"1940 Act" means the Investment Company Act of 1940, as amended, as the same may be further amended from time to time.

"Act" means the Texas Revised Limited Partnership Act, Article 6132(a) 1, as the same may be amended from time to time.

"Actual Depletion Deductions" means, with respect to each Partner, the Partner's actual depletion allowance with respect to the property, provided that a Partner's Actual Depletion Deductions with respect to any single property shall not, except for percentage depletion, exceed the Partner's share of the adjusted basis of the property determined pursuant to Code § 613A(c)(7)(D).

"Actual Gains" and "Actual Losses" mean, with respect to each Partner, the positive or negative difference, respectively, between (a) the Partner's share of the total amount realized from the disposition of any property (determined pursuant to Treasury Regulations § 1.704 1(b)(2)(v)), and (b) the Partner's share of the adjusted basis of the property determined pursuant to Code § 613A(c)(7)(D).

"Adjusted Capital Account" means the balance of a Partner's Capital Account as of the end of each Fiscal Year (i) increased by any amounts the Partner is unconditionally obligated to restore pursuant to this Agreement or is treated as unconditionally obligated to restore pursuant to Treasury Regulation Section 1.704 1(b)(ii)(c) and the penultimate sentences of Treasury Regulations Sections 1.704 2(g)(1) and 1.704 2(i)(5), and (ii) decreased by the amount of any applicable items described in Sections 1.704 1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations.

"Adjusted Tax Basis" means the adjusted basis for federal income tax purposes of a Partnership asset.

"Admission" means the admission of an Assignee as a Limited Partner.

"Affiliate" means, with respect to any Person, (a) any Person directly or indirectly controlling, controlled by or under common control with such Person and (b) any Person who, from time to time, is (i) an officer or director of such Person or (ii) a spouse, a parent, a sibling or a child of such Person, and (c) any Person that, directly or indirectly, is the beneficial owner of 25% or more of any class of equity securities or other ownership interests of such Person or of which such Person is directly or indirectly the owner of 25% or more of any class of equity securities or other ownership interests.

"Assignee" means any Person that receives any Interest in connection with an Involuntary Transfer; provided, such Person shall cease to be an Assignee if such person is admitted as a Limited Partner by the General Partner.

"Assumed Income Tax Rate" means the highest effective marginal combined Federal, state and local income tax rate for a Fiscal Year prescribed for an individual resident in Dallas, Texas (taking into account the character of the applicable income (e.g., long term or short term capital gain or ordinary or exempt) and the deductibility of state and local income taxes for Federal income tax purposes).

“Basic Sediment and Water” (BS&W) - Impurities and water contained in the fluid produced by an oil well.

“Bay Well” (SWR 14) Any well under the jurisdiction of the Commission for which the surface location is either:

located in or on a lake, river, stream, canal, estuary, bayou, or other inland navigable waters of the state; or

located on state lands seaward of the mean high tide line of the Gulf of Mexico in water of a depth at mean tide of not more than 100 feet that is sheltered from the direct action of the open seas of the Gulf of Mexico .

“Bbls” Barrels - In the energy industry, a barrel is 42 U.S. gallons measured at 60 º Fahrenheit.

“BCF” The abbreviation for billion cubic feet of gas

“BCF/D” The abbreviation for billion cubic feet of gas per day

“BCFE” Billion cubic feet Equivalent

“Blind Nipple” Nipple (pipe with threads at both ends) that can be blocked off from formation pressure and give a false pressure measurement.

“Blowout Prevention” Casinghead equipment that prevents the uncontrolled flow of oil, gas and mud from the well by closing around the drillpipe or sealing the hole.

“BO” Barrels of oil.

“BOPD” Barrels of oil per day.

"Book Basis" means, with respect to each Partnership asset, the asset's adjusted basis for federal income tax purposes, except that (a) the initial Book Basis of any asset contributed to the Partnership by a Partner shall be the asset's fair market value (as determined in good faith by the General Partner), (b) immediately before any Revaluation Event, the Book Basis of each Partnership asset (including intangible assets) shall be adjusted to equal its then fair market value (as determined in good faith by the General Partner), and (c) the Book Basis of any Partnership asset subject to depreciation, amortization or other cost recovery deductions and described in clause (a) or (b) of this definition shall be reduced by Book Depreciation or Actual Depletion Deductions or Simulated Depletion Deductions, as the case may be, and not by depreciation, amortization or other cost recovery deductions otherwise allowable for federal income tax purposes.

