change in the Final Memorandum then being used so that the Final Memorandum would not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading and to prepare and furnish, at the Partnership's expense, to FBR (and to any persons reasonably designated by FBR) promptly any proposed amendments or supplements to the Final Memorandum as may be necessary so that the Final Memorandum does not include or omit to state such material fact, and (ii) the receipt of any notification with respect to the modification, rescission, withdrawal or suspension of the qualification of the Units, or of any exemption from such qualification or from registration of the Units, for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes and, if any government agency or authority should issue any such order, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible;

(e) to furnish (or, once an initial public offering registration statement of the Partnership is effective, make available, including through electronic filings with the Commission) to FBR for a period of two years from the Closing Time (i) a copy of all annual, quarterly and current reports supplied to holders of the Units, and (ii) if requested in writing by FBR, a copy of all reports filed by the Partnership with the Commission, provided that any document filed electronically with the Commission shall satisfy the above delivery requirements with respect to such document;

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(f) not to amend or supplement the Preliminary Memorandum or the Final Memorandum unless FBR shall previously have been advised thereof and shall have consented thereto (which consent shall not be unreasonably withheld or delayed) or not have reasonably objected thereto (for legal reasons) in writing within a reasonable time after being furnished a copy thereof;

(g) during any period in the two years (or such shorter period as may then be applicable under the Securities Act regarding the holding period for securities under Rule 144(k) under the Securities Act or any successor rule) after the Closing Time in which the Partnership is not subject to Section 13 or 15(d) of the Exchange Act to furnish, upon request, to any holder of such Units the information ("RULE 144A INFORMATION") specified in Rule l44A(d)(4) under the Securities Act and any additional information ("PORTAL INFORMATION") required by the NASD PortalSM Market ("PORTAL"), and any such Rule 144A Information will not, at the date thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading;

(h) if the 144A Units are not delivered by the Partnership to FBR for any reason other than the termination of this Agreement pursuant to Sections 6(a)(iii) through (v) or the default by FBR in its obligations hereunder or the failure of FBR's counsel to deliver its opinion required hereunder (provided that counsel to the Partnership has timely delivered its opinion required hereunder), to reimburse FBR for all of its out-of-pocket expenses relating to the transactions contemplated hereby, including the reasonable fees and disbursements of its legal counsel;

(i) that no Partnership Entity, nor any of their respective affiliates (as defined in Section 501(b) of Regulation D) will, whether directly or through any agent or person acting on its behalf (other than FBR): (i) offer Common Units or any other securities convertible into or exchangeable or exercisable for such Common Units in a manner in violation of the Securities Act or the rules and regulations thereunder, (ii) distribute any other offering material in connection with the offer and sale of the Units, other than as described in the Offering Memorandum, or (iii) sell, offer for sale, solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act), any of which will be integrated with the offering and sale of the Units in a manner that would require the registration under the Securities Act of the sale to FBR or the Eligible Purchasers of the 144A Units or to the Accredited Investors of the Private Placement Units;

(j) that no Partnership Entity nor any of its affiliates will take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Units;

(k) that, except as permitted by the Securities Act, prior to the later of the Closing Time, the Option Closing Time or completion of the distribution of Units, no Partnership Entity will distribute any offering materials in connection with Exempt Resales;

(l) except as provided in Sections 1(a) and (b), to pay all expenses, fees and taxes in connection with (i) the preparation of the Offering Memorandum and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to FBR (including

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costs of mailing and shipment), (ii) the sale and delivery of the Units, including any stock or other transfer taxes or duties payable upon the sale of the Units, (iii) the qualification of the Units for offering and sale under state laws and the determination of their eligibility for investment under state law as aforesaid (including any filing fees or legal fees and expenses of FBR) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to FBR and to dealers, (iv) the printing of this Agreement,
(v) the designation of the Units as PORTAL-eligible securities by PORTAL, (vi) the costs and expenses of the Partnership and FBR incurred in connection with the marketing of the Units, including "road show" costs and expenses (but excluding 50% of the cost of any aircraft chartered in connection with the "road show" which FBR will be responsible for), (vii) all fees and disbursements of counsel and accountants for the Partnership, (viii) the fees and expenses of any transfer agent or registrar for the Units, and (ix) the performance of the Partnership's other obligations hereunder. Except as provided in Section 4(h) and this Section 4(l), FBR shall bear all fees and disbursements of its legal counsel.

(m) from and after the Closing Time, to have in place and maintain a system of accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences;

(n) to apply the net proceeds from the sale of the Units in the manner set forth under the caption "Use of Proceeds" in the Final Memorandum;

(o) that no Partnership Entity will be required to register as an "investment company" within the meaning of the Investment Company Act;

(p) that, as soon as reasonably practicable following completion of the transactions contemplated hereunder, to use commercially reasonable efforts to cause the Partnership's or the General Partner's board of directors to approve any changes to the corporate governance policies and procedures that may be required by law prior to filing any registration statement with the Commission; and

(q) to refrain during the period commencing on the date of this Agreement until 180 days after the completion of this offering and from the effective date of the Mandatory Shelf Registration Statement (as defined in the Registration Rights Agreement) until 60 days thereafter, without the prior written consent of FBR, from (i) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant for the sale of, lending or otherwise disposing of or transferring, directly or indirectly, any equity securities of the Partnership or any securities convertible into or exercisable or exchangeable for equity securities of the Partnership, or (ii) entering into any swap or other arrangement that transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of equity securities of the Partnership, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Units or such other securities, in cash or otherwise. The foregoing sentence

21

shall not apply to issuances of securities of the Partnership (A) pursuant to this Agreement; (B) pursuant to the Contribution Agreement; (C) pursuant to the exercise and issuance of options; (D) as a pro rata distribution to the Partnership's partners; (E) under any of the Partnership's benefit plans; (F) to third parties as consideration for acquisitions provided that such third parties agree to be bound by the same restrictions; and (G) pursuant to the IPO Registration Statement (as defined in the Registration Rights Agreement).

5. Conditions of FBR's Obligations. The obligations of FBR pursuant to this Agreement shall be subject to the accuracy, in all material respects to the extent not otherwise qualified by materiality, of the representations and warranties of the Partnership contained herein as of the date and time that this Agreement is executed and delivered by the parties hereto (the "EXECUTION TIME"), the Closing Time and the Option Closing Time (if any), as the case may be, to the accuracy of the certificates of the Partnership's officers given pursuant to the provisions hereof, to the performance by the Partnership of its covenants and agreements hereunder and to the following additional conditions:

(a) FBR shall have received on the Closing Time an opinion of Andrews Kurth LLP, counsel for the Partnership, dated the Closing Time, addressed to FBR in form and substance satisfactory to FBR.

(b) FBR shall have received on the Closing Time an opinion of Richards, Layton & Finger, P.A., special counsel for the Partnership, dated the Closing Time, addressed to FBR in form and substance satisfactory to FBR.

(c) FBR shall have received on the Closing Time an opinion of Lynch, Chappell & Alsup, PC, counsel for the Founding Investors and the charitable foundations referred to in the Offering Memorandum, dated the Closing Time, addressed to FBR in form and substance satisfactory to FBR.

(d) FBR shall have received on the Closing Time the favorable opinion of Akin Gump Strauss Hauer & Feld LLP, dated the Closing Time, addressed to FBR and in form and substance satisfactory to FBR.

(e) FBR shall have received from BDO Seidman LLP and Johnson, Miller & Co. letters addressed to FBR, dated as of the date of this Agreement and the Closing Time, respectively, in form and substance satisfactory to FBR, relating to the financial statements described in Section 2(q) and such other matters customarily covered by "comfort" letters issued in connection with registered public offerings.

(f) FBR shall have received from the Reservoir Engineer, letters addressed to FBR, dated as of the date of this Agreement and the Closing Time, respectively, in form and substance satisfactory to FBR, relating to the oil and gas reserves, of the Partnership, and such other matters customarily covered by "comfort" letters issued in connection with similar offerings.

If the letters referred to in Section 5(e) or (f) set forth any such changes, decreases or increases that, in the reasonable discretion of FBR, are likely to result in a Material Adverse Effect, it shall be a further condition to the obligations of FBR that such letters shall be

22

accompanied by a written explanation of the Partnership as to the significance thereof, unless FBR deems such explanation unnecessary.

(g) At the time of execution and delivery of this Agreement, FBR shall have received a written agreement (a "LOCK-UP AGREEMENT") in substantially the form attached as Exhibit B from the following persons and entities: Cary D. Brown; Steven H. Pruett; Kyle A. McGraw; Paul T. Horne; William M. Morris; Dale A. Brown; S. Wil VanLoh, Jr.; Moriah Properties, Ltd.; DAB Resources, Ltd.; Brothers Production Properties, Ltd.; Brothers Production Company, Inc.; Brothers Operating Company, Inc.; J&W McGraw Properties, Ltd.; H2K Holdings, Ltd.; MBN Properties LP; Newstone Capital, LP; Blackstone Investments I, LP; Blackstone Investments II, LP; Trinity Equity Partners I, LP; and SHP Capital LP.

(h) On or before the Closing Time, FBR shall have received each of the Formation Documents and Credit Facility as executed and delivered by the parties thereto, in form and substance reasonably satisfactory to FBR.

(i) Before the Closing Time and the Option Closing Time, as the case may be, (i) no suspension of the qualification of the Units for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes, shall have occurred and (ii) the Final Memorandum and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading.

(j) Between the time of execution of this Agreement and the Closing Time and the Option Closing Time, as the case may be, (i) no event, circumstance or change constituting a Material Adverse Effect shall have occurred or become known, (ii) no transaction which is material to the Partnership Entities, taken as a whole, shall have been entered into by any Partnership Entity that has not been fully and accurately disclosed in the Final Memorandum; and (iii) no order or decree preventing the use of the Final Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Securities Act shall have been issued.

(k) FBR shall have received certificates, dated the Closing Time, of duly authorized officers of the General Partner to the effect that:

(i) the conditions set forth in paragraph (i) and (j) shall have been satisfied and be true and correct as of the Closing Time;

(ii) the representations and warranties of the Legacy Parties set forth in this Agreement,

(A) to the extent such representations and warranties are subject to qualifications and exceptions contained therein relating to knowledge, materiality or Material Adverse Effect, shall be true and correct as of the Closing Time, as though made on and as such date (except to the extent that such representations

23

and warranties speak as of another date, in which case such representations and warranties shall be true and correct as of such other date); and

(B) to the extent such representations and warranties are not subject to any such qualifications or exceptions, shall be true and correct as of the Closing Time, as though made on and as such date (except to the extent that such representations and warranties speak as of another date, in which case such representations and warranties shall be true and correct as of such other date), except where the failure of such representations and warranties described in this clause (B) to be true and correct could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Partnership.

(l) At the Option Closing Time, FBR shall have received:

(i) certificates, dated as of the Option Closing Time, of the officers of the General Partner, substantially to the same effect as the certificates delivered at Closing Time pursuant to Section 5(k), subject to any exceptions that, in the reasonable judgment of FBR, are not material;

(ii) the opinion of (A) Andrews Kurth LLP, counsel for the Partnership, (B) Richards, Layton & Finger, P.A., special counsel to the Partnership, and (C) Lynch, Chappell & Alsup, P.C., counsel to the Founding Investors and the charitable foundations referred to in the Offering Memorandum, each in form and substance satisfactory to FBR, dated as of the Option Closing Time, relating to the Option Units, and otherwise substantially to the same effect as the opinions required by Section
5(a)-(c), respectively;

(iii) "comfort" letters from BDO Seidman LLP and Johnson, Miller & Co., in form and substance satisfactory to FBR, dated as of the Option Closing Time, substantially the same in scope and substance as the letter furnished to FBR pursuant to Section 5(e), except that the "specified date" in the letter furnished pursuant to this Section 5(l)(iii) shall be a date not more than five days prior to the Option Closing Time;

(iv) a letter from the Reservoir Engineer, in form and substance satisfactory to FBR, dated as of the Option Closing Time, substantially the same in scope and substance as the letter furnished to FBR pursuant to
Section 5(f), except that the "specified date" in the letter pursuant to this Section 5(l)(iv) shall be a date not more than five days prior to the Option Closing Time;

If any "comfort" letter referred to in Section 5(l)(iii) or (iv) sets forth any such changes, decreases or increases that, in the reasonable discretion of FBR, are likely to result in a Material Adverse Effect, it shall be a further condition to the obligations of FBR that such letters shall be accompanied by a written explanation of the Partnership as to the significance thereof, unless FBR deems such explanation unnecessary; and

(v) the opinion of Akin Gump Strauss Hauer & Feld LLP, dated as of the Option Closing Time, relating to the Option Units, and otherwise to the same effect as the opinion required by Section 5(d).

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(m) On or before the Closing Time, the Partnership shall have executed and delivered to FBR the Registration Rights Agreement and such agreement shall be in full force and effect;

(n) The Partnership shall have furnished to FBR such other agreements to be executed in connection with Formation Documents and the transactions contemplated hereby and documents and certificates as to the accuracy and completeness of any statement in the Final Memorandum or any amendment or supplement thereto and any additional matters, as of the Closing Time and the Option Closing Time as FBR may reasonably request;

(o) Each Purchaser Letter/Subscription Agreement with respect to the Units shall remain in full force and effect and no event shall have occurred giving any party the right to terminate any such agreement pursuant to the terms thereof, unless, in the event that such an agreement is no longer in full force and effect, the Units covered by such agreement may be reallocated to Purchasers who subscribed for additional Units under agreements that are in full force and effect;

(p) FBR shall receive a certificate of the Secretary of the General Partner certifying (i) the certificate of limited partnership and any amendments thereto, (ii) the Partnership Agreement and any amendments thereto, (iii) that all partnership action has been taken on the part of the Partnership necessary to authorize the execution and delivery of the Transaction Documents, the other offering documents to which the Partnership is a party and the transactions contemplated herein and therein, (iv) resolutions of the Board of Directors of the General Partner approving the original issuance and sale of the Units and
(v) a specimen Unit certificate; and

(q) The Units to be resold by FBR to QIBs pursuant to Rule 144A under the Securities Act shall have been designated as PORTAL-eligible securities by PORTAL.

All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to FBR and counsel for FBR. The Partnership shall furnish to FBR such copies of such opinions, certificates, letters and documents in such quantities as FBR and counsel for FBR shall reasonably request.

6. Termination.

(a) This Agreement may be terminated at the option of FBR by giving notice to the Partnership prior to the Closing Time or the Option Closing Time if, in the sole discretion of FBR, any of the following makes it impracticable to proceed with the offering of the Units or completion of the sale of the Units to be delivered at the Closing Time or the Option Closing Time:

(i) any Legacy Party shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto;

(ii) the Partnership shall have, in the reasonable judgment of FBR, sustained any Material Adverse Effect, or loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been

25

any event, circumstance or development that results in, or that FBR reasonably believes would result in, a Material Adverse Effect;

(iii) trading generally in securities on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall generally have been established on either such exchange or market system, or there has been a material disruption in the securities settlement, payment, or clearance services in the United States;

(iv) a banking moratorium shall have been declared by New York or United States authorities; or

(v) there shall have been (A) any outbreak or escalation of national or international hostilities or (B) any other calamity or crisis, including any terrorist attack or similar attack, or any material adverse change in general economic, political or financial conditions having an effect on United States or international financial markets that, in the reasonable judgment of FBR, makes it impractical or inadvisable to proceed with the offering or the delivery of the Units as contemplated by the Offering Memorandum, as amended as of the date hereof.

(b) Termination of this Agreement pursuant to this Section 6 shall be without liability of any party to any other party except for the expenses to be paid by the Partnership pursuant to Section 4 and except as provided in Section 7.

7. Indemnity.

(a) The Legacy Parties, jointly and severally, agree to indemnify, defend and hold harmless FBR and its affiliates, and their respective directors, officers, representatives and agents, and any person who controls FBR within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, FBR or any such controlling person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability or claim arises out of or is based upon
(i) any untrue statement or alleged untrue statement made by any Legacy Party herein, (ii) any breach by any Legacy Party or any covenant set forth herein, or
(iii) any untrue statement or alleged untrue statement of a material fact contained in (x) the Offering Memorandum or (y) in any materials or information provided to investors by, or with the approval of, the Partnership in connection with the marketing of the offering of the Units, including any road show or investor presentations made to investors by the Partnership (whether in person or electronically) ("MARKETING MATERIALS"), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in the Offering Memorandum or the Marketing Materials or necessary to make the statements made therein, in light of the circumstances under which they were made not misleading, except insofar as any such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by FBR to the Partnership expressly for use in such Final Memorandum (that information being limited to the information described in the last sentence of Section 7(c))

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(b) Subject to Section 7(h), Moriah Founders, Ltd., a Texas limited partnership, and Brothers Founders, Ltd., a Texas limited partnership (collectively, the "FOUNDERS"), jointly and severally, agree to indemnify, defend and hold harmless FBR and its affiliates, and their respective directors, officers, representatives and agents, and any person who controls FBR within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, FBR or any such controlling person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or the Marketing Materials. Each of the Founders acknowledge that they may be required to make payments hereunder and each covenants and agrees not to engage in any transactions the result of which would impede FBR's and its affiliates' ability to collect any payments due to any of them hereunder.

(c) FBR agrees to indemnify, defend and hold harmless the Partnership and its directors and officers and any person who controls the Partnership within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any loss, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Partnership or any such person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and made in reliance upon and in conformity with information furnished in writing by FBR to the Partnership expressly for use in the Offering Memorandum (or in any amendment or supplement thereof by the Partnership), such information being limited to the following: the last sentence of the cover page of the Offering Memorandum, the third sentence of the sixth paragraph of "Plan of Distribution" in the Offering Memorandum, the first sentence of the eighth paragraph of "Plan of Distribution" in the Offering Memorandum and the name of the Initial Purchaser on the front and back covers of the Offering Memorandum.

(d) If any action is brought against any person or entity (each an "INDEMNIFIED PARTY"), in respect of which indemnity may be sought pursuant to
Section 7(a), (b) or (c), the Indemnified Party shall promptly notify the party(ies) obligated to provide such indemnity (each an "INDEMNIFYING PARTY") in writing of the institution of such action and the Indemnifying Party shall assume the defense of such action, including the employment of counsel and payment of expenses; provided that the failure so to notify the Indemnifying Party will not relieve the Indemnifying Party from any liability which the Indemnifying Party may have to any Indemnified Party unless and to the extent the Indemnifying Party did not otherwise know of such action and such failure results in the forfeiture by the Indemnifying Party of rights and defenses that would have had material value in the defense. The Indemnified Party(ies) shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless the employment of such counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such action or the Indemnifying Party shall not have employed counsel to have charge of the defense of such action within a reasonable time or such Indemnified Party(ies) shall have reasonably concluded (based on the advice of counsel) that counsel selected by the Indemnifying Party has an actual conflict of interest or there may be defenses available to the Indemnified Party(ies) which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right

27

to direct the defense of such action on behalf of the Indemnified Party(ies)), in any of which events such fees and expenses shall be borne by the Indemnifying Party and paid as incurred (it being understood, however, that the Indemnifying Party shall not be liable for the fees and expenses of more than one separate firm of counsel (in addition to local counsel) for the Indemnified Party in any one action or series of related actions in the same jurisdiction representing the Indemnified Parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, the Indemnifying Party shall not be liable for any settlement of any such claim or action effected without its written consent. The Indemnifying Party shall have the right to settle any such claim or action for itself and any Indemnified Party so long as the Indemnifying Party pays any settlement payment and such settlement (i) includes a complete and unconditional release of the Indemnified Party from all losses, expenses, claims, damages, injunctions, liability and other obligations with respect to any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of the Indemnified Party.

(e) If the indemnification provided for in this Section 7 is unavailable to an Indemnified Party under Section 7(a), (b) or (c) in respect of any losses, expenses, liabilities or claims referred to therein, then each applicable Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Partnership and its subsidiaries, on the one hand, and FBR, on the other hand, from the offering of the Units or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Partnership and its subsidiaries, on the one hand, and of FBR, on the other hand, in connection with the statements or omissions which resulted in such losses, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Partnership and its subsidiaries, on the one hand, and FBR, on the other hand, shall be deemed to be in the same proportion as the total proceeds from the offering (net of initial placement agent discounts and commissions but before deducting expenses) received by the Partnership bear to the discounts and commissions received by FBR. The relative fault of the Partnership and its subsidiaries, on the one hand, and of FBR, on the other hand, shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Partnership or by FBR and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any claim or action.

(f) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in Section 7(e). Notwithstanding the provisions of this Section 7, FBR shall not be required to contribute any amount in excess of the amount by which the total price at which the Units were initially offered exceeds the amount of any damages which FBR has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of

28

fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

(g) The indemnity and contribution agreements contained in this Section 7 and the covenants, warranties and representations of the Partnership and contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of FBR or its affiliates, or their respective directors, officers, representatives and agents, or any person who controls FBR within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the Partnership or its directors and officers or any person who controls the Partnership within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the sale and delivery of the Units. Each of the parties to this Agreement agree promptly to notify the other parties of the commencement of any litigation or proceeding against it and, in the case of the Partnership or its subsidiaries, against any of their respective officers and directors, in connection with the sale and delivery of the Units, or in connection with the Offering Memorandum.

(h) Notwithstanding anything herein to the contrary, in no event shall the Founders be required to make payments under Section 7(b) for aggregate losses, expenses, liabilities or claims (including the reasonable costs of investigation) in excess of $17,000,000; provided, however, that the indemnification obligations of the Founders under this Section 7 shall be limited as to amount so as to apply only after the amount of, and to the extent that, such liabilities exceed $5,000,000.

8. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Partnership, its officers, the Founders and FBR set forth in or delivered in connection with this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (a) any investigation made by or on behalf of the Partnership, any of its officers or directors, FBR and each person, if any, who controls FBR within the meaning of the Securities Act or the Exchange Act and their respective trustees, directors, officers, employees, agents and controlling persons referred to in Section 7 and (b) delivery of and payment for the Units; provided, however, that, with respect to the Founders, their respective indemnification obligations under Section 7 shall survive for only six months from the Closing Time. The respective agreements, covenants, indemnities and other statements set forth in Sections 4(h), 4(l), 6(b), 7-19 shall remain in full force and effect, regardless of any termination or cancellation of this Agreement.

9. Research Independence. In addition, the Legacy Parties and the Founders acknowledge that FBR's research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such FBR research analysts may hold and make statements or investment recommendations and/or publish research reports with respect to the Partnership and/or the offering that differ from the views of its investment bankers. The Legacy Parties and the Founders hereby waive and release, to the fullest extent permitted by law, any claims that the Legacy Parties or the Founders may have against FBR with respect to any conflict of interest that may arise from the fact that the views expressed by their independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Legacy Parties or the Founders by such FBR investment banking divisions;

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provided, however, that nothing in this Section 9 shall affect the obligations of FBR under Section 3. The Legacy Parties and Founders acknowledge that FBR is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies which may be the subject of the transactions contemplated by this Agreement.

10. No Fiduciary Duty. The Legacy Parties and Founders acknowledge and agree that in connection with this offering, the sale of the Units or any other services FBR may be deemed to be providing hereunder, notwithstanding any preexisting relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by FBR, and except as otherwise contemplated in the placement agent arrangement herein: (i) no fiduciary or agency relationship between the Legacy Parties, the Founders and any other person, on the one hand, and FBR, on the other, exists; (ii) FBR is not acting as an advisor, expert or otherwise, to any of the Legacy Parties or the Founders, including with respect to the determination of the offering price of the Units, and such relationship between the Legacy Parties and the Founders, on the one hand, and FBR, on the other, is entirely and solely commercial, based on arms-length negotiations; (iii) any duties and obligations that FBR may have to the Legacy Parties or the Founders shall be limited to those duties and obligations specifically stated herein; and (iv) FBR and its affiliates may have interests that differ from those of the Legacy Parties and the Founders. The Legacy Parties and the Founders hereby waive any claims that they may have against FBR with respect to any breach of fiduciary duty in connection with this offering, the sale of the Units or any other services FBR may be deemed to be providing hereunder.

11. Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier or air courier guaranteeing overnight delivery:

(a) if to the Legacy Parties: Legacy Reserves LP Attn: Steven H. Pruett 303 W. Wall Street, Suite 1600 Midland, Texas 79701 Facsimile: (432) 682-4013

with a copy (which shall not 

constitute notice) to:             Andrews Kurth LLP
                                   Attn: Messrs. James V. Baird and
                                   Gislar Donnenberg
                                   600 Travis, Suite 4200
                                   Houston, Texas 77002
                                   Facsimile: 713-220-4285

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(b)  if to the Founders:           Moriah Founders, Ltd.
                                   Brothers Founders, Ltd.,
                                   Attn: Cary D. Brown
                                   303 W. Wall Street, Suite 1600
                                   Midland, Texas 79701
                                   Facsimile: (432) 682-4013

(c)  if to FBR:                    Friedman, Billings, Ramsey & Co.,
                                   Inc.
                                   Attn: Mr. William J. Ginivan,
                                         General Counsel
                                   1001 19th Street, North
                                   Arlington, Virginia 22209
                                   Facsimile: 804-788-8218

with a copy (which shall not
constitute notice) to:             Akin Gump Strauss Hauer & Feld LLP
                                   Attn: Messrs. Julien Smythe and
                                   Vince Kendrick
                                   1111 Louisiana Street
                                   44th Floor
                                   Houston, Texas 77002
                                   Facsimile: 713-236-0822

All such notices and communications shall be deemed to have been duly given when received. Any party by notice to the other party may designate additional or different addresses for subsequent notices or communications.

