Riley James Development Corporation

Program Structure

Riley James Development Corporation sponsors Acquisition Programs (Programs) that are designed to provide participants the opportunity to invest in energy projects in the same manner as other oil companies; that is, "third for a quarter" and on an "invoice-cost" basis. This means that the participants pay 100 percent of the cost to earn 75 percent of the project and only pay actual project costs. The remaining 25 percent, classified as carried interest, is retained by Riley James as its consideration for generating, managing and offering the project. Riley James is also willing to forego all or a substantial portion of its share of revenue distributions by the Partnership until its participants have received the return of up to 100 percent of their investment.

There are two reasons Riley James offers such terms – first is competition and second is confidence in our projects. Due to current market conditions, there is fierce competition for investors, and, in order to attract participants, Riley James realizes the need to offer them the best possible investment terms. Riley James also believes diversification of projects within its Programs and the expertise it has recently acquired to aid in its evaluation and selection process will enhance the probability of long-term Program profits for all parties.

SUBSCRIPTION INSTALLMENTS: Participants may secure a position in the Program by submitting 50 percent of their subscribed commitment. The balance of the subscribed commitment will be called for on an as-needed basis, that is, only the participant's share needed prior to the start of each project. All funds tendered by participants will be deposited to the Partnership's interest-bearing account.

EARLY SUBSCRIPTIONS: Early entrants to the Program receive the significant benefit of receiving all or a larger portion of revenue distributions before Riley James receives all or a portion of its carried interest distribution until 100 percent of their investment is returned.

INVOICE-COST PARTICIPATION: The Program is structured to provide participants the benefit of participating on an invoice-cost basis. That is, participants will be furnished an accounting of all costs associated with the Program in the form of a list of all invoices paid, their amounts and to whom they were paid. Any unexpended funds will be refunded to participants.

FRONT-END EXPENSES: In order to cover a portion of the costs associated with introducing the Program to participants, the Managing Partner is charging a one-time, front-end commission expense to the selling broker-dealer and a modest overhead percentage to the Managing Partner. To mitigate the effect of these expenses on participants, the Managing Partner is foregoing significant portions of its, standard in the industry, 25 percent carried interest in the Program until early entrants to the Program have received the return of up to 100 percent of their investment.

ADDITIONAL CAPITAL CONTRIBUTIONS: There may be a need for additional capital contributions that exceed the participant's subscribed investment amount in a Program. One need may be when unforseen monthly expenses exceed monthly income. This is known as an "operating deficit" and occurs after all initially proposed operations within a Program have been completed. In such an event, a call for additional capital would doubtfully be made unless the future clearly indicates the certainty of profitability.

An additional capital contribution may also be necessary for the completion of one or more of the initially proposed operations within a Program, such as drilling, testing, completing, or equipping a well. This is known as a "development deficit." It is always assumed that each well in a Program will be completed; therefore, if there is a cost overrun on the drilling portion of a well, the completion costs set aside for that well should cover the cost overrun. Furthermore, if the well is worthy of completion and completion funds have been applied to the cost of drilling, it is unlikely that a participant would refuse an additional capital contribution to complete the well. Additional capital contributions may be avoided by including completion costs in the cost projections of each project or by adding a generous contingency to all estimated project costs.

Additional capital contributions are limited to 50 percent of a participant's subscribed investment amount. It is important to note that if a participant fails to submit their share of the additional contribution, other participants, or the Managing Partner, may pay the non-contributing participant's share of the additional contribution and receive the non-contributing participant's revenue distributions until 750 percent of the additional contribution amount is recovered by the contributing participant.

RISK: Risk is inherent in almost any investment; however, the risk can be managed by investing in several projects as opposed to only one. Plus, careful consideration is given in the selection of each project with regard to its ability, if successful, to recover its cost as well as the costs of other projects that may not be successful.

RETURNS: No emphasis is placed on after-tax returns by Riley James in its projections as it believes participants are more concerned with cash-on-cash returns rather than tax deductions; however, they should be considered given that oil and gas investments actually save money that would normally be paid in taxes. In addition, little emphasis is put on the internal rate of return, which is a significant benefit for oil and gas participants due to their ability to receive monthly or quarterly returns on their investment principal and, in turn, re-invest their money in other vehicles.

TAX BENEFITS: Limited Partner Program participants may deduct expenses and/or losses associated with their investment against passive income resulting from real estate rental income, LLC's and income resulting from another Limited Partnership of which they are a Limited Partner. General Partner Program participants may deduct expenses and/or losses associated with their investment against ordinary, "active" income on Schedule C of their tax return.

LESS THAN MAXIMUM PROGRAM CAPITALIZATION: In the event a Program is closed prior to its stated maximum capitalization, meaning the total number of Units in the Program is not sold, the participants' interest will be increased in proportion to their subscription. For example, if 75 Units were to be sold at one percent per Unit and only 50 Units are sold to accomplish the Program's goals, each participant's percentage in the Program would be increased to 1.5 percent (75% divided by 50 = 1.5%). In addition, the Managing Partner may reduce the Partnership's participation in a Program if necessary to ensure diversity and achieve Program goals.