"Book Depreciation" means an amount which bears the same ratio to the Book Basis of an asset as depreciation, amortization, or other cost recovery deductions with respect to the asset, computed for federal income tax purposes, bears to the Adjusted Tax Basis of the asset; provided, that if the Adjusted Tax Basis of the asset is zero or otherwise immaterial in relation to the asset's Book Basis and remaining useful life, Book Depreciation shall be determined under any reasonable method selected by the General Partner.

“Btu” British thermal unit. The amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit.

"Business Day" means a day which is not a Saturday, Sunday or a day on which banks in Dallas , Texas are closed.

"BW" means barrels of water.

"Capital Account" means the account established and maintained for each Partner in the manner described in Section 4.1.

"Capital Contribution" means as to any Partner at any time, the aggregate amount of capital actually contributed to the Partnership by such Partner pursuant to Sections 3.2(a), 3.2(b) and 3.3 on or prior to such time.

"Code" means the Internal Revenue Code of 1986, as the same may be amended from time to time.

"Commitment" means, as to any Partner, the amount set forth in Schedule A hereto as its

"Commitment," as such amount may be reduced by reason of a Transfer of all or part of an Interest or otherwise changed by reason of actions taken pursuant to Section 3.3.

"Commitment Period" means the period from the Effective Date through the earlier of (a) the Expiration Date and (b) the date on which the obligation of Limited Partners to make Capital Contributions for Projects is satisfied by the Limited Partner having contributed the full amount of this commitment to the Partnership.

“Development Activities” Drilling a well (i) to a known producing formation in a previously discovered field, or (ii) to extend the limits of a known oil and gas reservoir.

"Development Expenses" means those expenses incurred by the Partnership in acquiring, owning, holding, developing, managing, operating, selling or otherwise disposing of or marketing oil and gas or other mineral leases or interests, or resulting from other oil and gas activities in which the Partnership participates, other than those expenses previously incurred by the Partnership as of the Effective Date with respect to the Initial Investment Wells.

“Development Prospect” An area in which the Partnership owns or intends to own one or more oil and gas interests which is geographically defined by the General Partner on the basis of geological data, and which is reasonably anticipated by the General Partner to contain at least
one reservoir.

"Development Prospects" means other development prospects that may be included in the Partnership.

“Development Prospect Well” A well drilled within a Development Prospect.

"Disposition" means the sale, exchange, redemption, repayment, repurchase or other disposition by the Partnership of all or any portion of any asset of the Partnership for cash, marketable securities or other property and shall also include the distribution in kind to the Partners of all or any portion of any asset of the Partnership as permitted hereby; provided, any exchange of any asset of the Partnership for cash and securities in a transaction that does not cause any taxable Partner to recognize gain or loss for United States federal income tax purposes with respect to such other securities received in such exchange shall not constitute a "'Disposition" of such asset except with respect to the cash consideration received.

"Dissolution Sale " means all sales and liquidations by or on behalf of the Partnership of its assets in connection with or in contemplation of the winding up of the Partnership.

"Effective Date" means March 26, 2004 .

"Eligible Limited Partners" means a Limited Partner, who has not been in default of this Agreement, has not caused any conflict of interest or conflicted otherwise with the Partnership's operations, nor otherwise violated, in the General Partner's sole and absolute discretion, any of the objectives or goodwill of the Partnership or its assets.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

"Expiration Date" means the third anniversary of the Effective Date.

“Exploratory Activities” Drilling a well either (i) in search of a new and as yet undiscovered reservoir of gas or oil, or (ii) with the hope of greatly extending the limits of a reservoir already developed.