12. Governing Law; Consent to Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF VIRGINIA. The parties hereto agree to be subject to, and hereby irrevocably submit to, the nonexclusive jurisdiction of any United States federal or New York state court sitting in New York, New York, in respect of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated herein, and irrevocably agree that all claims in respect of any such suit, action or proceeding may be heard and determined in any such court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by applicable law, any objection to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding has been brought in an inconvenient forum.

13. Parties in Interest. The Agreement herein set forth has been and is made solely for the benefit of FBR, the Founders, the Partnership and the controlling persons, trustees, directors and officers referred to in Section 7, and their respective successors, assigns, executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from FBR) shall acquire or have any right under or by virtue of this Agreement.

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

15. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties.

16. Counterpart and Facsimile Signatures. This Agreement may be in signed counterparts, each of which shall be an original and all of which together shall constitute one and the same agreement, and may be executed by facsimile.

17. Headings. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.

18. Severability. In the event that any one or more of the provisions contained herein is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, but only to the extent that giving effect to such provision and the remaining provisions hereof is in accordance with the intent of the parties as reflected in this Agreement.

19. Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the matters and transactions contemplated hereby and thereby and supersede all prior agreements and understandings whatsoever relating to such matters and transactions, except as provided in the following sentence. All of the obligations, agreements, covenants, representations and warranties under the engagement letter dated March 6, 2006, between the Partnership and FBR (the "ENGAGEMENT LETTER") entered into immediately prior to this Agreement, shall each survive the execution, delivery and termination and the performance of this Agreement and the consummation of the transactions contemplated hereby without any modification thereof; provided, that to the extent there is a conflict between the provisions of the Engagement Letter and the provisions of this Agreement, this Agreement shall prevail to that extent.

[SIGNATURE PAGES FOLLOW]

32

Please acknowledge and accept the foregoing provisions hereof by signing this Agreement in the space indicated below.

Very truly yours,

LEGACY RESERVES GP, LLC 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

LEGACY RESERVES LP

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name: Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

LEGACY RESERVES OPERATING GP LLC

By: Legacy Reserves LP,
its sole member

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
    Steven H. Pruett
    President, Chief Financial Officer
    and Secretary

Signature Page - Purchase/Placement Agreement

LEGACY RESERVES OPERATING LP

By: Legacy Reserves Operating GP LLC,
its general partner

By: Legacy Reserves LP,
its sole member

By: Legacy Reserves GP, LLC,
its general partner 

By: /s/ Steven H. Pruett
    ------------------------------------
Name:  Steven H. Pruett
Title: President, Chief Financial
       Officer and Secretary

Founders (solely for the purposes of Sections 7 - 19):

MORIAH FOUNDERS, LTD.

By: Moriah Founders Management, LLC,
its general partner 

By: /s/ Cary D. Brown
    ------------------------------------
Name:  Cary D. Brown
Title: Vice President

BROTHERS FOUNDERS, LTD.

By: Brothers Founders Management, LLC,
its general partner 

By: /s/ Kyle A. McGraw
    ------------------------------------
Name:  Kyle A. McGraw
Title: President

Signature Page - Purchase/Placement Agreement

ACCEPTED AND AGREED
as of the date first written above:

FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC., a Delaware corporation 

By: /s/ James R. Kleeblatt
    ---------------------------------
Name:   James R. Kleeblatt
      -------------------------------
Title:  Senior Managing Director
       ------------------------------

Signature Page - Purchase/Placement Agreement

EXHIBIT A

FORM OF REGISTRATION RIGHTS AGREEMENT

[Intentionally Omitted]

Exhibit A

EXHIBIT B

FORM OF LOCK-UP AGREEMENT

March [___], 2006

Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North, 18th Floor Arlington, Virginia 22209

Ladies and Gentlemen:

The undersigned understands and agrees as follows:

1. Friedman, Billings, Ramsey & Co., Inc. ("FBR") proposes to enter into a Purchase/Placement Agreement (the "AGREEMENT") with Legacy Reserves LP, a Delaware limited partnership (the "PARTNERSHIP") and certain other entities, providing for (a) the initial purchase by FBR of units representing limited partner interests in the Partnership (the "UNITS"), and the resale of such Units by FBR to certain eligible purchasers, (b) the direct sale by the Partnership of Units to certain accredited investors, and (c) an option for FBR to purchase or place Units either for resale by FBR to certain eligible purchasers or for direct sale by the Partnership to certain accredited investors (the transactions referred to in (a), (b) and (c) above are collectively referred to as the "OFFERING"), in each case, in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT").

2. In connection with the Offering and pursuant to the terms of a Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT") to be entered into in connection with the closing of the Offering, the Partnership has agreed to file with the Securities and Exchange Commission one or more registration statements providing for the resale of the Units under the Securities Act.

3. In recognition of the benefit that the Offering will confer upon the undersigned and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the undersigned, without the prior written consent of FBR, the undersigned will refrain during the period commencing on the date of the Agreement until 180 days after the completion of the Offering and from the effective date of the Mandatory Shelf Registration Statement (as defined in the Registration Rights Agreement entered into in connection with the Offering) until 60 days thereafter, without the prior written consent of FBR, from (i) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant for the sale of, lending or otherwise disposing of or transferring, directly or indirectly, any equity securities of the Partnership, or any securities convertible into or exercisable or exchangeable for equity securities of the Partnership, or (ii) entering into any swap or other arrangement that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of equity securities of the Partnership, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Units or such other securities, in cash or otherwise.

Notwithstanding the foregoing, subject to applicable securities laws and the restrictions contained in the Partnership's amended and restated partnership agreement, the undersigned may

transfer any securities of the Partnership as follows: (i) pursuant to the Contribution Agreement (as defined in the Agreement); (ii) pursuant to the exercise of options; (iii) as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound in writing by the restrictions set forth herein; (iv) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided that the trustee of the trust agrees that the trust will be bound by the restrictions set forth herein;
(v) as a distribution to stockholders, partners or members of the undersigned, provided that such stockholders, partners or members agree to be bound in writing by the restrictions set forth herein; (vi) any transfer required under any Partnership benefit plans or the Partnership's amended and restated partnership agreement; (vii) as collateral for any bona fide loan, provided that the lender agrees in writing to be bound by the restrictions set forth herein;
(viii) with respect to sales of securities acquired after the Closing Time in the open market; and (ix) pursuant to the IPO Registration Statement (as defined in the Registration Rights Agreement). For this agreement, "immediate family" shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. This Agreement shall not apply to the undersigned with respect to transactions by the Partnership governed by Section 4(q) of the Agreement.

For the avoidance of doubt, nothing shall prevent the undersigned from, or restrict the ability of the undersigned to, (i) purchase Units on the open market or (ii) exercise any options or other convertible securities granted under any benefit plan of the Partnership.

4. The undersigned acknowledges that FBR is relying on the agreements of the undersigned set forth herein in making its decision to enter into the Agreement and to continue its efforts in connection with the Offering.

5. This Lock-Up Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws.

6. This Lock-Up Agreement may be executed in one or more counterparts and delivered by facsimile, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the undersigned has executed this Lock-Up Agreement, or caused this Lock-Up Agreement to be executed, as of the date first written above.

Very truly yours,

Name:
Title:

(Address)

SCHEDULE 1

LEGACY RESERVES OPERATING GP LLC

LEGACY RESERVES OPERATING LP

LEGACY RESERVES SERVICES, INC.

SCHEDULE II

EXISTING UNITHOLDERS

Moriah Properties, Ltd.

DAB Resources, Ltd.

H2K Holdings, Ltd.

Brothers Production Properties Ltd.

Brothers Production Company, Inc.

Brothers Operating Company, Inc.

J&W McGraw Properties, Ltd.

MBN Properties LP

Bill Morris

Michael Hargesheimer

Exhibit 10.5

LEGACY RESERVES LP
LONG-TERM INCENTIVE PLAN

1. PURPOSE OF THE PLAN.

The Legacy Reserves LP Long-Term Incentive Plan (the "Plan") is intended to promote the interests of Legacy Reserves LP, a Delaware limited partnership (the "Partnership"), by providing to employees, consultants, and directors of Legacy Reserves GP LLC, a Delaware limited liability company and the sole general partner of the Partnership (the "Company"), the Partnership and its Affiliates incentive compensation awards for superior performance that are based on Units. The Plan is also contemplated to enhance the ability of the Company and its Affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Partnership and to encourage them to devote their best efforts to advancing the business of the Partnership and its subsidiaries.

2. DEFINITIONS.

As used in the Plan, the following terms shall have the meanings set forth below:

"Affiliate" means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

"Award" means an Option, Restricted Unit, Unit Grant, Phantom Unit or Unit Appreciation Right granted under the Plan, and shall include tandem DERs granted with respect to an Option, Phantom Unit or Unit Appreciation Right.

"Award Agreement" means the written agreement by which an Award shall be evidenced.

"Board" means the Board of Directors of the Company.

"Change of Control" means the occurrence of any of the following events:

(i) the acquisition by any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or an Affiliate of the Company, of "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or the Partnership representing more than 35% of the combined voting power of the Company's or the Partnership's then outstanding securities entitled to vote generally in the election of directors; provided, however, that any acquisition of securities from GP Members will be disregarded for purposes of determining whether a Change of Control has occurred; or

(ii) the consummation of a reorganization, merger, consolidation or other form of business transaction or series of business transactions, in each case, with respect to which more than 50% of the voting power of the outstanding equity interests in the Partnership or the Company cease to be owned by the Persons who own such interests as of the effective date of the initial offering of Units; or

(iii) the sale, lease or disposition (in one or a series of related transactions) by the Partnership of all or substantially all of the Partnership's assets to any Person other than the Partnership, the Company or any of their respective Affiliates; or

(iv) a change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who

either (A) are directors of the Company as of the effective date of the initial offering of Units, or (B) are elected, or nominated for election, thereafter to the Board with the affirmative votes of at least a majority in interest of the members of the Company, or, if applicable, by the number of limited partners of the Partnership as set forth in the Partnership agreement, in each case at the time of such election or nomination, but "Incumbent Director" shall not include an individual whose election or nomination is in connection with (i) an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board or (ii) a plan or agreement to replace a majority of the then Incumbent Directors, other than, in either case, as a result of the Partnership's failure to file a registration statement within 240 days of the effective date of the initial offering of Units; or

(v) the approval by the Board or the members of the Company of a complete or substantially complete liquidation or dissolution of the Partnership.

Solely with respect to any Award that is subject to Section 409A of the Code and to the extent that the definition of change of control under Section 409A applies to limited liability companies and/or partnerships, this definition is intended to comply with the definition of change of control under Section 409A of the Code and, to the extent that the above definition does not so comply, such definition shall be void and of no effect and, to the extent required to ensure that this definition complies with the requirements of
Section 409A of the Code, the definition of such term set forth in regulations or other regulatory guidance issued under Section 409A of the Code by the appropriate governmental authority is hereby incorporated by reference into and shall form part of this Plan as fully as if set forth herein verbatim and the Plan shall be operated in accordance with the above definition of Change of Control as modified to the extent necessary to ensure that the above definition complies with the definition prescribed in such regulations or other regulatory guidance insofar as the definition relates to any Award that is subject to Section 409A of the Code.

"Code" means the Internal Revenue Code of 1986, as amended.

"Committee" means the Compensation Committee of the Board or such other committee of the Board as may be appointed by the Board to administer the Plan.

"Consultant" means an individual, other than an Employee or a Director, providing bona fide services to the Company or any of its Affiliates as a consultant or advisor, as applicable, provided that such individual is a natural person and that such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for any securities of the Partnership.

"DER" or "Distribution Equivalent Right" means a contingent right, granted in tandem with a specific Option, Unit Appreciation Right or Phantom Unit, to receive an amount in cash equal to the cash distributions made by the Partnership with respect to a Unit during the period such tandem Award is outstanding.

"Director" means a member of the Board who is not an Employee.

"Employee" means any employee of the Company or an Affiliate who performs services for the Company and its Affiliates.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Fair Market Value" means the closing sales price of a Unit on the applicable date (or if there is no trading in the Units on such date, on the next preceding date on which there was trading) as reported in The Wall Street Journal (or other reporting service approved by the

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Committee). In the event Units are not publicly traded at the time a determination of fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee.

"GP Members" means the members of the Company.

"Option" means an option to purchase Units granted under the Plan.

"Participant" means any Employee, Consultant or Director granted an Award under the Plan.

"Partnership Agreement" means the Amended and Restated Limited Partnership Agreement of Legacy Reserves LP, as it may be subsequently amended or restated from time to time.

"Person" means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

"Phantom Unit" means a phantom (notional) Unit granted under the Plan which upon vesting entitles the Participant to receive a Unit or an amount of cash equal to the Fair Market Value of a Unit. Whether cash or Units are received for Phantom Units shall be determined in the sole discretion of the Committee and shall be set forth in the Award Agreement.

"Restricted Period" means the period established by the Committee with respect to an Award during which the Award remains subject to forfeiture or is either not exercisable by or payable to the Participant, as the case may be.

"Restricted Unit" means a Unit granted under the Plan that is subject to a Restricted Period.

"Rule 16b-3" means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.

"SEC" means the Securities and Exchange Commission, or any successor thereto.

"UAR" of "Unit Appreciation Right" means an Award that, upon exercise, entitles the holder to receive the excess of the Fair Market Value of a Unit on the exercise date over the exercise price established for such Unit Appreciation Right. Such excess may be paid in cash and/or in Units as determined in the sole discretion of the Committee and set forth in the Award Agreement.

"UDR" or "Unit Distribution Right" means a distribution made by the Partnership with respect to a Restricted Unit.

"Unit" means a Unit of the Partnership.

"Unit Grant" means an Award of an unrestricted Unit.

3. ADMINISTRATION.

The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the terms of the Plan and applicable law, and in addition to other

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express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants;
(ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of Units to be covered by Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled, exercised, canceled, or forfeited;
(vi) interpret and administer the Plan and any instrument or agreement relating to an Award made under the Plan; (vii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (viii) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, and any beneficiary of any Award.

4. UNITS.

(a) Limits on Units Deliverable. Subject to adjustment as provided in
Section 4(c), the maximum number of Units that may be delivered or reserved for delivery or underlying any Award with respect to the Plan is 2,000,000. If any Award expires, is canceled, exercised, paid or otherwise terminates without the delivery of Units, or if the maximum number of Units delivered is reduced for any reason other than tax withholding or payment of the exercise price, then the Units covered by such Award, to the extent of such expiration, cancellation, exercise, payment or termination, shall again be Units with respect to which Awards may be granted. Units that cease to be subject to an Award because of the exercise of the Award, or the vesting of Restricted Units or similar Awards, shall no longer be subject to or available for any further grant under this Plan. Notwithstanding the foregoing, there shall not be any limitation on the number of Awards that may be granted under the Plan and paid in cash.

(b) Sources of Units Deliverable Under Awards. Any Units delivered pursuant to an Award shall consist, in whole or in part, of Units acquired in the open market, from any Affiliate, the Partnership or any other Person, or any combination of the foregoing as determined by the Committee in its sole discretion.

(c) Adjustments. In the event that the Committee determines that any distribution (whether in the form of cash, Units, other securities, or other property), recapitalization, split, reverse split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Units or other securities of the Partnership, issuance of warrants or other rights to purchase Units or other securities of the Partnership, or other similar transaction or event affects the Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Units (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Units (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, that the number of Units subject to any Award shall always be a whole number and, provided further, that the Committee shall not take any action otherwise authorized under this subparagraph (c) to the extent that (i) such action would cause (A) the application of Section 409A of the Code to the Award or (B) create adverse tax consequences under Section 409A of the Code should that Code section apply to the Award or (ii) except as permitted in Section 7(c), materially reduce the benefit to the Participant without the consent of the Participant.

5. ELIGIBILITY.

Any Employee, Consultant or Director shall be eligible to be designated a Participant and receive an Award under the Plan.

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6. AWARDS.

(a) Options. The Committee shall have the authority to determine the Employees, Consultants and Directors to whom Options shall be granted, the number of Units to be covered by each Option, whether DERs are granted with respect to such Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan.

(i) Exercise Price. The purchase price per Unit purchasable under an Option shall be determined by the Committee at the time the Option is granted, provided such purchase price may not be less than 100% of its Fair Market Value as of the date of grant.

(ii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, which may include, without limitation, accelerated vesting upon the achievement of specified performance goals, and the method or methods by which payment of the exercise price with respect thereto may be made or deemed to have been made, which may include, without limitation, cash, check acceptable to the Company, a "cashless-broker" exercise through procedures approved by the Company, with the consent of the Committee, the withholding of Units that would otherwise be delivered to the Participant upon the exercise of the Option, other securities or other property, or any combination thereof, having a fair market value (as determined by the Committee) on the exercise date equal to the relevant exercise price.

(iii) Forfeiture. Except as otherwise provided in the terms of the Award Agreement, upon termination of a Participant's employment with or consulting services to the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason prior to the date an Option becomes exercisable, all Options shall be forfeited by the Participant. The Committee may in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Options.

(iv) DERs. To the extent provided by the Committee, in its discretion, a grant of Options may include a tandem DER grant, which may provide that such DERs shall be credited to a bookkeeping account (with or without interest in the discretion of the Committee) subject to the same vesting restrictions as the tandem Award, or be subject to such other provisions or restrictions as determined by the Committee in its discretion.

(b) Restricted Units and Unit Grants. The Committee shall have the authority to determine the Employees, Consultants and Directors to whom Restricted Units and Unit Grants shall be granted, the number of Restricted Units and/or Unit Grants to be granted to each such Participant, the Restricted Period, the conditions under which the Restricted Units may become vested or forfeited, and such other terms and conditions as the Committee may establish with respect to such Awards.

(i) UDRs. To the extent provided by the Committee, in its discretion, a grant of Restricted Units may provide that distributions made by the Partnership with respect to the Restricted Units shall be subject to the same forfeiture and other restrictions as the Restricted Unit and, if restricted, such distributions shall be held, without interest, until the Restricted Unit vests or is forfeited with the UDR being paid or forfeited at the same time, as the case may be. Absent such a restriction on the UDRs in the grant agreement, UDRs shall be paid to the holder of the Restricted Unit without restriction.

(ii) Forfeitures. Except as otherwise provided in the terms of the Award Agreement, upon termination of a Participant's employment with or consulting services to the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason during the applicable Restricted Period, all outstanding Restricted Units awarded the Participant shall be

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automatically forfeited on such termination. The Committee may in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Restricted Units.

(iii) Lapse of Restrictions. Upon or as soon as reasonably practical following the vesting of each Restricted Unit, subject to the provisions of Section 8(b), the Participant shall be entitled to have the restrictions removed from his or her Unit certificate so that the Participant then holds an unrestricted Unit.

(c) Phantom Units. The Committee shall have the authority to determine the Employees, Consultants and Directors to whom Phantom Units shall be granted, the number of Phantom Units to be granted to each such Participant, the Restricted Period, the time or conditions under which the Phantom Units may become vested or forfeited, which may include, without limitation, the accelerated vesting upon the achievement of specified performance goals, and such other terms and conditions as the Committee may establish with respect to such Awards, including whether DERs are granted with respect to such Phantom Units.

(i) DERs. To the extent provided by the Committee, in its discretion, a grant of Phantom Units may include a tandem DER grant, which may provide that such DERs shall be credited to a bookkeeping account (with or without interest in the discretion of the Committee) subject to the same vesting restrictions as the tandem Award, or be subject to such other provisions or restrictions as determined by the Committee in its discretion.

(ii) Forfeitures. Except as otherwise provided in the terms of the Award Agreement, upon termination of a Participant's employment with or consulting services to the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason during the applicable Restricted Period, all outstanding Phantom Units awarded the Participant shall be automatically forfeited on such termination. The Committee may, in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Phantom Units.

(iii) Lapse of Restrictions. Upon or as soon as reasonably practical following the vesting of each Phantom Unit, subject to the provisions of Section 8(b), the Participant shall be entitled to receive from the Company one Unit or cash equal to the Fair Market Value of a Unit, as determined by the Committee in its discretion.

(d) Unit Appreciation Rights. The Committee shall have the authority to determine the Employees, Consultants and Directors to whom Unit Appreciation Rights shall be granted, the number of Units to be covered by each grant and the conditions and limitations applicable to the exercise of the Unit Appreciation Right, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan.

(i) Exercise Price. The exercise price per Unit Appreciation Right shall be not less than 100% of its Fair Market Value as of the date of grant.

(ii) Vesting/Time of Payment. The Committee shall determine the time or times at which a Unit Appreciation Right shall become vested and exercisable and the time or times at which a Unit Appreciation Right shall be paid in whole or in part.

(iii) Forfeitures. Except as otherwise provided in the terms of the Award Agreement, upon termination of a Participant's employment with or services to the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason prior to vesting, all unvested Unit Appreciation Rights awarded the Participant shall be automatically forfeited on such termination. The Committee may, in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Unit Appreciation Rights, in which case, such Unit Appreciation Rights shall be deemed vested upon termination of employment or service and paid as soon as administratively practical thereafter.

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(iv) Unit Appreciation Right DERs. To the extent provided by the Committee, in its discretion, a grant of Unit Appreciation Rights may include a tandem DER grant, which may provide that such DERs shall be credited to a bookkeeping account (with or without interest in the discretion of the Committee) subject to the same vesting restrictions as the tandem Unit Appreciation Rights Award, or be subject to such other provisions or restrictions as determined by the Committee in its discretion.

(e) General.

(i) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. No Award shall be issued in tandem with another Award if the tandem Awards would result in adverse tax consequences under Section 409A of the Code. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

(ii) Limits on Transfer of Awards.

(A) Except as provided in Section 6(e)(ii)(C) below, each Award shall be exercisable or payable only to the Participant during the Participant's lifetime, or to the person to whom the Participant's rights shall pass by will or the laws of descent and distribution.

(B) Except as provided in Section 6(e)(ii)(C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company, the Partnership or any Affiliate.

(C) To the extent specifically provided by the Committee with respect to an Award, an Award may be transferred by a Participant without consideration to immediate family members or related family trusts, limited partnerships or similar entities or on such terms and conditions as the Committee may from time to time establish.

(iii) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee, but shall not exceed 10 years.

(iv) Unit Certificates. All certificates for Units or other securities of the Partnership delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Units or other securities are then listed, and any applicable federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(v) Consideration for Grants. Awards may be granted for such consideration, including services, as the Committee determines.

(vi) Delivery of Units or other Securities and Payment by Participant of Consideration. Notwithstanding anything in the Plan or any grant agreement to the contrary, delivery of Units pursuant to the exercise or vesting of an Award may be deferred for any period during which, in the good faith determination of the Committee, the Company is not reasonably able to obtain Units to deliver pursuant to such Award without violating the rules or regulations of

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any applicable law or securities exchange. No Units or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award grant agreement (including, without limitation, any exercise price or tax withholding) is received by the Company.

(vii) Change of Control. Unless specifically provided otherwise in the Award Agreement, upon a Change of Control or such time prior thereto as established by the Committee, all outstanding Awards shall automatically vest or become exercisable in full, as the case may be. In this regard, all Restricted Periods shall terminate and all performance criteria, if any, shall be deemed to have been achieved at the maximum level. To the extent an Option or UAR is not exercised, or a Phantom Unit or Restricted Unit does not vest, upon the Change of Control, the Committee may, in its discretion, cancel such Award or provide for an assumption of such Award or a replacement grant on substantially the same terms; provided, however, upon any cancellation of an Option or UAR that has a positive "spread" or a Phantom Unit or Restricted Unit, the holder shall be paid an amount in cash and/or other property, as determined by the Committee, equal to such "spread" if an Option or UAR or equal to the Fair Market Value of a Unit, if a Phantom Unit or Restricted Unit.

(viii) Section 409A of the Code. Notwithstanding any other provision of the Plan to the contrary, any Award granted under the Plan shall contain terms that (i) are designed to avoid application of
Section 409A of the Code to the Award or (ii) are designed to avoid adverse tax consequences under Section 409A should that Code section apply to the Award.

7. AMENDMENT AND TERMINATION.

Except to the extent prohibited by applicable law:

(a) Amendments to the Plan. Except as required by the rules of the principal securities exchange on which the Units are traded and subject to
Section 7(b) below, the Board or the Committee may amend, alter, suspend, discontinue, or terminate the Plan in any manner, including increasing the number of Units available for Awards under the Plan, without the consent of any partner, Participant, other holder or beneficiary of an Award, or other Person.

(b) Amendments to Awards Subject to Section 7(a). The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted, provided no change, other than pursuant to Section 7(c), in any Award shall materially reduce the benefit to a Participant without the consent of such Participant.

(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) of the Plan) affecting the Partnership or the financial statements of the Partnership, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available to Participants under the Plan or such Award.

8. GENERAL PROVISIONS.

(a) No Rights to Award. No Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Participants. The terms and conditions of Awards need not be the same with respect to each recipient.

(b) Tax Withholding. The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or from any compensation or other amount

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owing to a Participant the amount (in cash, Units, other securities, Units that would otherwise be issued pursuant to such Award or other property) of any applicable taxes payable in respect of the grant of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy its withholding obligations for the payment of such taxes.

(c) No Right to Employment or Services. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate, to continue as a consultant, or to remain on the Board, as applicable. Further, the Company or an Affiliate may at any time dismiss a Participant from employment or terminate a consulting relationship, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan, any Award agreement or other agreement.

(d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Texas without regard to its conflict of laws principles.