"Exploration Agreement" means those certain Exploration Agreements by and between New Century Exploration, Inc. and Paragon Energy, Inc., dated February 24, 2002, concerning the Sword Field; by and between New Century Exploration, Inc. and Paragon Energy, Inc., dated May 15, 2003, concerning the Rankin Field; by and between Savannah Oil and Gas 1, L.P. and Paragon Energy, Inc., dated October 1, 2002, concerning the South Thompson Creek Field.

“Farm-in” An agreement whereby the owner of a leasehold or Working Interest agrees to assign an interest in certain specified acreage to the assignees, retaining an interest, such as an overriding royalty interest, production payment or a portion of the Working Interest, subject to the drilling of one or more specified wells on the acreage as a condition to the assignment.

"Fair Market Value" means the value of assets of the Partnership as determined in accordance
with Section 7.6.

“Fee Minerals” The Mineral Interest owned by the owner of the surface prior to severing the Mineral Interest.

"Fiscal Quarter" means the calendar quarter or, in the case of the first and last fiscal quarters of the Partnership, the portion thereof commencing on the Effective Date or ending on the date on which the winding up of the Partnership is completed, as the case may be.

"FTP" means flowing tubing pressure.

"General Partner" means Paragon Energy, LLC, a Texas limited liability company, and any general partner substituted therefore in accordance with this Agreement but does not include any Person who has ceased to be a General Partner in the Partnership.

"Immediate Family Member" means with respect to any Person that is a natural person, that person's parents, spouse or children.

"Income" means each item of Partnership income and gain, as determined, recognized and classified for federal income tax purposes, adjusted as follows: (a) items of income and gain exempt from federal income tax shall be included in Income, (b) immediately before a Revaluation Event, the excess, if any, of the fair market value (as determined in good faith by the General Partner) of each Partnership asset (including intangible assets) over the Book Basis of the asset shall be treated as an item of Income and shall be allocated to the Capital Accounts of the Partners, (c) immediately before any distribution (liquidating or otherwise) by the Partnership to one (1) or more Partners of any Partnership asset (including intangible assets) other than cash, the excess, if any, of the fair market value (as determined in good faith by the General Partner) of the asset over its Book Basis shall be treated as an item of Income and shall be allocated to the Capital Accounts of the Partners, and (d) gain recognized upon a sale, exchange or other disposition of any Partnership asset whose Book Basis differs from its adjusted tax basis shall be computed by reference to the asset's Book Basis. Notwithstanding the foregoing, with respect to any property, Actual Gains or Simulated Gains, as the case may be, shall not be included in Income and, instead, shall be determined and allocated to the Capital Accounts of the Partners pursuant to Section 4.1(c).

"Initial Investment Wells" mean those wells developed by Paragon Energy, Inc. prior to the formation of the Partnership, specifically the Krebs #1, Tharp #1, Tharp #2, and USA 35-4 #2 wells, as more particularly described in Schedule B.

"Interest" means the entire limited partnership interest owned by a Limited Partner or Assignee in the Partnership at any particular time, including the right of such Limited Partner or Assignee to any and all benefits to which a Limited Partner or Assignee may be entitled as provided in this Agreement, together with the obligations of such Limited Partner or Assignee to comply with all the terms and provisions of this Agreement.

"Involuntary Transfer" means a Transfer resulting from the death, incompetence, divorce, insolvency, bankruptcy, involuntary termination, involuntary dissolution or liquidation of any Person.



"Joint Operating Agreement" (JOA) means those certain Joint Operating Agreements by and between New Century Exploration, Inc. and Paragon Energy, Inc., dated February 24, 2003, concerning the Sword Field; between New Century Exploration, Inc. and Paragon Energy, Inc. dated May 15, 2003, concerning the Rankin Field; between Primal Energy Corporation and Paragon Energy, Inc., dated October 1, 2002, concerning the South Thompson Creek Field.

“Lease” Full or partial interests in oil and gas leases, oil and gas mineral rights, fee rights, or other rights authorizing the owner to explore for and produce oil or gas and contractual rights to acquire any such interest.

"Limited Partners" means the parties shown as limited partners on the books and records of the Partnership, including any Person who has been admitted to the Partnership as a substituted or additional Limited Partner in accordance with this Agreement but does not include any Person who has ceased to be a Limited Partner in the Partnership.

"Loss" means each item of Partnership loss and deduction, as determined, recognized and classified for federal income tax purposes, adjusted as follows: (a) expenditures described in Code § 705(a)(2)(B) or expenditures treated as Code § 705(a)(2)(B) expenditures pursuant to Treasury Regulations § 1.704-1(b)(2)(iv)(i) shall be included in Loss, (b) immediately before a Revaluation Event, the excess, if any, of the Book Basis of each Partnership asset (including intangible assets) over the fair market value of the asset (as determined in good faith by the General Partner) shall be treated as an item of Loss and shall be allocated to the Capital Accounts of the Partners, (c) immediately before any distribution (liquidating or otherwise) by the Partnership to one (1) or more Partners of any Partnership asset (including intangible assets) other than cash, the excess, if any, of the Book Basis of the asset over its fair market value (as determined in good faith by the General Partner) shall be treated as an item of Loss and shall be allocated to the Capital Accounts of the Partners, (d) loss recognized upon a sale, exchange or other disposition of any Partnership asset whose Book Basis differs from its adjusted tax basis shall be computed by reference to the asset's Book Basis, and (e) when the Book Basis of any Partnership asset differs from its adjusted tax basis, Book Depreciation with respect to the asset shall be included in Loss in lieu of any depreciation or other cost recovery deductions otherwise allowable for federal income tax purposes. Notwithstanding the foregoing, with respect to any property, Actual Losses and Actual Depletion Deductions or Simulated Losses and Simulated Depletion Deductions, as the case may be, shall not be included in Loss and, instead, shall be determined and allocated to the Capital Accounts of the Partners pursuant to Section 4.1(c).

"Majority in Interest" means, with respect to any group of specified Partners, those of such Partners holding more than 50% of the total Commitments of all such Partners.

"Management Team" means Paragon Energy, Inc., an Affiliate of Paragon Energy, LLC.

"Manager" means Eric Kim .

“Mcf” Thousand cubic feet, the standard unit for measuring the volume of natural gas.

“McfPD” Thousand cubic feet per day.

"Memorandum" means the confidential memorandum prepared for prospective investors considering the purchase of an Interest in the Partnership.

“Mineral Interest” An interest in land the prime characteristic of which is the right to enter the land to explore, drill, produce and otherwise carry on mining activities. It is this attribute of operating rights that distinguishes a mineral interest from a royalty interest.

“Minerally Classified Lands” Certain public school lands which, pursuant to V.T.C.A. Natural Resources Code §52.171 through §52.190 (commonly referred to as the "Relinquishment Act"), the state has reserved the minerals related thereto, but the surface owner has the right to enter into leases with respect to such mineral interests as agent for the state.

"Net Income" and "Net Loss" mean, for each Fiscal Year, the positive or negative difference, respectively, between all items of Income and Loss, exclusive of items of Income and Loss specially allocated to a Partner pursuant to Section 1.3 of Exhibit B.

“Net Revenue Interest or NRI” The lessee's share of production after satisfaction of all royalty, overriding royalty, oil payments, or other non-operating interests.

"Non-recourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Regulations

"Organizational Expenses" means all out of pocket costs and expenses in connection with the organization of the Partnership, the General Partner and any related entities and the offering of interests in the Partnership, including without limitation any related legal and accounting fees, brokerage or finders fees, commissions, taxes, and relocation related expenses.

"Paragon Energy, Inc." means the Management Team of the Initial Investment Wells, and possible contract operator for Development Prospects. Paragon Energy, Inc. is an Affiliate of Paragon Energy GP, LLC.

"Partners" means the General Partner and the Limited Partners.

"Partner Minimum Gain" means partnership minimum gain attributable to partner non-recourse debt as determined under the rules of Section 1.704 2(i) of the Regulations.

"Partner Non-recourse Deductions" has the meaning set forth in Section 1.704 2(i)(2) of the Regulations.

"Partnership Minimum Gain" has the meaning set forth in Section 1.704 2(b)(2) of the Regulations.

"Partnership Expenses" shall have the meaning set forth in Section 6.2.