(e) Section 409A of the Code. Notwithstanding anything in this Plan to the contrary, any Award granted under the Plan shall contain terms that (i) are designed to avoid application of Section 409A of the Code to the Award or (ii) are designed to avoid adverse tax consequences under Section 409A of the Code should that section apply to the Award. If any Plan provision or Award under the Plan would result in the imposition of an applicable tax under Section 409A of the Code and related regulations and pronouncements, that Plan provision or Award will be reformed to the extent reformation would avoid imposition of the applicable tax and no action taken to comply with Section 409A of the Code shall be deemed to adversely affect the Participant's rights to an Award or to require the Participant's consent.

(f) Severability. If any provision of the Plan or any award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or award and the remainder of the Plan and any such Award shall remain in full force and effect.

(g) Other Laws. The Committee may refuse to issue or transfer any Units or other consideration under an Award if, in its sole discretion, it determines that the issuance or transfer of such Units or such other consideration might violate any applicable law or regulation, the rules of the principal securities exchange on which the Units are then traded, or entitle the Partnership or an Affiliate to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary.

(h) No Trust or Fund Created. Neither the Plan nor any award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any participating Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any participating Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or any participating Affiliate.

(i) No Fractional Units. No fractional Units shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Units or whether such fractional Units or any rights thereto shall be canceled, terminated, or otherwise eliminated.

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(j) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

(k) Facility Payment. Any amounts payable hereunder to any person under legal disability or who, in the judgment of the Committee, is unable to properly manage his financial affairs, may be paid to the legal representative of such person, or may be applied for the benefit of such person in any manner which the Committee may select, and the Company and its Affiliates shall be relieved of any further liability for payment of such amounts.

(l) Participation by Affiliates. In making Awards to Consultants and Employees employed by an Affiliate, the Committee shall be acting on behalf of the Affiliate, and to the extent the Partnership has an obligation to reimburse the Company for compensation paid to Consultants and Employees for services rendered for the benefit of the Partnership, such payments or reimbursement payments may be made by the Partnership directly to the Affiliate, and, if made to the Company, shall be received by the Company as agent for the Affiliate.

(m) Gender and Number. Words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural.

(n) No Guarantee of Tax Consequences. None of the Board, the Company, nor the Committee makes any commitment or guarantee that any federal, state or local tax treatment will apply or be available to any person participating or eligible to participate hereunder.

9. TERM OF THE PLAN.

The Plan shall be effective on the date of its approval by the Board and shall continue until the date terminated by the Board. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted prior to such termination, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under such Award, shall extend beyond such termination date.

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Exhibit 10.6

LEGACY RESERVES LP
LONG-TERM INCENTIVE PLAN

GRANT OF RESTRICTED UNITS

Grantee

Grant Date , 200__

1. GRANT OF RESTRICTED UNITS. Legacy Reserves LP (the "Partnership") hereby grants to you _____________ Restricted Units under the Legacy Reserves LP Long-Term Incentive Plan (the "Plan") on the terms and conditions set forth herein and in the Plan, which is incorporated herein by reference as a part of this Agreement. In the event of any conflict between the terms of this Agreement and the Plan, the Plan shall control. Capitalized terms used in this Agreement but not defined herein shall have the meanings ascribed to such terms in the Plan, unless the context requires otherwise.

2. REGULAR VESTING. Except as otherwise provided in Section 3 below, the Restricted Units granted hereunder shall vest (in installments if applicable) in accordance with the following schedule: 

                                                          CUMULATIVE VESTED
    VESTING DATE               VESTED INCREMENT               PERCENTAGE
----------------------     ------------------------     ------------------------

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

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

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

You are entitled to receive all cash distributions made with respect to Restricted Units registered in your name and are entitled to vote such Restricted Units, unless and until the Restricted Units are forfeited. Such cash distribution shall be made without interest no later than on the first day of the month next following the month in which cash distributions are made to Unitholders.

The number of Restricted Units that vest as of each date described above will be rounded down to the nearest whole Restricted Unit, with any remaining Restricted Units to vest with the final installment. Your employment with the Partnership, the Company or any of their Affiliates, as the case may be (the "Employer") must be continuous from the date of the grant through the applicable vesting date in order for the Award to become vested with respect to additional Units on such date.

3. EVENTS OCCURRING PRIOR TO REGULAR VESTING.

(A) DEATH OR DISABILITY. If your employment with the Employer terminates as a result of your death or a disability (within the meaning of
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended and in effect from time to time (the "Code")), the Restricted Units then held by you automatically will become fully vested upon such termination.

(B) TERMINATION BY THE PARTNERSHIP OTHER THAN FOR CAUSE. If your employment is terminated by the Partnership for any reason other than "Cause," as determined by the Partnership, the Restricted Units then held by you automatically will become fully vested upon such termination.

(C) OTHER TERMINATIONS. Except as provided in Section 3 hereof, if you terminate from the Partnership for any reason other than as provided in Sections 3(a) and (b) above, all unvested Restricted Units then held by you automatically shall be forfeited without payment upon such termination.

(D) CHANGE OF CONTROL. All outstanding Restricted Units held by you automatically shall become fully vested upon a Change of Control.

For purposes of this Section 3, "employment with the Partnership" shall include being an employee of or a director or consultant to the Partnership or an Affiliate.

For purposes of this Section 3, "Cause" is defined as:

(1) an act by the Grantee of willful misrepresentation, fraud or willful dishonesty intended to result in substantial personal enrichment at the expense of the Partnership or an Affiliate;

(2) the Grantee's willful misconduct with regard to the Partnership or an Affiliate that is intended to have a material adverse impact on the Partnership or an Affiliate;

(3) the Grantee's material, willful and knowing violation of Partnership or Affiliate guidelines or policies or the Grantee's fiduciary duties which has or is intended to have a material adverse impact on the Partnership or an Affiliate;

(4) the Grantee's willful or reckless behavior in the performance of his or her duties which has a material adverse impact on the Partnership or an Affiliate;

(5) the Grantee's willful failure to perform his or her duties or to follow a written direction of the Chairman or the board of directors of the Partnership;

(6) the Grantee's conviction of, or pleading nolo contendere or guilty to, a felony; or

(7) any other willful material breach by the Grantee of his or her obligations to the Partnership or an Affiliate that, if curable, is not cured within 20 days of receipt of written notice from the Partnership or an Affiliate.

4. UNIT CERTIFICATES. A certificate evidencing the Restricted Units may be issued in your name, pursuant to which you shall have all voting rights. The certificate shall bear the following legend:

The Units evidenced by this certificate have been issued pursuant to an agreement made as of ________, 200__, a copy of which is attached hereto and incorporated herein, between Legacy Reserves LP (the "Partnership") and the registered holder of the Units, and are subject to forfeiture

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to the Partnership under certain circumstances described in such agreement. The sale, assignment, pledge or other transfer of the Units evidenced by this certificate is prohibited under the terms and conditions of such agreement, and such Units may not be sold, assigned, pledged or otherwise transferred except as provided in such agreement.

The Partnership may cause the certificate to be delivered upon issuance to the Secretary of the Company as a depository for safekeeping until the forfeiture occurs or the restrictions lapse pursuant to the terms of this Agreement. Upon request of the Partnership, you shall deliver to the Partnership a unit power, endorsed in blank, relating to the Restricted Units then subject to the restrictions. Upon the lapse of the restrictions without forfeiture, the Partnership shall cause a certificate or certificates to be issued without legend in your name in exchange for the certificate evidencing the Restricted Units.

5. LIMITATIONS UPON TRANSFER. All rights under this Agreement shall belong to you alone and may not be transferred, assigned, pledged, or hypothecated by you in any way (whether by operation of law or otherwise), other than by will or the laws of descent and distribution and shall not be subject to execution, attachment, or similar process. Upon any attempt by you to transfer, assign, pledge, hypothecate, or otherwise dispose of such rights contrary to the provisions in this Agreement or the Plan, or upon the levy of any attachment or similar process upon such rights, such rights shall immediately become null and void.

6. RESTRICTIONS. By accepting this grant, you agree that any Units which you may acquire upon vesting of this award will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. You also agree that (i) the certificates representing the Units acquired under this award may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) the Company may refuse to register the transfer of the Units acquired under this award on the transfer records of the Partnership if such proposed transfer would in the opinion of counsel satisfactory to the Partnership constitute a violation of any applicable securities law, and (iii) the Partnership may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Units to be acquired under this award.

7. WITHHOLDING OF TAX. To the extent that the grant or vesting of a Restricted Unit results in the receipt of compensation by you with respect to which the Partnership or an Affiliate has a tax withholding obligation pursuant to applicable law, unless other arrangements have been made by you that are acceptable to the Partnership or such Affiliate, you shall deliver to the Partnership or the Affiliate such amount of money as the Partnership or the Affiliate may require to meet its withholding obligations under such applicable law. No issuance of an unrestricted Unit shall be made pursuant to this Agreement until you have paid or made arrangements approved by the Partnership or the Affiliate to satisfy in full the applicable tax withholding requirements of the Partnership or Affiliate with respect to such event.

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8. CODE SECTION 83(b) ELECTION. You shall be permitted to make an election under Section 83(b) of the Code, to include an amount in income in respect of the Award of Restricted Units in accordance with the requirements of
Section 83(b) of the Code.

9. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Partnership and upon any person lawfully claiming under you.

10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the Restricted Units granted hereby. Without limiting the scope of the preceding sentence, all prior understandings and agreements, if any, among the parties hereto relating to the subject matter hereof are hereby null and void and of no further force and effect. Any modification of this Agreement shall be effective only if it is in writing and signed by both you and an authorized officer of the Company.

11. GOVERNING LAW. This grant shall be governed by, and construed in accordance with, the laws of the State of [TEXAS], without regard to conflicts of laws principles thereof. 

LEGACY RESERVES LP                                        GRANTEE

By:  Legacy Reserves GP, LLC, its General Partner
     By:                                                  By:
          ------------------------------                         ------------------------------------

     Name:                                                Name:
            ----------------------------                         ------------------------------------

     Title:                                               Title:
             ---------------------------                         ------------------------------------

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Exhibit 10.9

EMPLOYMENT AGREEMENT

The parties to this Employment Agreement (this "Agreement") are LEGACY RESERVES SERVICES, INC., a Texas corporation (the "Employer") and CARY D. BROWN (the "Employee"). The parties desire to provide for the employment of the Employee as Chief Executive Officer of LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "Company") on the terms set forth herein effective as of the date of completion of a private placement of equity securities ("Units") of LEGACY RESERVES LP, a Delaware limited partnership ("Legacy"). Legacy is joining in this agreement for the limited purposes of reflecting its agreement to the matters set forth herein as to it, but such joinder is not intended to make Legacy the employer of the Employee for any purpose. The date this Agreement becomes effective is herein referred to as the "Effective Date".

1. POSITION AND DUTIES

1.1 Employment; Titles; Reporting. On the Effective Date, the Employer agrees to employ the Employee and the Employee agrees to enter employment with the Employer, upon the terms and subject to the conditions provided under this Agreement. During the Employment Term (as defined in Section 2), the Employee will serve as Chief Executive Officer of the Company. In such capacity, the Employee will report to and otherwise will be subject to the direction and control of the Board of Directors of the Company (including any committee thereof, the "Board") and will have such duties, responsibilities and authorities as may be assigned to him by the Board from time to time and otherwise consistent with such position in a public company, comparable in size to Legacy, which is engaged in natural gas and oil acquisition, development and production (including, but not limited to, maintaining, to the extent applicable, compliance with the Sarbanes-Oxley Act of 2002 and related regulations and all other federal, state and local laws and regulations, as well as all regulations and rules of any exchange or electronic trading system on which Legacy's securities may be traded).

1.2 Duties. During the Employment Term, the Employee will devote substantially all of his full working time to the business and affairs of the Employer, the Company and Legacy, will use his best efforts to promote the Employer's, the Company's and Legacy's interests and will perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Employee may be required by the Board to provide services to, or otherwise serve as an officer or director of, any direct or indirect subsidiary of the Employer, the Company or Legacy (the Employer, the Company, Legacy and all such direct and indirect subsidiaries of the Employer, the Company or Legacy being referred to herein as the "Related Parties"), as applicable. The Employee will comply with the Employer's, the Company's and Legacy's policies, codes and procedures, as they may be in effect from time to time, applicable to executive officers of the Company and Legacy. Nevertheless, the Employee may, with the prior approval of the Board in each instance, engage in such other business and charitable activities that do not violate Section 7, create a conflict of interest with the Employer, the Company or Legacy or materially interfere with the performance of his obligations to the Employer, the Company or Legacy under this Agreement. The activities in which the Employee is engaged as of the Effective Date, all of which have been approved by the Board, are listed on Exhibit A hereto.

1.3 Place of Employment. The Employee will perform his duties under this Agreement at the Company's offices in Midland, Texas, with the likelihood of substantial business travel.

2. TERM OF EMPLOYMENT. The term of the Employee's employment by the Employer under this Agreement (the "Employment Term") will commence on the Effective Date and will continue until employment is terminated by either party under Section
5. The date on which the Employee's employment ends is referred to in this Agreement as the "Termination Date."

3. COMPENSATION.

3.1 Base Salary. During the Employment Term, the Employee will be entitled to receive a base salary ("Base Salary") at an annual rate of not less than $200,000 for services rendered to the Employer, any of its affiliates and any of its or their direct or indirect subsidiaries, payable in accordance with the Employer's regular payroll practices. The Employee's Base Salary will be reviewed annually by the Board and may be adjusted upward in the Board's sole discretion.

3.2 Annual Bonus Compensation. During the Employment Term, the Employee will be entitled to receive incentive compensation in such amounts and at such times as the Board may determine in its sole discretion to award to him under any incentive compensation or other bonus plan or arrangement as may be established by the Board from time to time (collectively, the "Employee Bonus Plan"). Any additional incentive compensation payable under any Employee Bonus Plan will be referred to in the aggregate in this Agreement as the Employee's "Bonus."

3.3 Long-Term Incentive Compensation. Awards of Unit options, Unit grants, restricted Units and/or other forms of equity-based compensation to the Employee on or after the Effective Date may be made from time to time during the Employment Term by the Board in its sole discretion, whose decision will be based upon performance and award guidelines for executive officers of the Company and Legacy established periodically by the Board in its sole discretion.

4. EXPENSES AND OTHER BENEFITS.

4.1 Reimbursement of Expenses. The Employee will be entitled to receive prompt reimbursement for all reasonable expenses, including professional fees, incurred by him during the Employment Term (in accordance with the policies and practices presently followed by the Company or as may be established by the Board from time to time for the Company's senior executive officers) in performing services under this Agreement, provided that the Employee properly accounts for such expenses in accordance with the Company's and Legacy's policies as in effect from time to time.

4.2 Vacation. Employee will be entitled to paid vacation time each year during the Employment Term that will accrue in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company.

4.3 Other Employee Benefits. In addition to the foregoing, during the Employment Term, the Employee will be entitled to participate in and to receive benefits as a senior executive under all of the Company's and Legacy's employee benefit plans, programs and arrangements available to senior executives, subject to the eligibility criteria and other terms and conditions thereof, as such plans, programs and arrangements may be duly amended, terminated, approved or adopted by the Board from time to time.

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5. TERMINATION OF EMPLOYMENT.

5.1 Death. The Employee's employment under this Agreement will terminate upon his death.

5.2 Termination by the Employer.

(a) Terminable at Will. The Employer may terminate the Employee's employment under this Agreement at any time with or without Cause (as defined below).

(b) Definition of Cause. For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment under this Agreement by reason of any of the following: (i) the Employee's conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of Legacy or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (ii) the Employee's repeated intoxication by alcohol or drugs during the performance of his duties; (iii) malfeasance in the conduct of Employee's duties, including, but not limited to, (A) willful and intentional misuse or diversion of any of the Related Parties' funds, (B) embezzlement or (C) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to any of the Related Parties; (iv) the Employee's material failure to perform the duties of the Employee's employment consistent with Employee's position, expressly including the provisions of this Agreement, or material failure to follow or comply with the reasonable and lawful written directives of the Board; (v) a material breach of this Agreement; or (vi) a material breach by the Employee of written policies of the Related Parties concerning employee discrimination or harassment.

(c) Notice and Cure Opportunity in Certain Circumstances. The Employee may be afforded a reasonable opportunity to cure any act or omission that would otherwise constitute "Cause" hereunder according to the following terms: The Board will cause the Employer to give the Employee written notice stating with reasonable specificity the nature of the circumstances determined by the Board in good faith to constitute "Cause." If, in the good faith judgment of the Board, the alleged breach is reasonably susceptible to cure, the Employee will have fifteen (15) days from his receipt of such notice to effect the cure of such circumstances or such breach to the good faith satisfaction of the Board. The Board will state whether the Employee will have such an opportunity to cure in the initial notice of "Cause" referred to above. If, in the good faith judgment of the Board the alleged breach is not reasonably susceptible to cure, or such circumstances or breach have not been satisfactorily cured within such fifteen (15) day cure period, such breach will thereupon constitute "Cause" hereunder.

5.3 Termination by the Employee.

(a) Terminable at Will. The Employee may terminate his employment under this Agreement at any time with or without Good Reason (as defined below).

(b) Notice and Cure Opportunity. If such termination is with Good Reason, the Employee will give the Employer written notice, which will identify with reasonable specificity the grounds for the Employee's resignation and provide the Employer with fifteen (15) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. A termination will not be for Good Reason if such

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notice is given by the Employee to the Employer more than thirty (30) days after the occurrence of the event that the Employee alleges is Good Reason for his termination hereunder.

(c) Definition of Good Reason. For purposes of this Agreement, "Good Reason" will mean any of the following to which the Employee has not consented in writing: (a) a reduction in the Employee's Base Salary; (b) a relocation of the Employee's primary place of employment to a location more than 20 miles from Midland, Texas; or (c) any material reduction in the Employee's title, authority or responsibilities as Chief Executive Officer of the Company.

5.4 Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee during the Employment Term (other than termination pursuant to Section 5.1) will be communicated by written Notice of Termination to the other party hereto in accordance with Section 8.7. For purposes of this Agreement, a "Notice of Termination" means a written notice that (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date (as defined herein) is other than the date of receipt of such notice, specifies the Termination Date (which Termination Date will be not more than thirty (30) days after the giving of such notice).

5.5 Disability. If the Employer determines in good faith that the Disability (as defined herein) of the Employee has occurred during the Employment Term, it may, without breaching this Agreement, give to the Employee written notice in accordance with Section 5.4 of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer will terminate effective on the fifteenth (15th) day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the fifteen (15) days after such receipt, the Employee will not have returned to full-time performance of the Employee's duties. "Disability" means the determination by a physician selected by the Employer that the Employee has been unable to perform substantially the Employee's usual and customary duties under this Agreement for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. At any time and from time to time, upon reasonable request therefor by the Employer, the Employee will submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability.

6. COMPENSATION OF THE EMPLOYEE UPON TERMINATION.

6.1 Death. If the Employee's employment under this Agreement is terminated by reason of his death, the Employer will pay to the person or persons designated by the Employee for that purpose in a notice filed with the Employer, or, if no such person will have been so designated, to his estate, the amount of
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) a pro rata portion of any Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, determined by multiplying the Employee's target Bonus for such period by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such

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termination occurs through and including the Termination Date and the denominator of which is 365 ("Pro Rata Bonus"), and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law. Without limiting the generality of the foregoing, any rights the Employee's beneficiary(ies) may have to the proceeds of any life insurance arrangement set forth in Section 4.3 will be in lieu of any special entitlement to severance pay or benefits upon the Employee's death.

6.2 Disability. In the event of the Employee's termination by reason of Disability pursuant to Section 5.5, the Employee will continue to receive his Base Salary and participate in applicable employee benefit plans or programs of the Related Parties (on an equivalent basis to Section 6.4(a)(iv) below) through the Termination Date, subject to offset dollar-for-dollar by the amount of any disability income payments provided to the Employee under any disability policy or program funded by any of the Related Parties, and will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) the Employee's Pro-Rata Bonus, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.3 By the Employer for Cause or the Employee Without Good Reason. If the Employee's employment is terminated by the Employer for Cause, or if the Employee terminates his employment other than for Good Reason, the Employee will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.4 By the Employee for Good Reason or the Company other than for Cause.

(a) Severance Benefits on Non-Change of Control Termination. Subject to the provisions of Section 6.4(b) and Section 6.4(d), if prior to or more than one (1) year after the occurrence of a Change of Control (as defined below) the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then the Employee will be entitled to the following benefits (the "Severance Benefits"):

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(i) an amount equal to (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty
(30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date;

(ii) twenty-four (24) monthly payments each in an amount equal to one-twelfth (1/12) of the Employee's annual Base Salary at the highest rate in effect at any time during the thirty-six (36)-month period prior to the Termination Date plus the average annual Bonus of the two
(2) years preceding the Termination Date, commencing with the calendar month immediately following the calendar month in which the Termination Date occurs, it being agreed that for purposes hereof, the Employee's Base Salary during the first twelve (12) months following the Effective Date will be deemed to be $200,000;

(iii) a cash amount equal to the Employee's Pro-Rata Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company; and

(iv) the Employer will pay the full cost of the Employee's COBRA continuation coverage for such period, as such coverage is required to be continued under applicable law; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 6.4(a)(iv) may be discontinued prior to the end of the period provided in this subsection (iv) to the extent, but only to the extent, that the Employee receives substantially similar benefits from a subsequent employer ("COBRA Benefit").

(b) Change of Control Benefits. Subject to the provisions of Section 6.4(d), if within the one (1) year period following the occurrence of a Change of Control, the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then, in lieu of the Severance Benefits under Section 6.4(a), the Employee will be entitled to benefits (the "Change of Control Benefits") identical to those set forth in Section 6.4(a) except that the amount described in clause (ii) will be equal to thirty-six (36) monthly payments and will be paid in a lump sum within thirty (30) days following the Termination Date.

(c) Definition of Change of Control. For purposes of this Agreement, a "Change of Control" will mean the first to occur of:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding equity interests of Legacy (the "Outstanding Legacy Equity") or (B) the combined voting power of the then-outstanding voting securities of Legacy entitled to vote generally in the election of directors (the "Outstanding Legacy Voting Securities"); provided, however, that, for purposes of this Section 6.4(c)(i), the following acquisitions will not constitute a Change of

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Control: (A) any acquisition directly from Legacy, (B) any acquisition by Legacy, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Legacy or any affiliated company, (D) any acquisition by any corporation or other entity pursuant to a transaction that complies with Section 6.4(c)(iii)(A),
Section 6.4(c)(iii)(B) or Section 6.4(c)(iii)(C) or (E) any acquisition of shares from Legacy arising out of or in connection with an IPO or private placement of Legacy's securities;

(ii) Any time at which individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that (A) any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Legacy's Unitholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board and (B) any individual becoming a director subsequent to the date hereof whose election resulted from Legacy's failure to file a registration statement within 240 days of the Effective Date will be considered as though such individual were a member of the Incumbent Board;

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Legacy or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Legacy, or the acquisition of assets or equity interests of another entity by Legacy or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding equity interests and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation or other entity that, as a result of such transaction, owns Legacy or all or substantially all of Legacy's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Legacy or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding equity interests of the corporation or other entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation or other entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation or equivalent body of any other entity resulting from such Business Combination

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were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) Consummation of a complete liquidation or dissolution of Legacy.

(d) Conditions to Receipt of Severance Benefits.

(i) Release. As a condition to receiving any Severance Benefits or Change of Control Benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b), the Employee will execute a release (the "Release"), which will include an affirmation of the restrictive covenants set forth in Section 7 and a non-disparagement provision, in form and substance satisfactory to the Employer, of any claims, whether arising under federal, state or local statute, common law or otherwise, against the Employer and the Related Parties which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Employer and the Related Parties pursuant to any provisions of the Related Parties' organizational documents or any directors and officers liability insurance policies maintained by any of the Related Parties. If the Employee fails or otherwise refuses to execute a Release within a reasonable time after the Employer's request to do so, and in all events prior to the date on which such benefits are to be first paid to him, the Employee will not be entitled to any Severance Benefits or Change of Control Benefits, as the case may be, or any other benefits provided under this Agreement and the Employer will have no further obligations with respect to the provision of those benefits except as may be required by law.

(ii) Limitation on Benefits. If, following a termination of employment that gives the Employee a right to the payment of Severance Benefits under Section 6.4(a) or Section 6.4(b), the Employee violates in any material respect any of the covenants in Section 7 or as otherwise set forth in the Release, the Employee will have no further right or claim to any payments or other benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b) from and after the date on which the Employee engages in such activities and the Employer will have no further obligations with respect to such payments or benefits, and the covenants in Section 7 will nevertheless continue in full force and effect.

6.5 Severance Benefits Not Includable for Employee Benefits Purposes. Except to the extent the terms of any applicable benefit plan, policy or program provide otherwise, any benefit programs of any of the Related Parties that takes into account the Employee's income will exclude any and all Severance Benefits and Change of Control Benefits provided under this Agreement.

6.6 Exclusive Severance Benefits. The Severance Benefits payable under
Section 6.4(a) or the Change of Control Benefits payable under Section 6.4(b), if they become applicable under the terms of this Agreement, will be in lieu of any other severance or similar benefits that would otherwise be payable under any other agreement, plan, program or policy of the Employer.