"Past Due Rate" means the lesser of (a) the per annum prime rate published in The Wall Street Journal or, if no such rate is published therein, the rate quoted from time to time by a New York money center bank-selected by the General Partner plus 4% and (b) the maximum non usurious rate of interest permitted by applicable law.

"Payment or Cash Call Date" means a date on which the Partners are required to make Capital Contributions to the Partnership, which date (a) shall be specified in a Payment Notice delivered to each Limited Partner from which a Capital Contribution is required on such date, and (b) shall be at least 10 Business Days after the date of delivery of a Payment Notice.

"Payment Notice" means a written notice requiring Capital Contributions to the Partnership, which notice shall:
specify the amount required from the Limited Partne; specify the purpose for which the Capital Contributions are required to be made; In the case of a Payment Notice with respect to an anticipated Project, include a brief description (if not previously described iin writing to the Limited Partners) of the activities and operations relating to such Project, and specify the applicable Payment or Cash Call Date.

"Payout" means the point in time that the Limited Partners receive a return of 100% of their initial investment from net cash proceeds plus any additional expenses incurred in relation to the Initial Investment Wells during the time prior to Payout.

"Person" means any individual, partnership, corporation, Limited Liability Company, unincorporated organization or association, trust (including the trustees thereof, in their capacity as such) or other entity.

“PDNP” "Proved Developed Non-producing Reserves"Reserves that are (i) expected to be produced from existing completion intervals in existing wells, but due to pending pipeline connections, regulatory agency considerations, or other mechanical or contractual requirements hydrocarbon sales have not yet commenced or have been interrupted, and (2) other non-producing reserves which exist behind the casing of existing wells, or at minor depths below the present bottom of such wells, which are expected to be produced though these wells in the predictable future, where the cost of making such oil and gas available for production should be moderate when compared to the cost of a new well.

“PDP” "Proved Developed Producing Reserves" Reserves that are expected to be produced from existing completion intervals now open for production in existing wells.

"Project" means (a) the acquisition of any lease, (b) the maintenance of any leases, (c) the acquisition and evaluation of geologic, geophysical and seismic data, (d) the drilling, completing, fracing, deepening, plugging back, re-completing and equipping of any Partnership well, (e) the construction of treating and gathering systems and (f) all other exploration and development activities with respect to the Partnership.

“Proved Reserves” The estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions and current regulatory practices. Reserves are considered proved when commercial production has been established by actual production or well tests. The portion of the reservoir considered proved is the area delineated by drilling and reasonable interpretation of available data after considering fluid contacts, if any. Proved reserves may be developed or undeveloped.


”PUD” "Proved Undeveloped Reserves" Reserves that are relatively certain to be recovered from new wells on un-drilled acreage or from existing wells where a relatively major expenditure is required. Undeveloped reserves are considered proved when the interpretation of available geologic information, well test data, and production performance indicate the presence of commercial hydrocarbons that cannot be recovered from presently producing wells. Proved reserves on un-drilled acreage are usually limited to proration units that offset wells that have established the existence of commercial quantities of hydrocarbons.

"psi" means pounds per square inch.

"Rankin Field" means the approximate 475 acres of lands more particularly described on Schedule B of the Confidential Memorandum.

"Recapture Income" means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) 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, except that the term Recapture Income shall exclude all gain re-characterized as ordinary income pursuant to Code Section 1245 or 1250.

"Reference Rate" means the lesser of (a) the per annum prime rate published in the Wall Street Journal or, if no such rate is published therein, the rate quoted from time to time by a New York money center bank selected by the General Partner plus 2% and (b) the maximum non usurious rate of interest permitted by applicable law.

"Regulations" means temporary and final Income Tax Regulations promulgated under the Code, as amended and superseded from time to time.

"Regulatory Allocations" means the special allocations of items of Income and Loss set forth in Section 1.3.

“Remedial Work” Methods of supplementing natural forces and mechanisms of primary recovery or otherwise increasing the ultimate recovery from the Partnership's Producing Wells including, but not limited to, water flooding, pressure maintenance, gas cycling, fluid injection, polymer flooding, chemical flooding, and the use of displacement fluids.