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6.7 Additional Payments by the Employer. Notwithstanding anything in this Agreement to the contrary, in the event that any benefits payable or otherwise provided under this Agreement would be

(a) subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (such excise tax referred to in this Agreement as the "Excise Tax"), then the Board may, in its sole discretion, provide for the payment of, or otherwise reimburse the Employee for, an amount up to such Excise Tax and any related taxes, fees or penalties thereon as the Board may consider to be customary and appropriate for a comparable public company; or

(b) deemed to constitute non-qualified deferred compensation subject to Section 409A of the Code, the Employer will have the discretion to adjust the terms of such payment or benefit as it deems necessary to comply with the requirements of Section 409A to avoid the imposition of any excise tax or other penalty with respect to such payment or benefit under Section 409A of the Code.

7. RESTRICTIVE COVENANTS.

7.1 Confidential Information. The Employee hereby acknowledges that in connection with his employment by the Employer he has been provided and may in the future be provided Confidential Information (as defined below) (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by the Employee or otherwise has been or is made available to him) regarding the business and operations of the Related Parties. The Employee further acknowledges that such Confidential Information is unique, valuable, considered trade secrets and deemed proprietary by the Related Parties. For purposes of this Agreement, "Confidential Information" includes, without limitation, any information heretofore or hereafter acquired, developed or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Related Parties, whether oral or in written form. The Employee agrees that all Confidential Information is and will remain the property of one or more of the Related Parties. The Employee further agrees, except for disclosures occurring in the good faith performance of his duties for the Related Parties, during the Employment Term and for a period of two (2) years after the Termination Date, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than the Related Parties and authorized executives of the same, to use or otherwise gain access to any Confidential Information. The Employee will have no obligation under this Agreement with respect to any information that becomes generally available to the public other than as a result of a disclosure by the Employee or his agent or other representative or becomes available to the Employee on a non-confidential basis from a source other than the Related Parties. Further, the Employee will have no obligation under this Agreement to keep confidential any of the Confidential Information to the extent that a disclosure of it is required by law or is consented to by the Employer, the Company or Legacy; provided, however, that if and when such a disclosure is required by law, the Employee promptly will provide the Employer with notice of such requirement, so that an appropriate protective order may be sought.

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7.2 Return of Property. Employee agrees to deliver promptly to the Employer, upon termination of his employment hereunder, or at any other time when the Employer so requests, all documents relating to the business of the Related Parties, including without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any documents relating to the business of the Related Parties and all copies thereof and therefrom; provided, however, that the Employee will be permitted to retain copies of any documents or materials of a personal nature or otherwise related to the Employee's rights under this Agreement.

7.3 Non-Compete Obligations.

(a) Non-Compete Obligations During Employment Term. The Employee agrees that during the Employment Term:

(i) the Employee will not, other than through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, unless set forth on the approved activities list on Exhibit A; and

(ii) all investments made by the Employee (whether in his own name or in the name of any family members or other nominees or made by the Employee's controlled affiliates), which relate to the leasing, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products will be made solely through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A; and the Employee will not (directly or indirectly through any family members or other persons), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities, or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity, in either case, except through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A.

(b) Non-Compete Obligations After Termination Date. The Employee agrees that the Employee will not engage or participate in any manner, whether directly or indirectly through any family member or other person or as an employee, employer, consultant, agent principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, unless

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approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A:

(i) during the 90 day period following the Termination Date, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products within (A) any county or parish in which the Related Parties own any oil and gas interests or conducts operations on the Termination Date or in which the Related Parties have owned any oil and gas interests or conducted operations at any time during the six months immediately preceding the Termination Date or (B) any county or parish adjacent to any county or parish described in clause (A); and

(ii) during the one (1) year period following the Termination Date, in any business or activity which is a publicly traded oil and gas income distribution company or partnership or a privately held company or partnership that is contemplating an initial public offering as an oil and gas income distribution company or partnership that is in direct competition with the business of the Related Parties in the leasing, acquiring, exploring, producing, gathering or marketing of hydrocarbons and related products; provided that, this subsection (ii) will not preclude the Employee from making investments in securities of oil and gas companies which are registered on a national stock exchange, if (A) the aggregate amount owned by the Employee and all family members and affiliates does not exceed 5% of such company's outstanding securities, and (B) the aggregate amount invested in such investments by the Employee and all family members and affiliates after the date hereof does not exceed $5,000,000.

(c) Not Applicable Following Change of Control Termination. The Employee will not be subject to the covenants contained in this Section 7.3 and such covenants will not be enforceable against the Employee from and after the date that the Employee's employment is terminated within one (1) year after a Change of Control.

7.4 Non-Solicitation. During the Employment Term and for a period of twenty-four (24) months after the Termination Date, the Employee will not, whether for his own account or for the account of any other Person (other than the Related Parties), intentionally solicit, endeavor to entice away from the Related Parties, or otherwise interfere with the relationship of the Related Parties with, (a) any person who is employed by the Related Parties (including any independent sales representatives or organizations), or (b) any client or customer of the Related Parties.

7.5 Assignment of Developments. The Employee assigns and agrees to assign without further compensation to the Employer and its successors, assigns or designees, all of the Employee's right, title and interest in and to all Business Opportunities and Intellectual Property (as those terms are defined below), and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Employer.

For purposes of this Agreement, "Business Opportunities" means all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are developed by the Employee during the Employment Term, or originated by any third party

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and brought to the attention of the Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions or other written or charted means).

For purposes of this Agreement, "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of the Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which the Employee discovers, conceives, invents, creates or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation or development (A) occurs in the course of the Employee's employment with the Employer, or (B) occurs with the use of any of the time, materials or facilities of the Related Parties, or
(C) in the good faith judgment of the Board, relates or pertains in any material way to the purposes, activities or affairs of the Related Parties.

7.6 Injunctive Relief. The Employee acknowledges that a breach of any of the covenants contained in this Section 7 may result in material, irreparable injury to the Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat of breach, the Employer will be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Employee from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. To the extent that the Employer seeks a temporary restraining order (but not a preliminary or permanent injunction), the Employee agrees that a temporary restraining order may be obtained ex parte.

7.7 Adjustment of Covenants. The parties consider the covenants and restrictions contained in this Section 7 to be reasonable. However, if and when any such covenant or restriction is found to be void or unenforceable and would have been valid had some part of it been deleted or had its scope of application been modified, such covenant or restriction will be deemed to have been applied with such modification as would be necessary and consistent with the intent of the parties to have made it valid, enforceable and effective.

7.8 Forfeiture Provision.

(a) Detrimental Activities. If the Employee engages in any activity that violates any covenant or restriction contained in this Section 7, in addition to any other remedy the Employer may have at law or in equity, (i) the Employee will be entitled to no further payments or benefits from the Employer under this Agreement or otherwise, except for any payments or benefits required to be made or provided under applicable law, (ii) all unexercised Unit options, restricted Units and other forms of equity compensation held by or credited to the Employee will terminate effective as of the date on which the Employee engages in that activity, unless terminated sooner by operation of another term or condition of this Agreement or other applicable plans and agreements, and (iii) any exercise, payment or delivery pursuant to any equity compensation award that occurred within one year prior to the date on which the Employee engages in that activity may be rescinded within one year after the first date that a majority of the members of the Board first became aware that the Employee engaged in that activity. In the event of any such rescission, the Employee will pay to the

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Employer the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(b) Right of Set-Off. The Employee consents to a deduction from any amounts the Employer owes the Employee from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Employee by the Employer), to the extent of the amounts the Employee owes the Employer under Section 7.8(a) above. Whether or not the Employer elects to make any set-off in whole or in part, if the Employer does not recover by means of set-off the full amount the Employee owes, calculated as set forth above, the Employee agrees to pay immediately the unpaid balance to the Employer. In the discretion of the Board, reasonable interest may be assessed on the amounts owed, calculated from the later of (i) the date the Employee engages in the prohibited activity and (ii) the applicable date of exercise, payment or delivery.

8. MISCELLANEOUS.

8.1 Assignment; Successors; Binding Agreement. This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Employer arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Employer, or succeeding to the business and substantially all of the assets of the Employer or any affiliates for which the Employee performs substantial services. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

8.2 Modification and Waiver. Except as otherwise provided below, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is duly approved by the Board and is agreed to in writing by the Employee and such officer(s) as may be specifically authorized by the Board to effect it. No waiver by any party of any breach by any other party of, or of compliance with, any term or condition of this Agreement to be performed by any other party, at any time, will constitute a waiver of similar or dissimilar terms or conditions at that time or at any prior or subsequent time.

8.3 Entire Agreement. This Agreement embodies the entire understanding of the parties hereof, and, upon the Effective Date, will supersede all other oral or written agreements or understandings between them regarding the subject matter hereof. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Texas other than the conflict of laws provision thereof.

8.5 Consent to Jurisdiction and Service of Process.

(a) Section 7 Disputes. In the event of any dispute, controversy or claim between the Employer and the Employee arising out of or relating to the interpretation, application or enforcement of the provisions of Section 7, the Employer and the

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Employee agree and consent to the personal jurisdiction of the state and local courts of Midland County, Texas and/or the United States District Court for the Western District of Texas for resolution of the dispute, controversy or claim, and that those courts, and only those courts, will have jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with Section 7 of this Agreement. The Employer and the Employee also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Employer at the address of its principal executive offices and to the Employee at his last known address as reflected in the Employer's records.

(b) Disputes Other Than Under Section 7. In the event of any dispute relating to this Agreement, other than a dispute relating solely to Section 7, the parties will use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they will consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If such a dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure. If the parties do not reach such solution through negotiation or mediation within a period of sixty (60) days, then, upon notice by either party to the other, all disputes, claims, questions, or differences will be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its Commercial Arbitration Rules. The arbitrator will be selected by agreement of the parties or, if they do not agree on an arbitrator within thirty (30) days after either party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator will be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Midland, Texas. The determination reached in such arbitration will be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Midland, Texas, and will be conducted in accordance with the Commercial Arbitration Rules of the AAA.

8.6 Withholding of Taxes. The Employer will withhold from any amounts payable under the Agreement all federal, state, local or other taxes as legally will be required to be withheld.

8.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

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to the Employer, to:

Attn: Chairman of the Board
Legacy Reserves Services, Inc. 303 W. Wall, Suite 1600
Midland, Texas 79701

to the Employee, to:

Cary D. Brown
303 W. Wall, Suite 1600
Midland, Texas 79701

Addresses may be changed by written notice sent to the other party at the last recorded address of that party.

8.8 Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

8.10 Headings. The headings used in this Agreement are for convenience only, do not constitute a part of the Agreement, and will not be deemed to limit, characterize, or affect in any way the provisions of the Agreement, and all provisions of the Agreement will be construed as if no headings had been used in the Agreement.

8.11 Construction. As used in this Agreement, unless the context otherwise requires: (a) the terms defined herein will have the meanings set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include," "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (d) "writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof," "herein," "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section or other subdivision hereof or attachment hereto; (f) references to any gender include references to all genders; and (g) references to any agreement or other instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

8.12 Capacity; No Conflicts. The Employee represents and warrants to the Employer that: (i) he has full power, authority and capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) such execution, delivery and performance will not (and with the giving of notice or lapse of time, or both, would not) result in the breach of any agreement or other obligation to which he is a party or is otherwise bound, and (iii) this Agreement is his valid and binding obligation, enforceable in accordance with its terms.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

LEGACY RESERVES SERVICES, INC. 

By: /s/ Steven H. Pruett
    --------------------------------------
    Steven H. Pruett, President,
    Chief Financial Officer and Secretary

EMPLOYEE 

/s/ Cary D. Brown
------------------------------------------
Cary D. Brown

FOR THE LIMITED PURPOSES SET FORTH HEREIN:

LEGACY RESERVES LP

BY: LEGACY RESERVES GP, LLC
ITS GENERAL PARTNER 

By: /s/ Steven H. Pruett
    --------------------------------------
    Steven H. Pruett, President,
    Chief Financial Officer and Secretary

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EXHIBIT A

APPROVED OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE

Royalty Interest and Overriding Royalty Interest in the following:

Montague County, Texas

Interests owned by Desert Partners II and III

Outside Activities other than Oil & Gas Investments:

1. Current owner and board member of Petroleum Strategies, Inc.

2. Current board member of Unlock Ministries, Inc.

3. Loadcraft Industries, Ltd. board member and owner

4. Real estate investment partnerships

a. 300 Burnett Partners, Ltd.

b. 1500 Broadway Partners, Ltd.

c. Moriah Investment Partners

d. Treepoint Partners, Ltd.

e. Heartland Investments, Ltd.

f. Six Flags Office, Ltd.

g. Best-Star Development Partners

h. Cheney Road Partners, L.P.

i. TCTB Partnership, Ltd.

j. Priority Power Management, Ltd.

5. Current board member of Cary Brown Family Foundation, Inc. and Charities Support Foundation, Inc.

Exhibit 10.10

EMPLOYMENT AGREEMENT

The parties to this Employment Agreement (this "Agreement") are LEGACY RESERVES SERVICES, INC., a Texas corporation (the "Employer") and STEVEN H. PRUETT (the "Employee"). The parties desire to provide for the employment of the Employee as President and Chief Financial Officer of LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "Company") on the terms set forth herein effective as of the date of completion of a private placement of equity securities ("Units") of LEGACY RESERVES LP, a Delaware limited partnership ("Legacy"). Legacy is joining in this agreement for the limited purposes of reflecting its agreement to the matters set forth herein as to it, but such joinder is not intended to make Legacy the employer of the Employee for any purpose. The date this Agreement becomes effective is herein referred to as the "Effective Date".

1. POSITION AND DUTIES

1.1 Employment; Titles; Reporting. On the Effective Date, the Employer agrees to employ the Employee and the Employee agrees to enter employment with the Employer, upon the terms and subject to the conditions provided under this Agreement. During the Employment Term (as defined in Section 2), the Employee will serve as President and Chief Financial Officer of the Company. In such capacity, the Employee will report to and otherwise will be subject to the direction and control of the Board of Directors of the Company (including any committee thereof, the "Board") and will have such duties, responsibilities and authorities as may be assigned to him by the Board from time to time and otherwise consistent with such position in a public company, comparable in size to Legacy, which is engaged in natural gas and oil acquisition, development and production (including, but not limited to, maintaining, to the extent applicable, compliance with the Sarbanes-Oxley Act of 2002 and related regulations and all other federal, state and local laws and regulations, as well as all regulations and rules of any exchange or electronic trading system on which Legacy's securities may be traded).

1.2 Duties. During the Employment Term, the Employee will devote substantially all of his full working time to the business and affairs of the Employer, the Company and Legacy, will use his best efforts to promote the Employer's, the Company's and Legacy's interests and will perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Employee may be required by the Board to provide services to, or otherwise serve as an officer or director of, any direct or indirect subsidiary of the Employer, the Company or Legacy (the Employer, the Company, Legacy and all such direct and indirect subsidiaries of the Employer, the Company or Legacy being referred to herein as the "Related Parties"), as applicable. The Employee will comply with the Employer's, the Company's and Legacy's policies, codes and procedures, as they may be in effect from time to time, applicable to executive officers of the Company and Legacy. Nevertheless, the Employee may, with the prior approval of the Board in each instance, engage in such other business and charitable activities that do not violate Section 7, create a conflict of interest with the Employer, the Company or Legacy or materially interfere with the performance of his obligations to the Employer, the Company or Legacy under this Agreement. The activities in which the Employee is engaged as of the Effective Date, all of which have been approved by the Board, are listed on Exhibit A hereto.

1.3 Place of Employment. The Employee will perform his duties under this Agreement at the Company's offices in Midland, Texas, with the likelihood of substantial business travel.

2. TERM OF EMPLOYMENT. The term of the Employee's employment by the Employer under this Agreement (the "Employment Term") will commence on the Effective Date and will continue until employment is terminated by either party under Section
5. The date on which the Employee's employment ends is referred to in this Agreement as the "Termination Date."

3. COMPENSATION.

3.1 Base Salary. During the Employment Term, the Employee will be entitled to receive a base salary ("Base Salary") at an annual rate of not less than $175,000 for services rendered to the Employer, any of its affiliates and any of its or their direct or indirect subsidiaries, payable in accordance with the Employer's regular payroll practices. The Employee's Base Salary will be reviewed annually by the Board and may be adjusted upward in the Board's sole discretion.

3.2 Annual Bonus Compensation. During the Employment Term, the Employee will be entitled to receive incentive compensation in such amounts and at such times as the Board may determine in its sole discretion to award to him under any incentive compensation or other bonus plan or arrangement as may be established by the Board from time to time (collectively, the "Employee Bonus Plan"). Any additional incentive compensation payable under any Employee Bonus Plan will be referred to in the aggregate in this Agreement as the Employee's "Bonus."

3.3 Long-Term Incentive Compensation. Awards of Unit options, Unit grants, restricted Units and/or other forms of equity-based compensation to the Employee on or after the Effective Date may be made from time to time during the Employment Term by the Board in its sole discretion, whose decision will be based upon performance and award guidelines for executive officers of the Company and Legacy established periodically by the Board in its sole discretion.

4. EXPENSES AND OTHER BENEFITS.

4.1 Reimbursement of Expenses. The Employee will be entitled to receive prompt reimbursement for all reasonable expenses, including professional fees and reasonable moving expenses, incurred by him during the Employment Term (in accordance with the policies and practices presently followed by the Company or as may be established by the Board from time to time for the Company's senior executive officers) in performing services under this Agreement, provided that the Employee properly accounts for such expenses in accordance with the Company's and Legacy's policies as in effect from time to time.

4.2 Vacation. Employee will be entitled to paid vacation time each year during the Employment Term that will accrue in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company.

4.3 Other Employee Benefits. In addition to the foregoing, during the Employment Term, the Employee will be entitled to participate in and to receive benefits as a senior executive under all of the Company's and Legacy's employee benefit plans, programs and arrangements available to senior executives, subject to the eligibility criteria and other terms and conditions thereof, as such plans, programs and arrangements may be duly amended, terminated, approved or adopted by the Board from time to time.

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5. TERMINATION OF EMPLOYMENT.

5.1 Death. The Employee's employment under this Agreement will terminate upon his death.

5.2 Termination by the Company.

(a) Terminable at Will. The Employer may terminate the Employee's employment under this Agreement at any time with or without Cause (as defined below).

(b) Definition of Cause. For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment under this Agreement by reason of any of the following: (i) the Employee's conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of Legacy or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (ii) the Employee's repeated intoxication by alcohol or drugs during the performance of his duties; (iii) malfeasance in the conduct of Employee's duties, including, but not limited to, (A) willful and intentional misuse or diversion of any of the Related Parties' funds, (B) embezzlement or (C) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to any of the Related Parties; (iv) the Employee's material failure to perform the duties of the Employee's employment consistent with Employee's position, expressly including the provisions of this Agreement, or material failure to follow or comply with the reasonable and lawful written directives of the Board; (v) a material breach of this Agreement; or (vi) a material breach by the Employee of written policies of the Related Parties concerning employee discrimination or harassment.

(c) Notice and Cure Opportunity in Certain Circumstances. The Employee may be afforded a reasonable opportunity to cure any act or omission that would otherwise constitute "Cause" hereunder according to the following terms: The Board will cause the Employer to give the Employee written notice stating with reasonable specificity the nature of the circumstances determined by the Board in good faith to constitute "Cause." If, in the good faith judgment of the Board, the alleged breach is reasonably susceptible to cure, the Employee will have fifteen (15) days from his receipt of such notice to effect the cure of such circumstances or such breach to the good faith satisfaction of the Board. The Board will state whether the Employee will have such an opportunity to cure in the initial notice of "Cause" referred to above. If, in the good faith judgment of the Board the alleged breach is not reasonably susceptible to cure, or such circumstances or breach have not been satisfactorily cured within such fifteen (15) day cure period, such breach will thereupon constitute "Cause" hereunder.

5.3 Termination by the Employee.

(a) Terminable at Will. The Employee may terminate his employment under this Agreement at any time with or without Good Reason (as defined below).

(b) Notice and Cure Opportunity. If such termination is with Good Reason, the Employee will give the Employer written notice, which will identify with reasonable specificity the grounds for the Employee's resignation and provide the Employer with fifteen (15) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. A termination will not be for Good Reason if such

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notice is given by the Employee to the Employer more than thirty (30) days after the occurrence of the event that the Employee alleges is Good Reason for his termination hereunder.

(c) Definition of Good Reason. For purposes of this Agreement, "Good Reason" will mean any of the following to which the Employee has not consented in writing: (a) a reduction in the Employee's Base Salary; (b) a relocation of the Employee's primary place of employment to a location more than 20 miles from Midland, Texas; or (c) any material reduction in the Employee's title, authority or responsibilities as President and Chief Financial Officer of the Company.

5.4 Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee during the Employment Term (other than termination pursuant to Section 5.1) will be communicated by written Notice of Termination to the other party hereto in accordance with Section 8.7. For purposes of this Agreement, a "Notice of Termination" means a written notice that (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date (as defined herein) is other than the date of receipt of such notice, specifies the Termination Date (which Termination Date will be not more than thirty (30) days after the giving of such notice).

5.5 Disability. If the Employer determines in good faith that the Disability (as defined herein) of the Employee has occurred during the Employment Term, it may, without breaching this Agreement, give to the Employee written notice in accordance with Section 5.4 of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer will terminate effective on the fifteenth (15th) day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the fifteen (15) days after such receipt, the Employee will not have returned to full-time performance of the Employee's duties. "Disability" means the determination by a physician selected by the Employer that the Employee has been unable to perform substantially the Employee's usual and customary duties under this Agreement for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. At any time and from time to time, upon reasonable request therefor by the Employer, the Employee will submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability.

6. COMPENSATION OF THE EMPLOYEE UPON TERMINATION.

6.1 Death. If the Employee's employment under this Agreement is terminated by reason of his death, the Employer will pay to the person or persons designated by the Employee for that purpose in a notice filed with the Employer, or, if no such person will have been so designated, to his estate, the amount of
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) a pro rata portion of any Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, determined by multiplying the Employee's target Bonus for such period by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such

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termination occurs through and including the Termination Date and the denominator of which is 365 ("Pro Rata Bonus"), and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law. Without limiting the generality of the foregoing, any rights the Employee's beneficiary(ies) may have to the proceeds of any life insurance arrangement set forth in Section 4.3 will be in lieu of any special entitlement to severance pay or benefits upon the Employee's death.

6.2 Disability. In the event of the Employee's termination by reason of Disability pursuant to Section 5.5, the Employee will continue to receive his Base Salary and participate in applicable employee benefit plans or programs of the Related Parties (on an equivalent basis to Section 6.4(a)(iv) below) through the Termination Date, subject to offset dollar-for-dollar by the amount of any disability income payments provided to the Employee under any disability policy or program funded by any of the Related Parties, and will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) the Employee's Pro-Rata Bonus, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.3 By the Company for Cause or the Employee Without Good Reason. If the Employee's employment is terminated by the Company for Cause, or if the Employee terminates his employment other than for Good Reason, the Employee will receive
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.4 By the Employee for Good Reason or the Employer other than for Cause.

(a) Severance Benefits on Non-Change of Control Termination. Subject to the provisions of Section 6.4(b) and Section 6.4(d), if prior to or more than one (1) year after the occurrence of a Change of Control (as defined below) the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then the Employee will be entitled to the following benefits (the "Severance Benefits"):

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(i) an amount equal to (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty
(30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date;

(ii) twenty-four (24) monthly payments each in an amount equal to one-twelfth (1/12) of the Employee's annual Base Salary at the highest rate in effect at any time during the thirty-six (36)-month period prior to the Termination Date plus the average annual Bonus of the two
(2) years preceding the Termination Date, commencing with the calendar month immediately following the calendar month in which the Termination Date occurs, it being agreed that for purposes hereof, the Employee's Base Salary during the first twelve (12) months following the Effective Date will be deemed to be $175,000;

(iii) a cash amount equal to the Employee's Pro-Rata Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company; and

(iv) the Employer will pay the full cost of the Employee's COBRA continuation coverage for such period, as such coverage is required to be continued under applicable law; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 6.4(a)(iv) may be discontinued prior to the end of the period provided in this subsection (iv) to the extent, but only to the extent, that the Employee receives substantially similar benefits from a subsequent employer ("COBRA Benefit").

(b) Change of Control Benefits. Subject to the provisions of Section 6.4(d), if within the one (1) year period following the occurrence of a Change of Control, the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then, in lieu of the Severance Benefits under Section 6.4(a), the Employee will be entitled to benefits (the "Change of Control Benefits") identical to those set forth in Section 6.4(a) except that the amount described in clause (ii) will be equal to thirty-six (36) monthly payments and will be paid in a lump sum within thirty (30) days following the Termination Date.

(c) Definition of Change of Control. For purposes of this Agreement, a "Change of Control" will mean the first to occur of:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding equity interests of Legacy (the "Outstanding Legacy Equity") or (B) the combined voting power of the then-outstanding voting securities of Legacy entitled to vote generally in the election of directors (the "Outstanding Legacy Voting Securities"); provided, however, that, for purposes of this Section 6.4(c)(i), the following acquisitions will not constitute a Change of

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Control: (A) any acquisition directly from Legacy, (B) any acquisition by Legacy, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Legacy or any affiliated company, (D) any acquisition by any corporation or other entity pursuant to a transaction that complies with Section 6.4(c)(iii)(A),
Section 6.4(c)(iii)(B) or Section 6.4(c)(iii)(C) or (E) any acquisition of shares from Legacy arising out of or in connection with an IPO or private placement of Legacy's securities;

(ii) Any time at which individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that (A) any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Legacy's Unitholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, and (B) any individual becoming a director subsequent to the date hereof whose election resulted from Legacy's failure to file a registration statement within 240 days of the Effective Date will be considered as though such individual were a member of the Incumbent Board;

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Legacy or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Legacy, or the acquisition of assets or equity interests of another entity by Legacy or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding equity interests and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation or other entity that, as a result of such transaction, owns Legacy or all or substantially all of Legacy's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Legacy or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding equity interests of the corporation or other entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation or other entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation or equivalent body of any other entity resulting from such Business Combination

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were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) Consummation of a complete liquidation or dissolution of Legacy.

(d) Conditions to Receipt of Severance Benefits.

(i) Release. As a condition to receiving any Severance Benefits or Change of Control Benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b), the Employee will execute a release (the "Release"), which will include an affirmation of the restrictive covenants set forth in Section 7 and a non-disparagement provision, in form and substance satisfactory to the Employer, of any claims, whether arising under federal, state or local statute, common law or otherwise, against the Employer and the Related Parties which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Employer and the Related Parties pursuant to any provisions of the Related Parties' organizational documents or any directors and officers liability insurance policies maintained by any of the Related Parties. If the Employee fails or otherwise refuses to execute a Release within a reasonable time after the Employer's request to do so, and in all events prior to the date on which such benefits are to be first paid to him, the Employee will not be entitled to any Severance Benefits or Change of Control Benefits, as the case may be, or any other benefits provided under this Agreement and the Employer will have no further obligations with respect to the provision of those benefits except as may be required by law.

(ii) Limitation on Benefits. If, following a termination of employment that gives the Employee a right to the payment of Severance Benefits under Section 6.4(a) or Section 6.4(b), the Employee violates in any material respect any of the covenants in Section 7 or as otherwise set forth in the Release, the Employee will have no further right or claim to any payments or other benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b) from and after the date on which the Employee engages in such activities and the Employer will have no further obligations with respect to such payments or benefits, and the covenants in Section 7 will nevertheless continue in full force and effect.

6.5 Severance Benefits Not Includable for Employee Benefits Purposes. Except to the extent the terms of any applicable benefit plan, policy or program provide otherwise, any benefit programs of any of the Related Parties that takes into account the Employee's income will exclude any and all Severance Benefits and Change of Control Benefits provided under this Agreement.

6.6 Exclusive Severance Benefits. The Severance Benefits payable under
Section 6.4(a) or the Change of Control Benefits payable under Section 6.4(b), if they become applicable under the terms of this Agreement, will be in lieu of any other severance or similar benefits that would otherwise be payable under any other agreement, plan, program or policy of the Employer.

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6.7 Additional Payments by the Employer. Notwithstanding anything in this Agreement to the contrary, in the event that any benefits payable or otherwise provided under this Agreement would be

(a) subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (such excise tax referred to in this Agreement as the "Excise Tax"), then the Board may, in its sole discretion, provide for the payment of, or otherwise reimburse the Employee for, an amount up to such Excise Tax and any related taxes, fees or penalties thereon as the Board may consider to be customary and appropriate for a comparable public company; or

(b) deemed to constitute non-qualified deferred compensation subject to Section 409A of the Code, the Employer will have the discretion to adjust the terms of such payment or benefit as it deems necessary to comply with the requirements of Section 409A to avoid the imposition of any excise tax or other penalty with respect to such payment or benefit under Section 409A of the Code.

7. RESTRICTIVE COVENANTS.

7.1 Confidential Information. The Employee hereby acknowledges that in connection with his employment by the Employer he has been provided and may in the future be provided Confidential Information (as defined below) (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by the Employee or otherwise has been or is made available to him) regarding the business and operations of the Related Parties. The Employee further acknowledges that such Confidential Information is unique, valuable, considered trade secrets and deemed proprietary by the Related Parties. For purposes of this Agreement, "Confidential Information" includes, without limitation, any information heretofore or hereafter acquired, developed or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Related Parties, whether oral or in written form. The Employee agrees that all Confidential Information is and will remain the property of one or more of the Related Parties. The Employee further agrees, except for disclosures occurring in the good faith performance of his duties for the Related Parties, during the Employment Term and for a period of two (2) years after the Termination Date, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than the Related Parties and authorized executives of the same, to use or otherwise gain access to any Confidential Information. The Employee will have no obligation under this Agreement with respect to any information that becomes generally available to the public other than as a result of a disclosure by the Employee or his agent or other representative or becomes available to the Employee on a non-confidential basis from a source other than the Related Parties. Further, the Employee will have no obligation under this Agreement to keep confidential any of the Confidential Information to the extent that a disclosure of it is required by law or is consented to by the Employer, the Company or Legacy; provided, however, that if and when such a disclosure is required by law, the Employee promptly will provide the Employer with notice of such requirement, so that an appropriate protective order may be sought.

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7.2 Return of Property. Employee agrees to deliver promptly to the Employer, upon termination of his employment hereunder, or at any other time when the Employer so requests, all documents relating to the business of the Related Parties, including without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any documents relating to the business of the Related Parties and all copies thereof and therefrom; provided, however, that the Employee will be permitted to retain copies of any documents or materials of a personal nature or otherwise related to the Employee's rights under this Agreement.

7.3 Non-Compete Obligations.

(a) Non-Compete Obligations During Employment Term. The Employee agrees that during the Employment Term:

(i) the Employee will not, other than through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, unless set forth on the approved activities list on Exhibit A; and

(ii) all investments made by the Employee (whether in his own name or in the name of any family members or other nominees or made by the Employee's controlled affiliates), which relate to the leasing, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products will be made solely through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A; and the Employee will not (directly or indirectly through any family members or other persons), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related parties in any Business Opportunities, or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity, in either case, except through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A.

(b) Non-Compete Obligations After Termination Date. The Employee agrees that the Employee will not engage or participate in any manner, whether directly or indirectly through any family member or other person or as an employee, employer, consultant, agent principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, unless

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approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A:

(i) during the 90 day period following the Termination Date, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products within (A) any county or parish in which the Related Parties own any oil and gas interests or conducts operations on the Termination Date or in which the Related Parties have owned any oil and gas interests or conducted operations at any time during the six months immediately preceding the Termination Date or (B) any county or parish adjacent to any county or parish described in clause (A); and

(ii) during the one (1) year period following the Termination Date, in any business or activity which is a publicly traded oil and gas income distribution company or partnership or a privately held company or partnership that is contemplating an initial public offering as an oil and gas income distribution company or partnership that is in direct competition with the business of the Related Parties in the leasing, acquiring, exploring, producing, gathering or marketing of hydrocarbons and related products; provided that, this subsection (ii) will not preclude the Employee from making investments in securities of oil and gas companies which are registered on a national stock exchange, if (A) the aggregate amount owned by the Employee and all family members and affiliates does not exceed 5% of such company's outstanding securities, and (B) the aggregate amount invested in such investments by the Employee and all family members and affiliates after the date hereof does not exceed $500,000.

(c) Not Applicable Following Change of Control Termination. The Employee will not be subject to the covenants contained in this Section 7.3 and such covenants will not be enforceable against the Employee from and after the date that the Employee's employment is terminated within one (1) year after a Change of Control.

7.4 Non-Solicitation. During the Employment Term and for a period of twenty-four (24) months after the Termination Date, the Employee will not, whether for his own account or for the account of any other Person (other than the Related Parties), intentionally solicit, endeavor to entice away from the Related Parties, or otherwise interfere with the relationship of the Related Parties with, (a) any person who is employed by the Related Parties (including any independent sales representatives or organizations), or (b) any client or customer of the Related Parties.

7.5 Assignment of Developments. The Employee assigns and agrees to assign without further compensation to the Employer, and its successors, assigns or designees, all of the Employee's right, title and interest in and to all Business Opportunities and Intellectual Property (as those terms are defined below), and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Employer.

For purposes of this Agreement, "Business Opportunities" means all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are developed by the Employee during the Employment Term, or originated by any third party

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and brought to the attention of the Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions or other written or charted means).

For purposes of this Agreement, "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of the Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which the Employee discovers, conceives, invents, creates or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation or development (A) occurs in the course of the Employee's employment with the Employer, or (B) occurs with the use of any of the time, materials or facilities of the Related Parties, or
(C) in the good faith judgment of the Board, relates or pertains in any material way to the purposes, activities or affairs of the Related Parties.

7.6 Injunctive Relief. The Employee acknowledges that a breach of any of the covenants contained in this Section 7 may result in material, irreparable injury to the Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat of breach, the Employer will be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Employee from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. To the extent that the Employer seeks a temporary restraining order (but not a preliminary or permanent injunction), the Employee agrees that a temporary restraining order may be obtained ex parte.

7.7 Adjustment of Covenants. The parties consider the covenants and restrictions contained in this Section 7 to be reasonable. However, if and when any such covenant or restriction is found to be void or unenforceable and would have been valid had some part of it been deleted or had its scope of application been modified, such covenant or restriction will be deemed to have been applied with such modification as would be necessary and consistent with the intent of the parties to have made it valid, enforceable and effective.

7.8 Forfeiture Provision.

(a) Detrimental Activities. If the Employee engages in any activity that violates any covenant or restriction contained in this Section 7, in addition to any other remedy the Employer may have at law or in equity, (i) the Employee will be entitled to no further payments or benefits from the Employer under this Agreement or otherwise, except for any payments or benefits required to be made or provided under applicable law, (ii) all unexercised Unit options, restricted Units and other forms of equity compensation held by or credited to the Employee will terminate effective as of the date on which the Employee engages in that activity, unless terminated sooner by operation of another term or condition of this Agreement or other applicable plans and agreements, and (iii) any exercise, payment or delivery pursuant to any equity compensation award that occurred within one year prior to the date on which the Employee engages in that activity may be rescinded within one year after the first date that a majority of the members of the Board first became aware that the Employee engaged in that activity. In the event of any such rescission, the Employee will pay to the

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Employer the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(b) Right of Set-Off. The Employee consents to a deduction from any amounts the Employer owes the Employee from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Employee by the Employer), to the extent of the amounts the Employee owes the Employer under Section 7.8(a) above. Whether or not the Employer elects to make any set-off in whole or in part, if the Employer does not recover by means of set-off the full amount the Employee owes, calculated as set forth above, the Employee agrees to pay immediately the unpaid balance to the Employer. In the discretion of the Board, reasonable interest may be assessed on the amounts owed, calculated from the later of (i) the date the Employee engages in the prohibited activity and (ii) the applicable date of exercise, payment or delivery.

8. MISCELLANEOUS.

8.1 Assignment; Successors; Binding Agreement. This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Employer arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Employer, or succeeding to the business and substantially all of the assets of the Employer or any affiliates for which the Employee performs substantial services. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

8.2 Modification and Waiver. Except as otherwise provided below, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is duly approved by the Board and is agreed to in writing by the Employee and such officer(s) as may be specifically authorized by the Board to effect it. No waiver by any party of any breach by any other party of, or of compliance with, any term or condition of this Agreement to be performed by any other party, at any time, will constitute a waiver of similar or dissimilar terms or conditions at that time or at any prior or subsequent time.

8.3 Entire Agreement. This Agreement embodies the entire understanding of the parties hereof, and, upon the Effective Date, will supersede all other oral or written agreements or understandings between them regarding the subject matter hereof. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Texas other than the conflict of laws provision thereof.

8.5 Consent to Jurisdiction and Service of Process.

(a) Section 7 Disputes. In the event of any dispute, controversy or claim between the Employer and the Employee arising out of or relating to the interpretation, application or enforcement of the provisions of Section 7, the Employer and the

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Employee agree and consent to the personal jurisdiction of the state and local courts of Midland County, Texas and/or the United States District Court for the Western District of Texas for resolution of the dispute, controversy or claim, and that those courts, and only those courts, will have jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with Section 7 of this Agreement. The Employer and the Employee also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Employer at the address of its principal executive offices and to the Employee at his last known address as reflected in the Employer's records.

(b) Disputes Other Than Under Section 7. In the event of any dispute relating to this Agreement, other than a dispute relating solely to Section 7, the parties will use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they will consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If such a dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure. If the parties do not reach such solution through negotiation or mediation within a period of sixty (60) days, then, upon notice by either party to the other, all disputes, claims, questions, or differences will be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its Commercial Arbitration Rules. The arbitrator will be selected by agreement of the parties or, if they do not agree on an arbitrator within thirty (30) days after either party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator will be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Midland, Texas. The determination reached in such arbitration will be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Midland, Texas, and will be conducted in accordance with the Commercial Arbitration Rules of the AAA.

8.6 Withholding of Taxes. The Employer will withhold from any amounts payable under the Agreement all federal, state, local or other taxes legally required to be withheld.

8.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

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to the Employer, to:

Attn: Chairman of the Board
Legacy Reserves Services, Inc. 303 W. Wall, Suite 1600
Midland, Texas 79701

to the Employee, to:

Steven H. Pruett
2727 Carolina Way
Houston, TX 77005

Addresses may be changed by written notice sent to the other party at the last recorded address of that party.

8.8 Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

8.10 Headings. The headings used in this Agreement are for convenience only, do not constitute a part of the Agreement, and will not be deemed to limit, characterize, or affect in any way the provisions of the Agreement, and all provisions of the Agreement will be construed as if no headings had been used in the Agreement.

8.11 Construction. As used in this Agreement, unless the context otherwise requires: (a) the terms defined herein will have the meanings set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include," "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (d) "writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof," "herein," "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section or other subdivision hereof or attachment hereto; (f) references to any gender include references to all genders; and (g) references to any agreement or other instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

8.12 Capacity; No Conflicts. The Employee represents and warrants to the Employer that: (i) he has full power, authority and capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) such execution, delivery and performance will not (and with the giving of notice or lapse of time, or both, would not) result in the breach of any agreement or other obligation to which he is a party or is otherwise bound, and (iii) this Agreement is his valid and binding obligation, enforceable in accordance with its terms.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

LEGACY RESERVES SERVICES, INC. 

By: /s/ Cary D. Brown
    ------------------------------------
    Cary D. Brown, Chief Executive
    Officer

EMPLOYEE 

/s/ Steven H. Pruett
----------------------------------------
Steven H. Pruett

FOR THE LIMITED PURPOSES SET FORTH HEREIN:

LEGACY RESERVES LP

By: LEGACY RESERVES GP, LLC
its general partner 

By: /s/ Cary D. Brown
    ------------------------------------
    Cary D. Brown, Chief Executive
    Officer

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EXHIBIT A

APPROVED OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE

President of PSI Management LLC as its sole member, which owns an undivided 1.0% working interest in 2500 gross acres in Midland County, TX operated by Discovery Operating, Inc., of Midland, Texas with interests in four producing wells and two wells in the process of being completed with a continuous drilling program.

Mineral and overriding royalty interests in FGA Family Trust in the Permian Basin and mid-continent owned by Deborah Alstrin Pruett (co-trustee of FGA), wife of Steven H. Pruett.

Investment in Quantum Energy Partners III, LP; and a 0.5% ownership interest in Quantum Energy Management III, LP, its general partner. Both investments are held by SHP Capital LP, whose partners are Steven H. Pruett and Deborah A. Pruett, who also are the sole members of its general partner, SHP Capital Management LLC.

Exhibit 10.11

EMPLOYMENT AGREEMENT

The parties to this Employment Agreement (this "Agreement") are LEGACY RESERVES SERVICES, INC., a Texas corporation (the "Employer") and KYLE A. MCGRAW (the "Employee"). The parties desire to provide for the employment of the Employee as Executive Vice President of Business Development and Land of LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "Company") on the terms set forth herein effective as of the date of completion of a private placement of equity securities ("Units") of LEGACY RESERVES LP, a Delaware limited partnership ("Legacy"). Legacy is joining in this agreement for the limited purposes of reflecting its agreement to the matters set forth herein as to it, but such joinder is not intended to make Legacy the employer of the Employee for any purpose. The date this Agreement becomes effective is herein referred to as the "Effective Date".

1. POSITION AND DUTIES

1.1 Employment; Titles; Reporting. On the Effective Date, the Employer agrees to employ the Employee and the Employee agrees to enter employment with the Employer, upon the terms and subject to the conditions provided under this Agreement. During the Employment Term (as defined in Section 2), the Employee will serve as Executive Vice President of Business Development and Land of the Company. In such capacity, the Employee will report to and otherwise will be subject to the direction and control of the Board of Directors of the Company (including any committee thereof, the "Board") and will have such duties, responsibilities and authorities as may be assigned to him by the Board from time to time and otherwise consistent with such position in a public company, comparable in size to Legacy, which is engaged in natural gas and oil acquisition, development and production (including, but not limited to, maintaining, to the extent applicable, compliance with the Sarbanes-Oxley Act of 2002 and related regulations and all other federal, state and local laws and regulations, as well as all regulations and rules of any exchange or electronic trading system on which Legacy's securities may be traded).

1.2 Duties. During the Employment Term, the Employee will devote substantially all of his full working time to the business and affairs of the Employer, the Company and Legacy, will use his best efforts to promote the Employer's, the Company's and Legacy's interests and will perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Employee may be required by the Board to provide services to, or otherwise serve as an officer or director of, any direct or indirect subsidiary of the Employer, the Company or Legacy (the Employer, the Company, Legacy and all such direct and indirect subsidiaries of the Employer, the Company or Legacy being referred to herein as the "Related Parties"), as applicable. The Employee will comply with the Employer's, the Company's and Legacy's policies, codes and procedures, as they may be in effect from time to time, applicable to executive officers of the Company and Legacy. Nevertheless, the Employee may, with the prior approval of the Board in each instance, engage in such other business and charitable activities that do not violate Section 7, create a conflict of interest with the Employer, the Company or Legacy or materially interfere with the performance of his obligations to the Employer, the Company or Legacy under this Agreement. The activities in which the Employee is engaged as of the Effective Date, all of which have been approved by the Board, are listed on Exhibit A hereto.

1.3 Place of Employment. The Employee will perform his duties under this Agreement at the Company's offices in Midland, Texas, with the likelihood of substantial business travel.

2. TERM OF EMPLOYMENT. The term of the Employee's employment by the Employer under this Agreement (the "Employment Term") will commence on the Effective Date and will continue until employment is terminated by either party under Section
5. The date on which the Employee's employment ends is referred to in this Agreement as the "Termination Date."

3. COMPENSATION.

3.1 Base Salary. During the Employment Term, the Employee will be entitled to receive a base salary ("Base Salary") at an annual rate of not less than $150,000 for services rendered to the Employer, any of its affiliates and any of its or their direct or indirect subsidiaries, payable in accordance with the Employer's regular payroll practices. The Employee's Base Salary will be reviewed annually by the Board and may be adjusted upward in the Board's sole discretion.

3.2 Annual Bonus Compensation. During the Employment Term, the Employee will be entitled to receive incentive compensation in such amounts and at such times as the Board may determine in its sole discretion to award to him under any incentive compensation or other bonus plan or arrangement as may be established by the Board from time to time (collectively, the "Employee Bonus Plan"). Any additional incentive compensation payable under any Employee Bonus Plan will be referred to in the aggregate in this Agreement as the Employee's "Bonus."

3.3 Long-Term Incentive Compensation. Awards of Unit options, Unit grants, restricted Units and/or other forms of equity-based compensation to the Employee on or after the Effective Date may be made from time to time during the Employment Term by the Board in its sole discretion, whose decision will be based upon performance and award guidelines for executive officers of the Company and Legacy established periodically by the Board in its sole discretion.

4. EXPENSES AND OTHER BENEFITS.

4.1 Reimbursement of Expenses. The Employee will be entitled to receive prompt reimbursement for all reasonable expenses, including professional fees, incurred by him during the Employment Term (in accordance with the policies and practices presently followed by the Company or as may be established by the Board from time to time for the Company's senior executive officers) in performing services under this Agreement, provided that the Employee properly accounts for such expenses in accordance with the Company's and Legacy's policies as in effect from time to time.

4.2 Vacation. Employee will be entitled to paid vacation time each year during the Employment Term that will accrue in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company.

4.3 Other Employee Benefits. In addition to the foregoing, during the Employment Term, the Employee will be entitled to participate in and to receive benefits as a senior executive under all of the Company's and Legacy's employee benefit plans, programs and arrangements available to senior executives, subject to the eligibility criteria and other terms and conditions thereof, as such plans, programs and arrangements may be duly amended, terminated, approved or adopted by the Board from time to time.

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5. TERMINATION OF EMPLOYMENT.

5.1 Death. The Employee's employment under this Agreement will terminate upon his death.

5.2 Termination by the Employer.

(a) Terminable at Will. The Employer may terminate the Employee's employment under this Agreement at any time with or without Cause (as defined below).

(b) Definition of Cause. For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment under this Agreement by reason of any of the following: (i) the Employee's conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of Legacy or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (ii) the Employee's repeated intoxication by alcohol or drugs during the performance of his duties; (iii) malfeasance in the conduct of Employee's duties, including, but not limited to, (A) willful and intentional misuse or diversion of any of the Related Parties' funds, (B) embezzlement or (C) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to any of the Related Parties; (iv) the Employee's material failure to perform the duties of the Employee's employment consistent with Employee's position, expressly including the provisions of this Agreement, or material failure to follow or comply with the reasonable and lawful written directives of the Board; (v) a material breach of this Agreement; or (vi) a material breach by the Employee of written policies of the Related Parties concerning employee discrimination or harassment.

(c) Notice and Cure Opportunity in Certain Circumstances. The Employee may be afforded a reasonable opportunity to cure any act or omission that would otherwise constitute "Cause" hereunder according to the following terms: The Board will cause the Employer to give the Employee written notice stating with reasonable specificity the nature of the circumstances determined by the Board in good faith to constitute "Cause." If, in the good faith judgment of the Board, the alleged breach is reasonably susceptible to cure, the Employee will have fifteen (15) days from his receipt of such notice to effect the cure of such circumstances or such breach to the good faith satisfaction of the Board. The Board will state whether the Employee will have such an opportunity to cure in the initial notice of "Cause" referred to above. If, in the good faith judgment of the Board the alleged breach is not reasonably susceptible to cure, or such circumstances or breach have not been satisfactorily cured within such fifteen (15) day cure period, such breach will thereupon constitute "Cause" hereunder.

5.3 Termination by the Employee.

(a) Terminable at Will. The Employee may terminate his employment under this Agreement at any time with or without Good Reason (as defined below).

(b) Notice and Cure Opportunity. If such termination is with Good Reason, the Employee will give the Employer written notice, which will identify with reasonable specificity the grounds for the Employee's resignation and provide the Employer with fifteen (15) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. A termination will not be for Good Reason if such

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notice is given by the Employee to the Employer more than thirty (30) days after the occurrence of the event that the Employee alleges is Good Reason for his termination hereunder.

(c) Definition of Good Reason. For purposes of this Agreement, "Good Reason" will mean any of the following to which the Employee has not consented in writing: (a) a reduction in the Employee's Base Salary; (b) a relocation of the Employee's primary place of employment to a location more than 20 miles from Midland, Texas; or (c) any material reduction in the Employee's title, authority or responsibilities as Executive Vice President of Business Development and Land of the Company.

5.4 Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee during the Employment Term (other than termination pursuant to Section 5.1) will be communicated by written Notice of Termination to the other party hereto in accordance with Section 8.7. For purposes of this Agreement, a "Notice of Termination" means a written notice that (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date (as defined herein) is other than the date of receipt of such notice, specifies the Termination Date (which Termination Date will be not more than thirty (30) days after the giving of such notice).

5.5 Disability. If the Employer determines in good faith that the Disability (as defined herein) of the Employee has occurred during the Employment Term, it may, without breaching this Agreement, give to the Employee written notice in accordance with Section 5.4 of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer will terminate effective on the fifteenth (15th) day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the fifteen (15) days after such receipt, the Employee will not have returned to full-time performance of the Employee's duties. "Disability" means the determination by a physician selected by the Employer that the Employee has been unable to perform substantially the Employee's usual and customary duties under this Agreement for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. At any time and from time to time, upon reasonable request therefor by the Employer, the Employee will submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability.

6. COMPENSATION OF THE EMPLOYEE UPON TERMINATION.

6.1 Death. If the Employee's employment under this Agreement is terminated by reason of his death, the Employer will pay to the person or persons designated by the Employee for that purpose in a notice filed with the Employer, or, if no such person will have been so designated, to his estate, the amount of
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) a pro rata portion of any Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, determined by multiplying the Employee's target Bonus for such period by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such

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termination occurs through and including the Termination Date and the denominator of which is 365 ("Pro Rata Bonus"), and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law. Without limiting the generality of the foregoing, any rights the Employee's beneficiary(ies) may have to the proceeds of any life insurance arrangement set forth in Section 4.3 will be in lieu of any special entitlement to severance pay or benefits upon the Employee's death.

6.2 Disability. In the event of the Employee's termination by reason of Disability pursuant to Section 5.5, the Employee will continue to receive his Base Salary and participate in applicable employee benefit plans or programs of the Related Parties (on an equivalent basis to Section 6.4(a)(iv) below) through the Termination Date, subject to offset dollar-for-dollar by the amount of any disability income payments provided to the Employee under any disability policy or program funded by any of the Related Parties, and will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) the Employee's Pro-Rata Bonus, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.3 By the Employer for Cause or the Employee Without Good Reason. If the Employee's employment is terminated by the Employer for Cause, or if the Employee terminates his employment other than for Good Reason, the Employee will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.4 By the Employee for Good Reason or the Employer other than for Cause.