"Required Interest" means, with respect to any group of specified Partners, those of such Partners holding at least 66 2/3% of the total Commitments of all of such Partners.

"Revaluation Event" means (a) a Capital Contribution after the date hereof by any new or existing Partner in exchange for an additional or increased Sharing Ratio or other economic interest, (b) a distribution by the Partnership (liquidating or otherwise) of cash or property in reduction of all or part of a withdrawing or continuing Partner's Sharing Ratio or other economic interest, (c) the termination of the Partnership for federal income tax purposes within the meaning of Code § 708(b)(1)(A), or (d) any other event that the General Partner determines should be treated as a Revaluation Event in order to fairly reflect the relative economic interests of the Partners. Notwithstanding the foregoing, the General Partner may elect not to treat an event described in clause (a), (b), or (c) of this definition as a Revaluation Event if the General Partner determines that the relative economic interest of any Partner will be materially adversely affected by such election.

"Reversionary Interest" means, as it relates to each Limited Partner, all amounts distributed to the General Partner, with respect to such Limited Partner, pursuant to Section 4.4(a)(ii).

“Royalty Interest” The owner of a royalty interest is entitled to share of production, if, as and when there is production, free of the costs of production.

"Sale Proceeds" means gross proceeds received by the Partnership upon the Disposition of any oil and gas property or interest held by the Partnership.

"Section 1245 Recapture" means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income under Code Section 1245.


"Section 1250 Recapture"
means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income under Code Section 1250.


"Securities Act" means the Securities Act of 1933, as amended.


"Service Agreement" means that certain service agreement entered into between the General Partner and Paragon Energy, Inc. as of the Effective Date and attached as Exhibit C to the Confidential Memorandum.


"Service Fee Amounts" means those certain fees that the General Partner will receive on a monthly basis for general administration and will be charged proportionately to each Limited Partner from the Partnership's gross income. The General Partner will receive a $1,500 monthly fee and an additional Service Fee of $150.00 per month for each Development Prospect added to the Partnership when production begins. Should a multi-completion well be drilled or one of the existing wells re-completed which is not commingled down hole and is considered a separate well by the governing regulatory authority, the $150.00 charge shall be charged for each completion.


"Sharing Ratio" means 99% as to the Limited Partners and 1% as to the General Partner.


"Simulated Basis" means the Book Basis of each property (as defined in Code §614).


"Simulated Depletion Deductions" means the simulated depletion allowance computed by the Partnership with respect to the properties pursuant to Treasury Regulations § 1.704 (1)(b)(2)(iv)(k)(2).

"Simulated Gains" and "Simulated Losses"
mean, respectively, the simulated gains or simulated losses computed by the Partnership with respect to the properties pursuant to Treasury Regulations § 1.704-1(b)(2)(iv)(k)(2).


"South Thompson Creek Field" means the approximate 200 acres of lands more particularly described on Schedule B.


"Subscription Agreement" means each Subscription Agreement between the Partnership and each Limited Partner.

"Sword Field" means the approximate 1200 acres of lands more particularly described on Schedule B.


"Transfer" including the correlative terms "Transferring”, or "Transferred" means any direct or indirect transfer, assignment, sale, gift, pledge, hypothecation or other encumbrance, or any disposition (whether voluntary or involuntary or by operation of law), or the acts of the foregoing.

“TCF” Trillion cubic feet.

"Unfunded Commitment" means, as to any Partner as of any date, an amount equal to:
(a) such Partner's Commitment,

(b) any Commitment assumed by such Partner in connection with the purchase of all or a portion of another Partner's Interest,

(c) the amount of any Capital Contribution by a Partner that is returned to such Partner on or prior to such date in lieu of its application toward a Project,

(d) all distributions to such Limited Partner made on or prior to such date, less

(e) the aggregate amount of such Partner's Capital Contributions made on or prior to such date.



"Working Interest" (WI) means the lessee's interest under an oil and gas lease whereby the lessee is entitled to a proportionate share of any production or revenues and is subject to an obligation to bear a proportionate share of the expenses of development, operation and maintenance of the lease.