(a) Severance Benefits on Non-Change of Control Termination. Subject to the provisions of Section 6.4(b) and Section 6.4(d), if prior to or more than one (1) year after the occurrence of a Change of Control (as defined below) the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then the Employee will be entitled to the following benefits (the "Severance Benefits"):

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(i) an amount equal to (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty
(30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date;

(ii) twenty-four (24) monthly payments each in an amount equal to one-twelfth (1/12) of the Employee's annual Base Salary at the highest rate in effect at any time during the thirty-six (36)-month period prior to the Termination Date plus the average annual Bonus of the two
(2) years preceding the Termination Date, commencing with the calendar month immediately following the calendar month in which the Termination Date occurs, it being agreed that for purposes hereof, the Employee's Base Salary during the first twelve (12) months following the Effective Date will be deemed to be $150,000;

(iii) a cash amount equal to the Employee's Pro-Rata Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company; and

(iv) the Employer will pay the full cost of the Employee's COBRA continuation coverage for such period, as such coverage is required to be continued under applicable law; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 6.4(a)(iv) may be discontinued prior to the end of the period provided in this subsection (iv) to the extent, but only to the extent, that the Employee receives substantially similar benefits from a subsequent employer ("COBRA Benefit").

(b) Change of Control Benefits. Subject to the provisions of Section 6.4(d), if within the one (1) year period following the occurrence of a Change of Control, the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then, in lieu of the Severance Benefits under Section 6.4(a), the Employee will be entitled to benefits (the "Change of Control Benefits") identical to those set forth in Section 6.4(a) except that the amount described in clause (ii) will be equal to thirty-six (36) monthly payments and will be paid in a lump sum within thirty (30) days following the Termination Date.

(c) Definition of Change of Control. For purposes of this Agreement, a "Change of Control" will mean the first to occur of:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding equity interests of Legacy (the "Outstanding Legacy Equity") or (B) the combined voting power of the then-outstanding voting securities of Legacy entitled to vote generally in the election of directors (the "Outstanding Legacy Voting Securities"); provided, however, that, for purposes of this Section 6.4(c)(i), the following acquisitions will not constitute

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a Change of Control: (A) any acquisition directly from Legacy, (B) any acquisition by Legacy, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Legacy or any affiliated company, (D) any acquisition by any corporation or other entity pursuant to a transaction that complies with Section 6.4(c)(iii)(A), Section 6.4(c)(iii)(B) or Section 6.4(c)(iii)(C) or (E) any acquisition of shares from Legacy arising out of or in connection with an IPO or private placement of Legacy's securities;

(ii) Any time at which individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason, to constitute at least a majority of the Board; provided, however, that (A) any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Legacy's Unitholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, and (B) any individual becoming a director subsequent to the date hereof whose election resulted from Legacy's failure to file a registration statement within 240 days of the Effective Date will be considered as though such individual were a member of the Incumbent Board;

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Legacy or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Legacy, or the acquisition of assets or equity interests of another entity by Legacy or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding equity interests and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation or other entity that, as a result of such transaction, owns Legacy or all or substantially all of Legacy's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Legacy or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding equity interests of the corporation or other entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation or other entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation or equivalent body of any other entity resulting from such Business Combination

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were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) Consummation of a complete liquidation or dissolution of Legacy.

(d) Conditions to Receipt of Severance Benefits.

(i) Release. As a condition to receiving any Severance Benefits or Change of Control Benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b), the Employee will execute a release (the "Release"), which will include an affirmation of the restrictive covenants set forth in Section 7 and a non-disparagement provision, in form and substance satisfactory to the Employer, of any claims, whether arising under federal, state or local statute, common law or otherwise, against Employer and the Related Parties which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Employer and the Related Parties pursuant to any provisions of the Related Parties' organizational documents or any directors and officers liability insurance policies maintained by any of the Related Parties. If the Employee fails or otherwise refuses to execute a Release within a reasonable time after the Employer's request to do so, and in all events prior to the date on which such benefits are to be first paid to him, the Employee will not be entitled to any Severance Benefits or Change of Control Benefits, as the case may be, or any other benefits provided under this Agreement and the Employer will have no further obligations with respect to the provision of those benefits except as may be required by law.

(ii) Limitation on Benefits. If, following a termination of employment that gives the Employee a right to the payment of Severance Benefits under Section 6.4(a) or Section 6.4(b), the Employee violates in any material respect any of the covenants in Section 7 or as otherwise set forth in the Release, the Employee will have no further right or claim to any payments or other benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b) from and after the date on which the Employee engages in such activities and the Employer will have no further obligations with respect to such payments or benefits, and the covenants in Section 7 will nevertheless continue in full force and effect.

6.5 Severance Benefits Not Includable for Employee Benefits Purposes. Except to the extent the terms of any applicable benefit plan, policy or program provide otherwise, any benefit programs of any of the Related Parties that takes into account the Employee's income will exclude any and all Severance Benefits and Change of Control Benefits provided under this Agreement.

6.6 Exclusive Severance Benefits. The Severance Benefits payable under
Section 6.4(a) or the Change of Control Benefits payable under Section 6.4(b), if they become applicable under the terms of this Agreement, will be in lieu of any other severance or similar benefits that would otherwise be payable under any other agreement, plan, program or policy of the Employer.

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6.7 Additional Payments by the Employer. Notwithstanding anything in this Agreement to the contrary, in the event that any benefits payable or otherwise provided under this Agreement would be

(a) subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (such excise tax referred to in this Agreement as the "Excise Tax"), then the Board may, in its sole discretion, provide for the payment of, or otherwise reimburse the Employee for, an amount up to such Excise Tax and any related taxes, fees or penalties thereon as the Board may consider to be customary and appropriate for a comparable public company; or

(b) deemed to constitute non-qualified deferred compensation subject to Section 409A of the Code, the Employer will have the discretion to adjust the terms of such payment or benefit as it deems necessary to comply with the requirements of Section 409A to avoid the imposition of any excise tax or other penalty with respect to such payment or benefit under Section 409A of the Code.

7. RESTRICTIVE COVENANTS.

7.1 Confidential Information. The Employee hereby acknowledges that in connection with his employment by the Employer he has been provided and may in the future be provided Confidential Information (as defined below) (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by the Employee or otherwise has been or is made available to him) regarding the business and operations of the Related Parties. The Employee further acknowledges that such Confidential Information is unique, valuable, considered trade secrets and deemed proprietary by the Related Parties. For purposes of this Agreement, "Confidential Information" includes, without limitation, any information heretofore or hereafter acquired, developed or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Related Parties, whether oral or in written form. The Employee agrees that all Confidential Information is and will remain the property of one or more of the Related Parties. The Employee further agrees, except for disclosures occurring in the good faith performance of his duties for the Related Parties, during the Employment Term and for a period of two (2) years after the Termination Date, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than the Related Parties and authorized executives of the same, to use or otherwise gain access to any Confidential Information. The Employee will have no obligation under this Agreement with respect to any information that becomes generally available to the public other than as a result of a disclosure by the Employee or his agent or other representative or becomes available to the Employee on a non-confidential basis from a source other than the Related Parties. Further, the Employee will have no obligation under this Agreement to keep confidential any of the Confidential Information to the extent that a disclosure of it is required by law or is consented to by the Employer, the Company or Legacy; provided, however, that if and when such a disclosure is required by law, the Employee promptly will provide the Employer with notice of such requirement, so that an appropriate protective order may be sought.

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7.2 Return of Property. Employee agrees to deliver promptly to the Employer, upon termination of his employment hereunder, or at any other time when the Employer so requests, all documents relating to the business of the Related Parties, including without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any documents relating to the business of the Related Parties and all copies thereof and therefrom; provided, however, that the Employee will be permitted to retain copies of any documents or materials of a personal nature or otherwise related to the Employee's rights under this Agreement.

7.3 Non-Compete Obligations.

(a) Non-Compete Obligations During Employment Term. The Employee agrees that during the Employment Term:

(i) the Employee will not, other than through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, unless set forth on the approved activities list on Exhibit A; and

(ii) all investments made by the Employee (whether in his own name or in the name of any family members or other nominees or made by the Employee's controlled affiliates), which relate to the leasing, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products will be made solely through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A; and the Employee will not (directly or indirectly through any family members or other persons), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities, or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity, in either case, except through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A.

(b) Non-Compete Obligations After Termination Date. The Employee agrees that the Employee will not engage or participate in any manner, whether directly or indirectly through any family member or other person or as an employee, employer, consultant, agent principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, unless

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approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A:

(i) during the 90 day period following the Termination Date, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products within (A) any county or parish in which the Related Parties owns any oil and gas interests or conducts operations on the Termination Date or in which the Related Parties have owned any oil and gas interests or conducted operations at any time during the six months immediately preceding the Termination Date or (B) any county or parish adjacent to any county or parish described in clause (A); and

(ii) during the one (1) year period following the Termination Date, in any business or activity which is a publicly traded oil and gas income distribution company or partnership or a privately held company or partnership that is contemplating an initial public offering as an oil and gas income distribution company or partnership that is in direct competition with the business of the Related Parties in the leasing, acquiring, exploring, producing, gathering or marketing of hydrocarbons and related products; provided that, this subsection (ii) will not preclude the Employee from making investments in securities of oil and gas companies which are registered on a national stock exchange, if (A) the aggregate amount owned by the Employee and all family members and affiliates does not exceed 5% of such company's outstanding securities, and (B) the aggregate amount invested in such investments by the Employee and all family members and affiliates after the date hereof does not exceed $5,000,000.

(c) Not Applicable Following Change of Control Termination. The Employee will not be subject to the covenants contained in this Section 7.3 and such covenants will not be enforceable against the Employee from and after the date that the Employee's employment is terminated within one (1) year after a Change of Control.

7.4 Non-Solicitation. During the Employment Term and for a period of twenty-four (24) months after the Termination Date, the Employee will not, whether for his own account or for the account of any other Person (other than the Related Parties), intentionally solicit, endeavor to entice away from the Related Parties, or otherwise interfere with the relationship of the Related Parties with, (a) any person who is employed by the Related Parties (including any independent sales representatives or organizations), or (b) any client or customer of the Related Parties.

7.5 Assignment of Developments. The Employee assigns and agrees to assign without further compensation to the Employer and its successors, assigns or designees, all of the Employee's right, title and interest in and to all Business Opportunities and Intellectual Property (as those terms are defined below), and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Employer.

For purposes of this Agreement, "Business Opportunities" means all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are developed by the Employee during the Employment Term, or originated by any third party

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and brought to the attention of the Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions or other written or charted means).

For purposes of this Agreement, "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of the Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which the Employee discovers, conceives, invents, creates or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation or development (A) occurs in the course of the Employee's employment with the Employer, or (B) occurs with the use of any of the time, materials or facilities of the Related Parties, or
(C) in the good faith judgment of the Board, relates or pertains in any material way to the purposes, activities or affairs of the Related Parties.

7.6 Injunctive Relief. The Employee acknowledges that a breach of any of the covenants contained in this Section 7 may result in material, irreparable injury to the Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat of breach, the Employer will be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Employee from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. To the extent that the Employer seeks a temporary restraining order (but not a preliminary or permanent injunction), the Employee agrees that a temporary restraining order may be obtained ex parte.

7.7 Adjustment of Covenants. The parties consider the covenants and restrictions contained in this Section 7 to be reasonable. However, if and when any such covenant or restriction is found to be void or unenforceable and would have been valid had some part of it been deleted or had its scope of application been modified, such covenant or restriction will be deemed to have been applied with such modification as would be necessary and consistent with the intent of the parties to have made it valid, enforceable and effective.

7.8 Forfeiture Provision.

(a) Detrimental Activities. If the Employee engages in any activity that violates any covenant or restriction contained in this Section 7, in addition to any other remedy the Employer may have at law or in equity, (i) the Employee will be entitled to no further payments or benefits from the Employer under this Agreement or otherwise, except for any payments or benefits required to be made or provided under applicable law, (ii) all unexercised Unit options, restricted Units and other forms of equity compensation held by or credited to the Employee will terminate effective as of the date on which the Employee engages in that activity, unless terminated sooner by operation of another term or condition of this Agreement or other applicable plans and agreements, and (iii) any exercise, payment or delivery pursuant to any equity compensation award that occurred within one year prior to the date on which the Employee engages in that activity may be rescinded within one year after the first date that a majority of the members of the Board first became aware that the Employee engaged in that activity. In the event of any such rescission, the Employee will pay to the

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Employer the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(b) Right of Set-Off. The Employee consents to a deduction from any amounts the Employer owes the Employee from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Employee by the Employer), to the extent of the amounts the Employee owes the Employer under Section 7.8(a) above. Whether or not the Employer elects to make any set-off in whole or in part, if the Employer does not recover by means of set-off the full amount the Employee owes, calculated as set forth above, the Employee agrees to pay immediately the unpaid balance to the Employer. In the discretion of the Board, reasonable interest may be assessed on the amounts owed, calculated from the later of (i) the date the Employee engages in the prohibited activity and (ii) the applicable date of exercise, payment or delivery.

8. MISCELLANEOUS.

8.1 Assignment; Successors; Binding Agreement. This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Employer arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Employer, or succeeding to the business and substantially all of the assets of the Employer or any affiliates for which the Employee performs substantial services. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

8.2 Modification and Waiver. Except as otherwise provided below, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is duly approved by the Board and is agreed to in writing by the Employee and such officer(s) as may be specifically authorized by the Board to effect it. No waiver by any party of any breach by any other party of, or of compliance with, any term or condition of this Agreement to be performed by any other party, at any time, will constitute a waiver of similar or dissimilar terms or conditions at that time or at any prior or subsequent time.

8.3 Entire Agreement. This Agreement embodies the entire understanding of the parties hereof, and, upon the Effective Date, will supersede all other oral or written agreements or understandings between them regarding the subject matter hereof. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Texas other than the conflict of laws provision thereof.

8.5 Consent to Jurisdiction and Service of Process.

(a) Section 7 Disputes. In the event of any dispute, controversy or claim between the Employer and the Employee arising out of or relating to the interpretation, application or enforcement of the provisions of Section 7, the Employer and the

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Employee agree and consent to the personal jurisdiction of the state and local courts of Midland County, Texas and/or the United States District Court for the Western District of Texas for resolution of the dispute, controversy or claim, and that those courts, and only those courts, will have jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with Section 7 of this Agreement. The Employer and the Employee also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Employer at the address of its principal executive offices and to the Employee at his last known address as reflected in the Employer's records.

(b) Disputes Other Than Under Section 7. In the event of any dispute relating to this Agreement, other than a dispute relating solely to Section 7, the parties will use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they will consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If such a dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure. If the parties do not reach such solution through negotiation or mediation within a period of sixty (60) days, then, upon notice by either party to the other, all disputes, claims, questions, or differences will be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its Commercial Arbitration Rules. The arbitrator will be selected by agreement of the parties or, if they do not agree on an arbitrator within thirty (30) days after either party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator will be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Midland, Texas. The determination reached in such arbitration will be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Midland, Texas, and will be conducted in accordance with the Commercial Arbitration Rules of the AAA.

8.6 Withholding of Taxes. The Employer will withhold from any amounts payable under the Agreement all federal, state, local or other taxes legally required to be withheld.

8.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

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to the Employer, to:

Attn: Chairman of the Board
Legacy Reserves Services, Inc. 303 W. Wall, Suite 1600
Midland, Texas 79701

to the Employee, to:

Kyle A. McGraw
303 W. Wall, Suite 1600
Midland, Texas 79701

Addresses may be changed by written notice sent to the other party at the last recorded address of that party.

8.8 Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

8.10 Headings. The headings used in this Agreement are for convenience only, do not constitute a part of the Agreement, and will not be deemed to limit, characterize, or affect in any way the provisions of the Agreement, and all provisions of the Agreement will be construed as if no headings had been used in the Agreement.

8.11 Construction. As used in this Agreement, unless the context otherwise requires: (a) the terms defined herein will have the meanings set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include," "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (d) "writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof," "herein," "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section or other subdivision hereof or attachment hereto; (f) references to any gender include references to all genders; and (g) references to any agreement or other instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

8.12 Capacity; No Conflicts. The Employee represents and warrants to the Employer that: (i) he has full power, authority and capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) such execution, delivery and performance will not (and with the giving of notice or lapse of time, or both, would not) result in the breach of any agreement or other obligation to which he is a party or is otherwise bound, and (iii) this Agreement is his valid and binding obligation, enforceable in accordance with its terms.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

LEGACY RESERVES SERVICES, INC. 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

EMPLOYEE 

/s/ Kyle A. McGraw
------------------------------------------
Kyle A. McGraw

FOR THE LIMITED PURPOSES SET FORTH HEREIN:

LEGACY RESERVES LP

By: LEGACY RESERVES GP, LLC.
its general partner 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

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EXHIBIT A

APPROVED OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE

Oil and Gas Investments

1. 25% Ownership in McGraw Brothers Investments a general partnership that owns oil and gas leasehold rights in Lea County, NM, Hockly County, TX and Jefferson/Hardin County, TX this Partnership also owns some real estate interests.

2. Overriding Royalty Interests in various wells located in Midland, Martin, Howard, Garza, Glasscock and Brown Counties, TX.

Outside Activities other than Oil & Gas Investments:

1. Church and community volunteer work from time to time.

2. Current board member of Family Dynamics Institute (501C3) Nonprofit.

3. Current board member of Hallal Ministries (501C3) Non Profit

4. Real estate investment partnerships

a. CMC Realty Partners

b. 1500 Broadway Partners, Ltd.

c. Rogers Ave Development Partners

d. Treepoint Partners, Ltd.

e. Trinity Tower Partners

f. Granite Development Partners

g. Best-Star Development Partners

h. Cheney Road Partners, L.P.

i. TCTB Partnership, Ltd.

j. Priority Power Management, Ltd.

k. Cattleman's Partners

Considering establishing a Family Foundation and becoming involved with Charities Support Foundation, Inc.

6. Cattle Ranching and Farming in various counties under current business names of Midland Disposal Farms, Inc, McGraw-Hooper Cattle Partners, Warfield Cattle Partners. Serve as President of Midland Disposal Farms, Inc. which has a contract with the City of Midland for the disposal of effluent water.

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Exhibit 10.12

EMPLOYMENT AGREEMENT

The parties to this Employment Agreement (this "Agreement") are LEGACY RESERVES SERVICES, INC., a Texas corporation (the "Employer") and PAUL T. HORNE (the "Employee"). The parties desire to provide for the employment of the Employee as Vice President of Operations of LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "Company") on the terms set forth herein effective as of the date of completion of a private placement of equity securities ("Units") of LEGACY RESERVES LP, a Delaware limited partnership ("Legacy"). Legacy is joining in this agreement for the limited purposes of reflecting its agreement to the matters set forth herein as to it, but such joinder is not intended to make Legacy the employer of the Employee for any purpose. The date this Agreement becomes effective is herein referred to as the "Effective Date".

1. POSITION AND DUTIES

1.1 Employment; Titles; Reporting. On the Effective Date, the Employer agrees to employ the Employee and the Employee agrees to enter employment with the Employer, upon the terms and subject to the conditions provided under this Agreement. During the Employment Term (as defined in Section 2), the Employee will serve as Vice President of Operations of the Company. In such capacity, the Employee will report to and otherwise will be subject to the direction and control of the Board of Directors of the Company (including any committee thereof, the "Board") and will have such duties, responsibilities and authorities as may be assigned to him by the Board from time to time and otherwise consistent with such position in a public company, comparable in size to Legacy, which is engaged in natural gas and oil acquisition, development and production (including, but not limited to, maintaining, to the extent applicable, compliance with the Sarbanes-Oxley Act of 2002 and related regulations and all other federal, state and local laws and regulations, as well as all regulations and rules of any exchange or electronic trading system on which Legacy's securities may be traded).

1.2 Duties. During the Employment Term, the Employee will devote substantially all of his full working time to the business and affairs of the Employer, the Company and Legacy, will use his best efforts to promote the Employer's, the Company's and Legacy's interests and will perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Employee may be required by the Board to provide services to, or otherwise serve as an officer or director of, any direct or indirect subsidiary of the Employer, the Company or Legacy (the Employer, the Company, Legacy and all such direct and indirect subsidiaries of the Employer, the Company or Legacy being referred to herein as the "Related Parties"), as applicable. The Employee will comply with the Employer's, the Company's and Legacy's policies, codes and procedures, as they may be in effect from time to time, applicable to executive officers of the Company and Legacy. Nevertheless, the Employee may, with the prior approval of the Board in each instance, engage in such other business and charitable activities that do not violate Section 7, create a conflict of interest with the Employer, the Company or Legacy or materially interfere with the performance of his obligations to the Employer, the Company or Legacy under this Agreement. The activities in which the Employee is engaged as of the Effective Date, all of which have been approved by the Board, are listed on Exhibit A hereto.

1.3 Place of Employment. The Employee will perform his duties under this Agreement at the Company's offices in Midland, Texas, with the likelihood of substantial business travel.

2. TERM OF EMPLOYMENT. The term of the Employee's employment by the Employer under this Agreement (the "Employment Term") will commence on the Effective Date and will continue until employment is terminated by either party under Section
5. The date on which the Employee's employment ends is referred to in this Agreement as the "Termination Date."

3. COMPENSATION.

3.1 Base Salary. During the Employment Term, the Employee will be entitled to receive a base salary ("Base Salary") at an annual rate of not less than $150,000 for services rendered to the Employer, any of its affiliates and any of its or their direct or indirect subsidiaries, payable in accordance with the Employer's regular payroll practices. The Employee's Base Salary will be reviewed annually by the Board and may be adjusted upward in the Board's sole discretion.

3.2 Annual Bonus Compensation. During the Employment Term, the Employee will be entitled to receive incentive compensation in such amounts and at such times as the Board may determine in its sole discretion to award to him under any incentive compensation or other bonus plan or arrangement as may be established by the Board from time to time (collectively, the "Employee Bonus Plan"). Any additional incentive compensation payable under any Employee Bonus Plan will be referred to in the aggregate in this Agreement as the Employee's "Bonus."

3.3 Long-Term Incentive Compensation. Awards of Unit options, Unit grants, restricted Units and/or other forms of equity-based compensation to the Employee on or after the Effective Date may be made from time to time during the Employment Term by the Board in its sole discretion, whose decision will be based upon performance and award guidelines for executive officers of the Company and Legacy established periodically by the Board in its sole discretion.

4. EXPENSES AND OTHER BENEFITS.

4.1 Reimbursement of Expenses. The Employee will be entitled to receive prompt reimbursement for all reasonable expenses, including professional fees, incurred by him during the Employment Term (in accordance with the policies and practices presently followed by the Company or as may be established by the Board from time to time for the Company's senior executive officers) in performing services under this Agreement, provided that the Employee properly accounts for such expenses in accordance with the Company's and Legacy's policies as in effect from time to time.

4.2 Vacation. Employee will be entitled to paid vacation time each year during the Employment Term that will accrue in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company.

4.3 Other Employee Benefits. In addition to the foregoing, during the Employment Term, the Employee will be entitled to participate in and to receive benefits as a senior executive under all of the Company's and Legacy's employee benefit plans, programs and arrangements available to senior executives, subject to the eligibility criteria and other terms and conditions thereof, as such plans, programs and arrangements may be duly amended, terminated, approved or adopted by the Board from time to time.

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5. TERMINATION OF EMPLOYMENT.

5.1 Death. The Employee's employment under this Agreement will terminate upon his death.

5.2 Termination by the Company.

(a) Terminable at Will. The Employer may terminate the Employee's employment under this Agreement at any time with or without Cause (as defined below).

(b) Definition of Cause. For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment under this Agreement by reason of any of the following: (i) the Employee's conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of Legacy or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (ii) the Employee's repeated intoxication by alcohol or drugs during the performance of his duties; (iii) malfeasance in the conduct of Employee's duties, including, but not limited to, (A) willful and intentional misuse or diversion of any of the Related Parties' funds, (B) embezzlement or (C) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to any of the Related Parties; (iv) the Employee's material failure to perform the duties of the Employee's employment consistent with Employee's position, expressly including the provisions of this Agreement, or material failure to follow or comply with the reasonable and lawful written directives of the Board; (v) a material breach of this Agreement; or (vi) a material breach by the Employee of written policies of the Related Parties concerning employee discrimination or harassment.

(c) Notice and Cure Opportunity in Certain Circumstances. The Employee may be afforded a reasonable opportunity to cure any act or omission that would otherwise constitute "Cause" hereunder according to the following terms: The Board will cause the Employer to give the Employee written notice stating with reasonable specificity the nature of the circumstances determined by the Board in good faith to constitute "Cause." If, in the good faith judgment of the Board, the alleged breach is reasonably susceptible to cure, the Employee will have fifteen (15) days from his receipt of such notice to effect the cure of such circumstances or such breach to the good faith satisfaction of the Board. The Board will state whether the Employee will have such an opportunity to cure in the initial notice of "Cause" referred to above. If, in the good faith judgment of the Board the alleged breach is not reasonably susceptible to cure, or such circumstances or breach have not been satisfactorily cured within such fifteen (15) day cure period, such breach will thereupon constitute "Cause" hereunder.

5.3 Termination by the Employee.

(a) Terminable at Will. The Employee may terminate his employment under this Agreement at any time with or without Good Reason (as defined below).

(b) Notice and Cure Opportunity. If such termination is with Good Reason, the Employee will give the Employer written notice, which will identify with reasonable specificity the grounds for the Employee's resignation and provide the Employer with fifteen (15) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. A termination will not be for Good Reason if such

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notice is given by the Employee to the Employer more than thirty (30) days after the occurrence of the event that the Employee alleges is Good Reason for his termination hereunder.

(c) Definition of Good Reason. For purposes of this Agreement, "Good Reason" will mean any of the following to which the Employee has not consented in writing: (a) a reduction in the Employee's Base Salary; (b) a relocation of the Employee's primary place of employment to a location more than 20 miles from Midland, Texas; or (c) any material reduction in the Employee's title, authority or responsibilities as Vice President of Operations of the Company.

5.4 Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee during the Employment Term (other than termination pursuant to Section 5.1) will be communicated by written Notice of Termination to the other party hereto in accordance with Section 8.7. For purposes of this Agreement, a "Notice of Termination" means a written notice that (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date (as defined herein) is other than the date of receipt of such notice, specifies the Termination Date (which Termination Date will be not more than thirty (30) days after the giving of such notice).

5.5 Disability. If the Employer determines in good faith that the Disability (as defined herein) of the Employee has occurred during the Employment Term, it may, without breaching this Agreement, give to the Employee written notice in accordance with Section 5.4 of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer will terminate effective on the fifteenth (15th) day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the fifteen (15) days after such receipt, the Employee will not have returned to full-time performance of the Employee's duties. "Disability" means the determination by a physician selected by the Employer that the Employee has been unable to perform substantially the Employee's usual and customary duties under this Agreement for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. At any time and from time to time, upon reasonable request therefor by the Employer, the Employee will submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability.

6. COMPENSATION OF THE EMPLOYEE UPON TERMINATION.

6.1 Death. If the Employee's employment under this Agreement is terminated by reason of his death, the Employer will pay to the person or persons designated by the Employee for that purpose in a notice filed with the Employer, or, if no such person will have been so designated, to his estate, the amount of
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) a pro rata portion of any Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, determined by multiplying the Employee's target Bonus for such period by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such

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termination occurs through and including the Termination Date and the denominator of which is 365 ("Pro Rata Bonus"), and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law. Without limiting the generality of the foregoing, any rights the Employee's beneficiary(ies) may have to the proceeds of any life insurance arrangement set forth in Section 4.3 will be in lieu of any special entitlement to severance pay or benefits upon the Employee's death.

6.2 Disability. In the event of the Employee's termination by reason of Disability pursuant to Section 5.5, the Employee will continue to receive his Base Salary and participate in applicable employee benefit plans or programs of the Related Parties (on an equivalent basis to Section 6.4(a)(iv) below) through the Termination Date, subject to offset dollar-for-dollar by the amount of any disability income payments provided to the Employee under any disability policy or program funded by any of the Related Parties, and will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) the Employee's Pro-Rata Bonus, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.3 By the Company for Cause or the Employee Without Good Reason. If the Employee's employment is terminated by the Company for Cause, or if the Employee terminates his employment other than for Good Reason, the Employee will receive
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.4 By the Employee for Good Reason or the Employer other than for Cause.

(a) Severance Benefits on Non-Change of Control Termination. Subject to the provisions of Section 6.4(b) and Section 6.4(d), if prior to or more than one (1) year after the occurrence of a Change of Control (as defined below) the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then the Employee will be entitled to the following benefits (the "Severance Benefits"):

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(i) an amount equal to (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty
(30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date;

(ii) twenty-four (24) monthly payments each in an amount equal to one-twelfth (1/12) of the Employee's annual Base Salary at the highest rate in effect at any time during the thirty-six (36)-month period prior to the Termination Date plus the average annual Bonus of the two
(2) years preceding the Termination Date, commencing with the calendar month immediately following the calendar month in which the Termination Date occurs, it being agreed that for purposes hereof, the Employee's Base Salary during the first twelve (12) months following the Effective Date will be deemed to be $150,000;

(iii) a cash amount equal to the Employee's Pro-Rata Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company; and

(iv) the Employer will pay the full cost of the Employee's COBRA continuation coverage for such period, as such coverage is required to be continued under applicable law; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 6.4(a)(iv) may be discontinued prior to the end of the period provided in this subsection (iv) to the extent, but only to the extent, that the Employee receives substantially similar benefits from a subsequent employer ("COBRA Benefit").

(b) Change of Control Benefits. Subject to the provisions of Section 6.4(d), if within the one (1) year period following the occurrence of a Change of Control, the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then, in lieu of the Severance Benefits under Section 6.4(a), the Employee will be entitled to benefits (the "Change of Control Benefits") identical to those set forth in Section 6.4(a) except that the amount described in clause (ii) will be equal to thirty-six (36) monthly payments and will be paid in a lump sum within thirty (30) days following the Termination Date.

(c) Definition of Change of Control. For purposes of this Agreement, a "Change of Control" will mean the first to occur of:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding equity interests of Legacy (the "Outstanding Legacy Equity") or (B) the combined voting power of the then-outstanding voting securities of Legacy entitled to vote generally in the election of directors (the "Outstanding Legacy Voting Securities"); provided, however, that, for purposes of this Section 6.4(c)(i), the following acquisitions will not constitute a Change of

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Control: (A) any acquisition directly from Legacy, (B) any acquisition by Legacy, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Legacy or any affiliated company, (D) any acquisition by any corporation or other entity pursuant to a transaction that complies with Section 6.4(c)(iii)(A),
Section 6.4(c)(iii)(B) or Section 6.4(c)(iii)(C) or (E) any acquisition of shares from Legacy arising out of or in connection with an IPO or private placement of Legacy's securities;

(ii) Any time at which individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that (A) any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Legacy's Unitholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, and (B) any individual becoming a director subsequent to the date hereof whose election resulted from Legacy's failure to file a registration statement within 240 days of the Effective Date will be considered as though such individual were a member of the Incumbent Board;

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Legacy or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Legacy, or the acquisition of assets or equity interests of another entity by Legacy or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding equity interests and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation or other entity that, as a result of such transaction, owns Legacy or all or substantially all of Legacy's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Legacy or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding equity interests of the corporation or other entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation or other entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation or equivalent body of any other entity resulting from such Business Combination

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were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) Consummation of a complete liquidation or dissolution of Legacy.

(d) Conditions to Receipt of Severance Benefits.

(i) Release. As a condition to receiving any Severance Benefits or Change of Control Benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b), the Employee will execute a release (the "Release"), which will include an affirmation of the restrictive covenants set forth in Section 7 and a non-disparagement provision, in form and substance satisfactory to the Employer, of any claims, whether arising under federal, state or local statute, common law or otherwise, against the Employer and the Related Parties which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Employer and the Related Parties pursuant to any provisions of the Related Parties' organizational documents or any directors and officers liability insurance policies maintained by any of the Related Parties. If the Employee fails or otherwise refuses to execute a Release within a reasonable time after the Employer's request to do so, and in all events prior to the date on which such benefits are to be first paid to him, the Employee will not be entitled to any Severance Benefits or Change of Control Benefits, as the case may be, or any other benefits provided under this Agreement and the Employer will have no further obligations with respect to the provision of those benefits except as may be required by law.

(ii) Limitation on Benefits. If, following a termination of employment that gives the Employee a right to the payment of Severance Benefits under Section 6.4(a) or Section 6.4(b), the Employee violates in any material respect any of the covenants in Section 7 or as otherwise set forth in the Release, the Employee will have no further right or claim to any payments or other benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b) from and after the date on which the Employee engages in such activities and the Employer will have no further obligations with respect to such payments or benefits, and the covenants in Section 7 will nevertheless continue in full force and effect.

6.5 Severance Benefits Not Includable for Employee Benefits Purposes. Except to the extent the terms of any applicable benefit plan, policy or program provide otherwise, any benefit programs of any of the Related Parties that takes into account the Employee's income will exclude any and all Severance Benefits and Change of Control Benefits provided under this Agreement.

6.6 Exclusive Severance Benefits. The Severance Benefits payable under
Section 6.4(a) or the Change of Control Benefits payable under Section 6.4(b), if they become applicable under the terms of this Agreement, will be in lieu of any other severance or similar benefits that would otherwise be payable under any other agreement, plan, program or policy of the Employer.

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6.7 Additional Payments by the Employer. Notwithstanding anything in this Agreement to the contrary, in the event that any benefits payable or otherwise provided under this Agreement would be

(a) subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (such excise tax referred to in this Agreement as the "Excise Tax"), then the Board may, in its sole discretion, provide for the payment of, or otherwise reimburse the Employee for, an amount up to such Excise Tax and any related taxes, fees or penalties thereon as the Board may consider to be customary and appropriate for a comparable public company; or

(b) deemed to constitute non-qualified deferred compensation subject to Section 409A of the Code, the Employer will have the discretion to adjust the terms of such payment or benefit as it deems necessary to comply with the requirements of Section 409A to avoid the imposition of any excise tax or other penalty with respect to such payment or benefit under Section 409A of the Code.

7. RESTRICTIVE COVENANTS.

7.1 Confidential Information. The Employee hereby acknowledges that in connection with his employment by the Employer he has been provided and may in the future be provided Confidential Information (as defined below) (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by the Employee or otherwise has been or is made available to him) regarding the business and operations of the Related Parties. The Employee further acknowledges that such Confidential Information is unique, valuable, considered trade secrets and deemed proprietary by the Related Parties. For purposes of this Agreement, "Confidential Information" includes, without limitation, any information heretofore or hereafter acquired, developed or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Related Parties, whether oral or in written form. The Employee agrees that all Confidential Information is and will remain the property of one or more of the Related Parties. The Employee further agrees, except for disclosures occurring in the good faith performance of his duties for the Related Parties, during the Employment Term and for a period of two (2) years after the Termination Date, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than the Related Parties and authorized executives of the same, to use or otherwise gain access to any Confidential Information. The Employee will have no obligation under this Agreement with respect to any information that becomes generally available to the public other than as a result of a disclosure by the Employee or his agent or other representative or becomes available to the Employee on a non-confidential basis from a source other than the Related Parties. Further, the Employee will have no obligation under this Agreement to keep confidential any of the Confidential Information to the extent that a disclosure of it is required by law or is consented to by the Employer, the Company or Legacy; provided, however, that if and when such a disclosure is required by law, the Employee promptly will provide the Employer with notice of such requirement, so that an appropriate protective order may be sought.

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7.2 Return of Property. Employee agrees to deliver promptly to the Employer, upon termination of his employment hereunder, or at any other time when the Employer so requests, all documents relating to the business of the Related Parties, including without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any documents relating to the business of the Related Parties and all copies thereof and therefrom; provided, however, that the Employee will be permitted to retain copies of any documents or materials of a personal nature or otherwise related to the Employee's rights under this Agreement.

7.3 Non-Compete Obligations.

(a) Non-Compete Obligations During Employment Term. The Employee agrees that during the Employment Term:

(i) the Employee will not, other than through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, unless set forth on the approved activities list on Exhibit A; and

(ii) all investments made by the Employee (whether in his own name or in the name of any family members or other nominees or made by the Employee's controlled affiliates), which relate to the leasing, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products will be made solely through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A; and the Employee will not (directly or indirectly through any family members or other persons), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities, or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity, in either case, except through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A.

(b) Non-Compete Obligations After Termination Date. The Employee agrees that the Employee will not engage or participate in any manner, whether directly or indirectly through any family member or other person or as an employee, employer, consultant, agent principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, unless

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approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A:

(i) during the 90 day period following the Termination Date, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products within (A) any county or parish in which the Related Parties own any oil and gas interests or conducts operations on the Termination Date or in which the Related Parties have owned any oil and gas interests or conducted operations at any time during the six months immediately preceding the Termination Date or (B) any county or parish adjacent to any county or parish described in clause (A); and

(ii) during the one (1) year period following the Termination Date, in any business or activity which is a publicly traded oil and gas income distribution company or partnership or a privately held company or partnership that is contemplating an initial public offering as an oil and gas income distribution company or partnership that is in direct competition with the business of the Related Parties in the leasing, acquiring, exploring, producing, gathering or marketing of hydrocarbons and related products; provided that, this subsection (ii) will not preclude the Employee from making investments in securities of oil and gas companies which are registered on a national stock exchange, if (A) the aggregate amount owned by the Employee and all family members and affiliates does not exceed 5% of such company's outstanding securities, and (B) the aggregate amount invested in such investments by the Employee and all family members and affiliates after the date hereof does not exceed $500,000.

(c) Not Applicable Following Change of Control Termination. The Employee will not be subject to the covenants contained in this Section 7.3 and such covenants will not be enforceable against the Employee from and after the date that the Employee's employment is terminated within one (1) year after a Change of Control.

7.4 Non-Solicitation. During the Employment Term and for a period of twenty-four (24) months after the Termination Date, the Employee will not, whether for his own account or for the account of any other Person (other than the Related Parties), intentionally solicit, endeavor to entice away from the Related Parties, or otherwise interfere with the relationship of the Related Parties with, (a) any person who is employed by the Related Parties (including any independent sales representatives or organizations), or (b) any client or customer of the Related Parties.

7.5 Assignment of Developments. The Employee assigns and agrees to assign without further compensation to the Employer and its successors, assigns or designees, all of the Employee's right, title and interest in and to all Business Opportunities and Intellectual Property (as those terms are defined below), and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Employer.

For purposes of this Agreement, "Business Opportunities" means all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are developed by the Employee during the Employment Term, or originated by any third party

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and brought to the attention of the Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions or other written or charted means).

For purposes of this Agreement, "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of the Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which the Employee discovers, conceives, invents, creates or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation or development (A) occurs in the course of the Employee's employment with the Employer, or (B) occurs with the use of any of the time, materials or facilities of the Related Parties, or
(C) in the good faith judgment of the Board, relates or pertains in any material way to the purposes, activities or affairs of the Related Parties.

7.6 Injunctive Relief. The Employee acknowledges that a breach of any of the covenants contained in this Section 7 may result in material, irreparable injury to the Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat of breach, the Employer will be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Employee from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. To the extent that the Employer seeks a temporary restraining order (but not a preliminary or permanent injunction), the Employee agrees that a temporary restraining order may be obtained ex parte.

7.7 Adjustment of Covenants. The parties consider the covenants and restrictions contained in this Section 7 to be reasonable. However, if and when any such covenant or restriction is found to be void or unenforceable and would have been valid had some part of it been deleted or had its scope of application been modified, such covenant or restriction will be deemed to have been applied with such modification as would be necessary and consistent with the intent of the parties to have made it valid, enforceable and effective.

7.8 Forfeiture Provision.

(a) Detrimental Activities. If the Employee engages in any activity that violates any covenant or restriction contained in this Section 7, in addition to any other remedy the Employer may have at law or in equity, (i) the Employee will be entitled to no further payments or benefits from the Employer under this Agreement or otherwise, except for any payments or benefits required to be made or provided under applicable law, (ii) all unexercised Unit options, restricted Units and other forms of equity compensation held by or credited to the Employee will terminate effective as of the date on which the Employee engages in that activity, unless terminated sooner by operation of another term or condition of this Agreement or other applicable plans and agreements, and (iii) any exercise, payment or delivery pursuant to any equity compensation award that occurred within one year prior to the date on which the Employee engages in that activity may be rescinded within one year after the first date that a majority of the members of the Board first became aware that the Employee engaged in that activity. In the event of any such rescission, the Employee will pay to the

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Employer the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(b) Right of Set-Off. The Employee consents to a deduction from any amounts the Employer owes the Employee from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Employee by the Employer), to the extent of the amounts the Employee owes the Employer under Section 7.8(a) above. Whether or not the Employer elects to make any set-off in whole or in part, if the Employer does not recover by means of set-off the full amount the Employee owes, calculated as set forth above, the Employee agrees to pay immediately the unpaid balance to the Employer. In the discretion of the Board, reasonable interest may be assessed on the amounts owed, calculated from the later of (i) the date the Employee engages in the prohibited activity and (ii) the applicable date of exercise, payment or delivery.

8. MISCELLANEOUS.

8.1 Assignment; Successors; Binding Agreement. This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Employer arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Employer, or succeeding to the business and substantially all of the assets of the Employer or any affiliates for which the Employee performs substantial services. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

8.2 Modification and Waiver. Except as otherwise provided below, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is duly approved by the Board and is agreed to in writing by the Employee and such officer(s) as may be specifically authorized by the Board to effect it. No waiver by any party of any breach by any other party of, or of compliance with, any term or condition of this Agreement to be performed by any other party, at any time, will constitute a waiver of similar or dissimilar terms or conditions at that time or at any prior or subsequent time.

8.3 Entire Agreement. This Agreement embodies the entire understanding of the parties hereof, and, upon the Effective Date, will supersede all other oral or written agreements or understandings between them regarding the subject matter hereof. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Texas other than the conflict of laws provision thereof.

8.5 Consent to Jurisdiction and Service of Process.

(a) Section 7 Disputes. In the event of any dispute, controversy or claim between the Employer and the Employee arising out of or relating to the interpretation, application or enforcement of the provisions of Section 7, the Employer and the

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Employee agree and consent to the personal jurisdiction of the state and local courts of Midland County, Texas and/or the United States District Court for the Western District of Texas for resolution of the dispute, controversy or claim, and that those courts, and only those courts, will have jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with Section 7 of this Agreement. The Employer and the Employee also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Employer at the address of its principal executive offices and to the Employee at his last known address as reflected in the Employer's records.

(b) Disputes Other Than Under Section 7. In the event of any dispute relating to this Agreement, other than a dispute relating solely to Section 7, the parties will use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they will consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If such a dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure. If the parties do not reach such solution through negotiation or mediation within a period of sixty (60) days, then, upon notice by either party to the other, all disputes, claims, questions, or differences will be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its Commercial Arbitration Rules. The arbitrator will be selected by agreement of the parties or, if they do not agree on an arbitrator within thirty (30) days after either party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator will be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Midland, Texas. The determination reached in such arbitration will be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Midland, Texas, and will be conducted in accordance with the Commercial Arbitration Rules of the AAA.

8.6 Withholding of Taxes. The Employer will withhold from any amounts payable under the Agreement all federal, state, local or other taxes legally required to be withheld.

8.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

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to the Employer, to:

Attn: Chairman of the Board
Legacy Reserves Services, Inc. 303 W. Wall, Suite 1600
Midland, Texas 79701

to the Employee, to:

Paul T. Horne
303 W. Wall, Suite 1600
Midland, Texas 79701

Addresses may be changed by written notice sent to the other party at the last recorded address of that party.

8.8 Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

8.10 Headings. The headings used in this Agreement are for convenience only, do not constitute a part of the Agreement, and will not be deemed to limit, characterize, or affect in any way the provisions of the Agreement, and all provisions of the Agreement will be construed as if no headings had been used in the Agreement.

8.11 Construction. As used in this Agreement, unless the context otherwise requires: (a) the terms defined herein will have the meanings set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include," "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (d) "writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof," "herein," "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section or other subdivision hereof or attachment hereto; (f) references to any gender include references to all genders; and (g) references to any agreement or other instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

8.12 Capacity; No Conflicts. The Employee represents and warrants to the Employer that: (i) he has full power, authority and capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) such execution, delivery and performance will not (and with the giving of notice or lapse of time, or both, would not) result in the breach of any agreement or other obligation to which he is a party or is otherwise bound, and (iii) this Agreement is his valid and binding obligation, enforceable in accordance with its terms.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

LEGACY RESERVES SERVICES, INC. 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

EMPLOYEE 

/s/ Paul T. Horne
------------------------------------------
Paul T. Horne

FOR THE LIMITED PURPOSES SET FORTH HEREIN:

LEGACY RESERVES LP

By: LEGACY RESERVES GP, LLC
its general partner 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

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EXHIBIT A

APPROVED OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE

Outside Activities other than Oil & Gas Investments:

Owner and sole proprietor of a bird dog business which includes buying, selling, and raising birddogs as well as guiding quail hunts.

Investment of personal wealth in stocks, bonds, mutual funds, etc

Exhibit 10.13

EMPLOYMENT AGREEMENT

The parties to this Employment Agreement (this "Agreement") are LEGACY RESERVES SERVICES, INC., a Texas corporation (the "Employer") and WILLIAM M. MORRIS (the "Employee"). The parties desire to provide for the employment of the Employee as Controller of LEGACY RESERVES GP, LLC, a Delaware limited liability company (the "Company") on the terms set forth herein effective as of the date of completion of a private placement of equity securities ("Units") of LEGACY RESERVES LP, a Delaware limited partnership ("Legacy"). Legacy is joining in this agreement for the limited purposes of reflecting its agreement to the matters set forth herein as to it, but such joinder is not intended to make Legacy the employer of the Employee for any purpose. The date this Agreement becomes effective is herein referred to as the "Effective Date".

1. POSITION AND DUTIES

1.1 Employment; Titles; Reporting. On the Effective Date, the Employer agrees to employ the Employee and the Employee agrees to enter employment with the Employer, upon the terms and subject to the conditions provided under this Agreement. During the Employment Term (as defined in Section 2), the Employee will serve as Controller of the Company. In such capacity, the Employee will report to and otherwise will be subject to the direction and control of the Board of Directors of the Company (including any committee thereof, the "Board") and will have such duties, responsibilities and authorities as may be assigned to him by the Board from time to time and otherwise consistent with such position in a public company, comparable in size to Legacy, which is engaged in natural gas and oil acquisition, development and production (including, but not limited to, maintaining, to the extent applicable, compliance with the Sarbanes-Oxley Act of 2002 and related regulations and all other federal, state and local laws and regulations, as well as all regulations and rules of any exchange or electronic trading system on which Legacy's securities may be traded).

1.2 Duties. During the Employment Term, the Employee will devote substantially all of his full working time to the business and affairs of the Employer, the Company and Legacy, will use his best efforts to promote the Employer's, the Company's and Legacy's interests and will perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Employee may be required by the Board to provide services to, or otherwise serve as an officer or director of, any direct or indirect subsidiary of the Employer, the Company or Legacy (the Employer, the Company, Legacy and all such direct and indirect subsidiaries of the Employer, the Company or Legacy being referred to herein as the "Related Parties"), as applicable. The Employee will comply with the Employer's, the Company's and Legacy's policies, codes and procedures, as they may be in effect from time to time, applicable to executive officers of the Company and Legacy. Nevertheless, the Employee may, with the prior approval of the Board in each instance, engage in such other business and charitable activities that do not violate Section 7, create a conflict of interest with the Employer, the Company or Legacy or materially interfere with the performance of his obligations to the Employer, the Company or Legacy under this Agreement. The activities in which the Employee is engaged as of the Effective Date, all of which have been approved by the Board, are listed on Exhibit A hereto.

1.3 Place of Employment. The Employee will perform his duties under this Agreement at the Company's offices in Midland, Texas, with the likelihood of substantial business travel.

2. TERM OF EMPLOYMENT. The term of the Employee's employment by the Employer under this Agreement (the "Employment Term") will commence on the Effective Date and will continue until employment is terminated by either party under Section
5. The date on which the Employee's employment ends is referred to in this Agreement as the "Termination Date."

3. COMPENSATION.

3.1 Base Salary. During the Employment Term, the Employee will be entitled to receive a base salary ("Base Salary") at an annual rate of not less than $125,000 for services rendered to the Employer, any of its affiliates and any of its or their direct or indirect subsidiaries, payable in accordance with the Employer's regular payroll practices. The Employee's Base Salary will be reviewed annually by the Board and may be adjusted upward in the Board's sole discretion.

3.2 Annual Bonus Compensation. During the Employment Term, the Employee will be entitled to receive incentive compensation in such amounts and at such times as the Board may determine in its sole discretion to award to him under any incentive compensation or other bonus plan or arrangement as may be established by the Board from time to time (collectively, the "Employee Bonus Plan"). Any additional incentive compensation payable under any Employee Bonus Plan will be referred to in the aggregate in this Agreement as the Employee's "Bonus."

3.3 Long-Term Incentive Compensation. Awards of Unit options, Unit grants, restricted Units and/or other forms of equity-based compensation to the Employee on or after the Effective Date may be made from time to time during the Employment Term by the Board in its sole discretion, whose decision will be based upon performance and award guidelines for executive officers of the Company and Legacy established periodically by the Board in its sole discretion. Without limiting the foregoing, on the Effective Date, subject to the conditions hereinafter set forth, the Board will cause the Company to grant to the Employee and will cause Legacy to issue to the Employee a Unit grant (the "Unit Grant") equal to 35,077 Units. Assuming the Employee continues in the employ of the Employer and serves as an executive officer of the Company through the applicable vesting date, the Unit Grant will vest one-third (1/3) one year after the Effective Date, one-third (1/3) two years after the Effective Date and one-third (1/3) three years after the Effective Date. The Unit Award is subject to accelerated vesting in full upon the Employee's death or disability, a termination without Cause (as defined in Section 5.2(b)), with Good Reason (as defined in Section 5.3(c)) or upon a Change of Control (as defined in Section 6.4(c)), or otherwise in accordance with the provisions of the Legacy Reserves LP Long-Term Incentive Plan and the Unit award agreements relating to the Unit Grant.

4. EXPENSES AND OTHER BENEFITS.

4.1 Reimbursement of Expenses. The Employee will be entitled to receive prompt reimbursement for all reasonable expenses, including professional fees, incurred by him during the Employment Term (in accordance with the policies and practices presently followed by the Company or as may be established by the Board from time to time for the Company's senior executive officers) in performing services under this Agreement, provided that the Employee properly accounts for such expenses in accordance with the Company's and Legacy's policies as in effect from time to time.

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4.2 Vacation. Employee will be entitled to paid vacation time each year during the Employment Term that will accrue in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company.

4.3 Other Employee Benefits. In addition to the foregoing, during the Employment Term, the Employee will be entitled to participate in and to receive benefits as a senior executive under all of the Company's and Legacy's employee benefit plans, programs and arrangements available to senior executives, subject to the eligibility criteria and other terms and conditions thereof, as such plans, programs and arrangements may be duly amended, terminated, approved or adopted by the Board from time to time.

5. TERMINATION OF EMPLOYMENT.

5.1 Death. The Employee's employment under this Agreement will terminate upon his death.

5.2 Termination by the Employer.

(a) Terminable at Will. The Employer may terminate the Employee's employment under this Agreement at any time with or without Cause (as defined below).

(b) Definition of Cause. For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment under this Agreement by reason of any of the following: (i) the Employee's conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of Legacy or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (ii) the Employee's repeated intoxication by alcohol or drugs during the performance of his duties; (iii) malfeasance in the conduct of Employee's duties, including, but not limited to, (A) willful and intentional misuse or diversion of any of the Related Parties' funds, (B) embezzlement or (C) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to any of the Related Parties; (iv) the Employee's material failure to perform the duties of the Employee's employment consistent with Employee's position, expressly including the provisions of this Agreement, or material failure to follow or comply with the reasonable and lawful written directives of the Board; (v) a material breach of this Agreement; or (vi) a material breach by the Employee of written policies of the Related Parties concerning employee discrimination or harassment.

(c) Notice and Cure Opportunity in Certain Circumstances. The Employee may be afforded a reasonable opportunity to cure any act or omission that would otherwise constitute "Cause" hereunder according to the following terms: The Board will cause the Employer to give the Employee written notice stating with reasonable specificity the nature of the circumstances determined by the Board in good faith to constitute "Cause." If, in the good faith judgment of the Board, the alleged breach is reasonably susceptible to cure, the Employee will have fifteen (15) days from his receipt of such notice to effect the cure of such circumstances or such breach to the good faith satisfaction of the Board. The Board will state whether the Employee will have such an opportunity to cure in the initial notice of "Cause" referred to above. If, in the good faith judgment of the Board the alleged breach is not reasonably susceptible to cure, or such

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circumstances or breach have not been satisfactorily cured within such fifteen (15) day cure period, such breach will thereupon constitute "Cause" hereunder.

5.3 Termination by the Employee.

(a) Terminable at Will. The Employee may terminate his employment under this Agreement at any time with or without Good Reason (as defined below).

(b) Notice and Cure Opportunity. If such termination is with Good Reason, the Employee will give the Employer written notice, which will identify with reasonable specificity the grounds for the Employee's resignation and provide the Employer with fifteen (15) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. A termination will not be for Good Reason if such notice is given by the Employee to the Employer more than thirty (30) days after the occurrence of the event that the Employee alleges is Good Reason for his termination hereunder.

(c) Definition of Good Reason. For purposes of this Agreement, "Good Reason" will mean any of the following to which the Employee has not consented in writing: (a) a reduction in the Employee's Base Salary; (b) a relocation of the Employee's primary place of employment to a location more than 20 miles from Midland, Texas; or (c) any material reduction in the Employee's title, authority or responsibilities as Controller of the Company.

5.4 Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee during the Employment Term (other than termination pursuant to Section 5.1) will be communicated by written Notice of Termination to the other party hereto in accordance with Section 8.7. For purposes of this Agreement, a "Notice of Termination" means a written notice that (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date (as defined herein) is other than the date of receipt of such notice, specifies the Termination Date (which Termination Date will be not more than thirty (30) days after the giving of such notice).

5.5 Disability. If the Employer determines in good faith that the Disability (as defined herein) of the Employee has occurred during the Employment Term, it may, without breaching this Agreement, give to the Employee written notice in accordance with Section 5.4 of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer will terminate effective on the fifteenth (15th) day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the fifteen (15) days after such receipt, the Employee will not have returned to full-time performance of the Employee's duties. "Disability" means the determination by a physician selected by the Employer that the Employee has been unable to perform substantially the Employee's usual and customary duties under this Agreement for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. At any time and from time to time, upon reasonable request therefor by the Employer, the Employee will submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability.

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6. COMPENSATION OF THE EMPLOYEE UPON TERMINATION.

6.1 Death. If the Employee's employment under this Agreement is terminated by reason of his death, the Employer will pay to the person or persons designated by the Employee for that purpose in a notice filed with the Employer, or, if no such person will have been so designated, to his estate, the amount of
(a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) a pro rata portion of any Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, determined by multiplying the Employee's target Bonus for such period by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such termination occurs through and including the Termination Date and the denominator of which is 365 ("Pro Rata Bonus"), and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law. Without limiting the generality of the foregoing, any rights the Employee's beneficiary(ies) may have to the proceeds of any life insurance arrangement set forth in Section 4.3 will be in lieu of any special entitlement to severance pay or benefits upon the Employee's death.

6.2 Disability. In the event of the Employee's termination by reason of Disability pursuant to Section 5.5, the Employee will continue to receive his Base Salary and participate in applicable employee benefit plans or programs of the Related Parties (on an equivalent basis to Section 6.4(a)(iv) below) through the Termination Date, subject to offset dollar-for-dollar by the amount of any disability income payments provided to the Employee under any disability policy or program funded by any of the Related Parties, and will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, (c) the Employee's Pro-Rata Bonus, payable at such time as bonuses for the annual period are paid to other executive officers of the Company, and (d) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.3 By the Employer for Cause or the Employee Without Good Reason. If the Employee's employment is terminated by the Employer for Cause, or if the Employee terminates his employment other than for Good Reason, the Employee will receive (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty (30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date, and the Employer thereafter will have no further obligation to the Employee under this Agreement, other than for payment of any amounts accrued and

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vested under any employee benefit plans or programs of the Related Parties and any payments or benefits required to be made or provided under applicable law.

6.4 By the Employee for Good Reason or the Employer other than for Cause.

(a) Severance Benefits on Non-Change of Control Termination. Subject to the provisions of Section 6.4(b) and Section 6.4(d), if prior to or more than one (1) year after the occurrence of a Change of Control (as defined below) the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then the Employee will be entitled to the following benefits (the "Severance Benefits"):

(i) an amount equal to (a) the Employee's accrued but unpaid Base Salary through the Termination Date paid in a lump sum within thirty
(30) days following the Termination Date, (b) any accrued but unpaid Bonus, which Bonus will be payable at such time as the bonuses of other executive officers of the Company are payable, and (c) any other amounts that may be reimbursable by the Employer to the Employee as expressly provided under this Agreement paid in a lump sum within thirty (30) days following the Termination Date;

(ii) twenty-four (24) monthly payments each in an amount equal to one-twelfth (1/12) of the Employee's annual Base Salary at the highest rate in effect at any time during the thirty-six (36)-month period prior to the Termination Date plus the average annual Bonus of the two
(2) years preceding the Termination Date, commencing with the calendar month immediately following the calendar month in which the Termination Date occurs, it being agreed that for purposes hereof, the Employee's Base Salary during the first twelve (12) months following the Effective Date will be deemed to be $125,000;

(iii) a cash amount equal to the Employee's Pro-Rata Bonus for the fiscal year in which the Termination Date occurs, payable at such time as bonuses for the annual period are paid to other executive officers of the Company; and

(iv) the Employer will pay the full cost of the Employee's COBRA continuation coverage for such period, as such coverage is required to be continued under applicable law; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 6.4(a)(iv) may be discontinued prior to the end of the period provided in this subsection (iv) to the extent, but only to the extent, that the Employee receives substantially similar benefits from a subsequent employer ("COBRA Benefit").

(b) Change of Control Benefits. Subject to the provisions of Section 6.4(d), if within the one (1) year period following the occurrence of a Change of Control, the Employer terminates the Employee's employment without Cause, or the Employee terminates his employment for Good Reason, then, in lieu of the Severance Benefits under Section 6.4(a), the Employee will be entitled to benefits (the "Change of Control Benefits") identical to those set forth in Section 6.4(a) except that the amount described in clause (ii) will be equal to thirty-six (36) monthly payments and will be paid in a lump sum within thirty (30) days following the Termination Date.

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(c) Definition of Change of Control. For purposes of this Agreement, a "Change of Control" will mean the first to occur of:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding equity interests of Legacy (the "Outstanding Legacy Equity") or (B) the combined voting power of the then-outstanding voting securities of Legacy entitled to vote generally in the election of directors (the "Outstanding Legacy Voting Securities"); provided, however, that, for purposes of this Section 6.4(c)(i), the following acquisitions will not constitute a Change of Control: (A) any acquisition directly from Legacy, (B) any acquisition by Legacy, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Legacy or any affiliated company, (D) any acquisition by any corporation or other entity pursuant to a transaction that complies with Section 6.4(c)(iii)(A), Section 6.4(c)(iii)(B) or Section 6.4(c)(iii)(C) or (E) any acquisition of shares from Legacy arising out of or in connection with an IPO or private placement of Legacy's securities;

(ii) Any time at which individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason, to constitute at least a majority of the Board; provided, however, that (A) any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Legacy's Unitholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, and (B) any individual becoming a director subsequent to the date hereof whose election resulted from Legacy's failure to file a registration statement within 240 days of the Effective Date will be considered as though such individual were a member of the Incumbent Board;

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Legacy or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Legacy, or the acquisition of assets or equity interests of another entity by Legacy or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding equity interests and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation or other entity that, as a result of such transaction, owns Legacy or all or substantially all of Legacy's assets either directly or through one or more subsidiaries) in substantially the

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same proportions as their ownership immediately prior to such Business Combination of the Outstanding Legacy Equity and the Outstanding Legacy Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Legacy or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding equity interests of the corporation or other entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation or other entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation or equivalent body of any other entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) Consummation of a complete liquidation or dissolution of Legacy.

(d) Conditions to Receipt of Severance Benefits.

(i) Release. As a condition to receiving any Severance Benefits or Change of Control Benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b), the Employee will execute a release (the "Release"), which will include an affirmation of the restrictive covenants set forth in Section 7 and a non-disparagement provision, in form and substance satisfactory to the Employer, of any claims, whether arising under federal, state or local statute, common law or otherwise, against the Employer and the Related Parties which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Employer and the Related Parties pursuant to any provisions of the Related Parties' organizational documents or any directors and officers liability insurance policies maintained by any of the Related Parties. If the Employee fails or otherwise refuses to execute a Release within a reasonable time after the Employer's request to do so, and in all events prior to the date on which such benefits are to be first paid to him, the Employee will not be entitled to any Severance Benefits or Change of Control Benefits, as the case may be, or any other benefits provided under this Agreement and the Employer will have no further obligations with respect to the provision of those benefits except as may be required by law.

(ii) Limitation on Benefits. If, following a termination of employment that gives the Employee a right to the payment of Severance Benefits under Section 6.4(a) or Section 6.4(b), the Employee violates in any material respect any of the covenants in Section 7 or as otherwise set forth in the Release, the Employee will have no further right or claim to any payments or other benefits to which the Employee may otherwise be entitled under Section 6.4(a) or Section 6.4(b) from and after the date on which the Employee engages in such activities and the Employer will have no further obligations with respect to such payments or benefits, and the covenants in Section 7 will nevertheless continue in full force and effect.

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6.5 Severance Benefits Not Includable for Employee Benefits Purposes. Except to the extent the terms of any applicable benefit plan, policy or program provide otherwise, any benefit programs of any of the Related Parties that takes into account the Employee's income will exclude any and all Severance Benefits and Change of Control Benefits provided under this Agreement.

6.6 Exclusive Severance Benefits. The Severance Benefits payable under
Section 6.4(a) or the Change of Control Benefits payable under Section 6.4(b), if they become applicable under the terms of this Agreement, will be in lieu of any other severance or similar benefits that would otherwise be payable under any other agreement, plan, program or policy of the Employer.

6.7 Additional Payments by the Employer. Notwithstanding anything in this Agreement to the contrary, in the event that any benefits payable or otherwise provided under this Agreement would be

(a) subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (such excise tax referred to in this Agreement as the "Excise Tax"), then the Board may, in its sole discretion, provide for the payment of, or otherwise reimburse the Employee for, an amount up to such Excise Tax and any related taxes, fees or penalties thereon as the Board may consider to be customary and appropriate for a comparable public company; or

(b) deemed to constitute non-qualified deferred compensation subject to Section 409A of the Code, the Employer will have the discretion to adjust the terms of such payment or benefit as it deems necessary to comply with the requirements of Section 409A to avoid the imposition of any excise tax or other penalty with respect to such payment or benefit under Section 409A of the Code.

7. RESTRICTIVE COVENANTS.

7.1 Confidential Information. The Employee hereby acknowledges that in connection with his employment by the Employer he has been provided and may in the future be provided Confidential Information (as defined below) (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by the Employee or otherwise has been or is made available to him) regarding the business and operations of the Related Parties. The Employee further acknowledges that such Confidential Information is unique, valuable, considered trade secrets and deemed proprietary by the Related Parties. For purposes of this Agreement, "Confidential Information" includes, without limitation, any information heretofore or hereafter acquired, developed or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Related Parties, whether oral or in written form. The Employee agrees that all Confidential Information is and will remain the property of one or more of the Related Parties. The Employee further agrees, except for disclosures occurring in the good faith performance of his duties for the Related Parties, during the Employment Term and for a period of two (2) years after the Termination Date, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than the Related Parties and authorized executives

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of the same, to use or otherwise gain access to any Confidential Information. The Employee will have no obligation under this Agreement with respect to any information that becomes generally available to the public other than as a result of a disclosure by the Employee or his agent or other representative or becomes available to the Employee on a non-confidential basis from a source other than the Related Parties. Further, the Employee will have no obligation under this Agreement to keep confidential any of the Confidential Information to the extent that a disclosure of it is required by law or is consented to by the Employer, the Company or Legacy; provided, however, that if and when such a disclosure is required by law, the Employee promptly will provide the Employer with notice of such requirement, so that an appropriate protective order may be sought.

7.2 Return of Property. Employee agrees to deliver promptly to the Employer, upon termination of his employment hereunder, or at any other time when the Employer so requests, all documents relating to the business of the Related Parties, including without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any documents relating to the business of the Related Parties and all copies thereof and therefrom; provided, however, that the Employee will be permitted to retain copies of any documents or materials of a personal nature or otherwise related to the Employee's rights under this Agreement.

7.3 Non-Compete Obligations.

(a) Non-Compete Obligations During Employment Term. The Employee agrees that during the Employment Term:

(i) the Employee will not, other than through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, unless set forth on the approved activities list on Exhibit A; and

(ii) all investments made by the Employee (whether in his own name or in the name of any family members or other nominees or made by the Employee's controlled affiliates), which relate to the leasing, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products will be made solely through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A; and the Employee will not (directly or indirectly through any family members or other persons), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities, or (B) invest or otherwise

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participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity, in either case, except through the Related Parties, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A.

(b) Non-Compete Obligations After Termination Date. The Employee agrees that the Employee will not engage or participate in any manner, whether directly or indirectly through any family member or other person or as an employee, employer, consultant, agent principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity, unless approved in writing by a majority of the independent members of the Board of Directors or unless such activity is set forth on Exhibit A:

(i) during the 90 day period following the Termination Date, in any business or activity which is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products within (A) any county or parish in which the Related Parties own any oil and gas interests or conducts operations on the Termination Date or in which the Related Parties have owned any oil and gas interests or conducted operations at any time during the six months immediately preceding the Termination Date or (B) any county or parish adjacent to any county or parish described in clause (A); and

(ii) during the one (1) year period following the Termination Date, in any business or activity which is a publicly traded oil and gas income distribution company or partnership or a privately held company or partnership that is contemplating an initial public offering as an oil and gas income distribution company or partnership that is in direct competition with the business of the Related Parties in the leasing, acquiring, exploring, producing, gathering or marketing of hydrocarbons and related products; provided that, this subsection (ii) will not preclude the Employee from making investments in securities of oil and gas companies which are registered on a national stock exchange, if (A) the aggregate amount owned by the Employee and all family members and affiliates does not exceed 5% of such company's outstanding securities, and (B) the aggregate amount invested in such investments by the Employee and all family members and affiliates after the date hereof does not exceed $500,000.

(c) Not Applicable Following Change of Control Termination. The Employee will not be subject to the covenants contained in this Section 7.3 and such covenants will not be enforceable against the Employee from and after the date that the Employee's employment is terminated within one (1) year after a Change of Control.

7.4 Non-Solicitation. During the Employment Term and for a period of twenty-four (24) months after the Termination Date, the Employee will not, whether for his own account or for the account of any other Person (other than the Related Parties), intentionally solicit, endeavor to entice away from the Related Parties, or otherwise interfere with the relationship of the Related Parties with, (a) any person who is employed by the Related Parties (including any independent sales representatives or organizations), or (b) any client or customer of the Related Parties.

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7.5 Assignment of Developments. The Employee assigns and agrees to assign without further compensation to the Employer and its successors, assigns or designees, all of the Employee's right, title and interest in and to all Business Opportunities and Intellectual Property (as those terms are defined below), and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Employer.

For purposes of this Agreement, "Business Opportunities" means all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are developed by the Employee during the Employment Term, or originated by any third party and brought to the attention of the Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions or other written or charted means).

For purposes of this Agreement, "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of the Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which the Employee discovers, conceives, invents, creates or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation or development (A) occurs in the course of the Employee's employment with the Employer, or (B) occurs with the use of any of the time, materials or facilities of the Related Parties, or
(C) in the good faith judgment of the Board, relates or pertains in any material way to the purposes, activities or affairs of the Related Parties.

7.6 Injunctive Relief. The Employee acknowledges that a breach of any of the covenants contained in this Section 7 may result in material, irreparable injury to the Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat of breach, the Employer will be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Employee from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. To the extent that the Employer seeks a temporary restraining order (but not a preliminary or permanent injunction), the Employee agrees that a temporary restraining order may be obtained ex parte.

7.7 Adjustment of Covenants. The parties consider the covenants and restrictions contained in this Section 7 to be reasonable. However, if and when any such covenant or restriction is found to be void or unenforceable and would have been valid had some part of it been deleted or had its scope of application been modified, such covenant or restriction will be deemed to have been applied with such modification as would be necessary and consistent with the intent of the parties to have made it valid, enforceable and effective.

7.8 Forfeiture Provision.

(a) Detrimental Activities. If the Employee engages in any activity that violates any covenant or restriction contained in this Section 7, in addition to any other

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remedy the Employer may have at law or in equity, (i) the Employee will be entitled to no further payments or benefits from the Employer under this Agreement or otherwise, except for any payments or benefits required to be made or provided under applicable law, (ii) all unexercised Unit options, restricted Units and other forms of equity compensation held by or credited to the Employee will terminate effective as of the date on which the Employee engages in that activity, unless terminated sooner by operation of another term or condition of this Agreement or other applicable plans and agreements, and (iii) any exercise, payment or delivery pursuant to any equity compensation award that occurred within one year prior to the date on which the Employee engages in that activity may be rescinded within one year after the first date that a majority of the members of the Board first became aware that the Employee engaged in that activity. In the event of any such rescission, the Employee will pay to the Employer the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(b) Right of Set-Off. The Employee consents to a deduction from any amounts the Employer owes the Employee from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Employee by the Employer), to the extent of the amounts the Employee owes the Employer under Section 7.8(a) above. Whether or not the Employer elects to make any set-off in whole or in part, if the Employer does not recover by means of set-off the full amount the Employee owes, calculated as set forth above, the Employee agrees to pay immediately the unpaid balance to the Employer. In the discretion of the Board, reasonable interest may be assessed on the amounts owed, calculated from the later of (i) the date the Employee engages in the prohibited activity and (ii) the applicable date of exercise, payment or delivery.

8. MISCELLANEOUS.

8.1 Assignment; Successors; Binding Agreement. This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Employer arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Employer, or succeeding to the business and substantially all of the assets of the Employer or any affiliates for which the Employee performs substantial services. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

8.2 Modification and Waiver. Except as otherwise provided below, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is duly approved by the Board and is agreed to in writing by the Employee and such officer(s) as may be specifically authorized by the Board to effect it. No waiver by any party of any breach by any other party of, or of compliance with, any term or condition of this Agreement to be performed by any other party, at any time, will constitute a waiver of similar or dissimilar terms or conditions at that time or at any prior or subsequent time.

8.3 Entire Agreement. This Agreement embodies the entire understanding of the parties hereof, and, upon the Effective Date, will supersede all other oral or written agreements or understandings between them regarding the subject matter hereof. No agreement or

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representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Texas other than the conflict of laws provision thereof.

8.5 Consent to Jurisdiction and Service of Process.

(a) Section 7 Disputes. In the event of any dispute, controversy or claim between the Employer and the Employee arising out of or relating to the interpretation, application or enforcement of the provisions of Section 7, the Employer and the Employee agree and consent to the personal jurisdiction of the state and local courts of Midland County, Texas and/or the United States District Court for the Western District of Texas for resolution of the dispute, controversy or claim, and that those courts, and only those courts, will have jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with
Section 7 of this Agreement. The Employer and the Employee also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Employer at the address of its principal executive offices and to the Employee at his last known address as reflected in the Employer's records.

(b) Disputes Other Than Under Section 7. In the event of any dispute relating to this Agreement, other than a dispute relating solely to Section 7, the parties will use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they will consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If such a dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure. If the parties do not reach such solution through negotiation or mediation within a period of sixty (60) days, then, upon notice by either party to the other, all disputes, claims, questions, or differences will be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its Commercial Arbitration Rules. The arbitrator will be selected by agreement of the parties or, if they do not agree on an arbitrator within thirty (30) days after either party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator will be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Midland, Texas. The determination reached in such arbitration will be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Midland, Texas, and will be conducted in accordance with the Commercial Arbitration Rules of the AAA.

8.6 Withholding of Taxes. The Employer will withhold from any amounts payable under the Agreement all federal, state, local or other taxes legally required to be withheld.

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8.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

to the Employer, to:

Attn: Chairman of the Board
Legacy Reserves Services, Inc. 303 W. Wall, Suite 1600
Midland, Texas 79701

to the Employee, to:

William M. Morris
303 W. Wall, Suite 1600
Midland, Texas 79701

Addresses may be changed by written notice sent to the other party at the last recorded address of that party.

8.8 Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

8.10 Headings. The headings used in this Agreement are for convenience only, do not constitute a part of the Agreement, and will not be deemed to limit, characterize, or affect in any way the provisions of the Agreement, and all provisions of the Agreement will be construed as if no headings had been used in the Agreement.

8.11 Construction. As used in this Agreement, unless the context otherwise requires: (a) the terms defined herein will have the meanings set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include," "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (d) "writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof," "herein," "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section or other subdivision hereof or attachment hereto; (f) references to any gender include references to all genders; and (g) references to any agreement or other instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

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8.12 Capacity; No Conflicts. The Employee represents and warrants to the Employer that: (i) he has full power, authority and capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) such execution, delivery and performance will not (and with the giving of notice or lapse of time, or both, would not) result in the breach of any agreement or other obligation to which he is a party or is otherwise bound, and (iii) this Agreement is his valid and binding obligation, enforceable in accordance with its terms.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

LEGACY RESERVES SERVICES, INC. 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

EMPLOYEE 

/s/ William M. Morris
------------------------------------------
William M. Morris

FOR THE LIMITED PURPOSES SET FORTH HEREIN:

LEGACY RESERVES LP

By: LEGACY RESERVES GP, LLC
its general partner 

By: /s/ Cary D. Brown
    --------------------------------------
    Cary D. Brown, Chief Executive Officer

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EXHIBIT A

APPROVED OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE

Outside Activities other than Oil & Gas Investments:

Maintains small private tax practice for 18 private clients involving the preparation of income tax returns

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

NAME, JURISDICTION

Legacy Reserves Operating GP LLC, Delaware

Legacy Reserves Operating LP, Delaware

Legacy Reserves Services, Inc., Texas

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

Legacy Reserves LP

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the combined financial statements of the Moriah Group, which is contained in that Prospectus.

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the combined financial statements of the Brothers Group, which is contained in that Prospectus.

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated November 7, 2005, relating to the statements of revenues and direct operating expenses of the PITCO Properties, which is contained in that Prospectus.

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the balance sheet of Legacy Reserves LP, which is contained in that Prospectus.

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the balance sheet of Legacy Reserves GP, LLC, which is contained in that Prospectus.

We also consent to the reference to us under the caption "Experts" in the Prospectus. 

/s/ BDO Seidman, LLP

BDO Seidman, LLP
Houston, Texas


May 11, 2006

Exhibit 23.02

Consent of Independent Certified Public Accountants

Legacy Reserves LP

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the financial statements of the Selected Interests of Paul T. Horne, which is contained in that Prospectus.

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 5, 2006, relating to the combined financial statements of the Selected Properties of Charities Support Foundation Inc. and Affiliates, which is contained in that Prospectus.

We also consent to the reference to us under the caption "Experts" in the Prospectus. 

/s/ Johnson Miller & Co., CPA's PC
----------------------------------
Johnson Miller & Co., CPA's PC
Midland, Texas

May 11, 2006

EXHIBIT 23.3

Consent of LaRoche Petroleum Consultants, Ltd.

As independent petroleum engineers, geologists and geophysicists we hereby consent to the reference to our Firm's name and the filing of our Firm's reserve report on the oil and natural gas reserves of Legacy Reserves LP as of December 31, 2005 as Appendix C to the Registration Statement on Form S-1 and related Prospectus of Legacy Reserves LP for the registration of units representing limited partner interests. 

                                /s/ Edward Travis
                                ------------------------------------------------
                                LaRoche Petroleum Consultants, Ltd.


Midland, Texas
May 12, 2006