THIS
WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF
 HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
 "SECURITIES
ACT"), AS AMENDED, OR REGISTERED OR QUALIFIED UNDER THE
 SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE
 SOLD,
PLEDGED, TRANSFERRED OR OTHERWISE ASSIGNED IN VIOLATION OF
 SUCH ACT
AND LAWS OR THE PROVISIONS OF THIS WARRANT.
  THIS
WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF
 ARE
SUBJECT TO ADDITIONAL AGREEMENTS SET FORTH IN A REGISTRATION
 RIGHTS
AGREEMENT, BY AND AMONG THE PARTIES THERETO. A COPY OF SUCH
 AGREEMENT
MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
 PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE.
  WARRANT
  To
Purchase Shares of
  Deep
Down, Inc.
  THIS
CERTIFIES THAT, for value received, Prospect Capital Corporation, a Maryland
corporation ("Lender"),or its registered and permitted assigns, is entitled, at any time and
from time to time prior to the Expiration Date (as hereinafter defined), to
purchase from Deep Down, Inc., a Nevada corporation (the "Company"),an aggregate of Four Million Nine Hundred Sixty Thousand Five Hundred
Eighty Five (4,960,585) shares ("Warrant Grant")of common stock, par value $0.001 per share, of the Company (the "Shares"),in whole or in part, at a purchase price of $0.507 per Share (the "Exercise Price"as agreed to and effective May 25, 2007 which reflects the market price
of the Company Shares at the close of the trading day), all on the terms and
conditions and pursuant to the provisions hereinafter set forth.
  1. 
DEFINITIONS. As
used in this Warrant, the following terms have the respective meanings
set forth below:
  "Additional
Shares"means all Shares issued by the Company after the Closing Date,
other than Permitted Shares.
  "Affiliate"of, or a Person "Affiliated"with, a specified Person means any other Person directly or indirectly
controlling, controlled by, or under common control with, that Person or any
other Related Fund. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as applied to any Person, means the possession, directly
or indirectly, of the power (i) to vote 5% or more of the securities having
ordinary voting power for the election of directors of such Person, or (ii) to
direct or cause the direction of the management and policies of that Person,
whether through the ownership of voting securities or by contract or
otherwise.
  "Articles of
Incorporation"means the Articles of Incorporation of the Company filed
with the Secretary of State of Nevada on February 1, 2007.
  "Board"means the Board of Directors of the Company.
  1
  "Board Observers"has the meaning set forth in Section 14.3 of this Warrant.
  "Business Day"means any day that is not a Saturday, Sunday or other day when banks are
required or permitted to be closed in the State of Texas.
  "Closing Date"means August 6, 2007.
  "Commission"means the U.S. Securities and Exchange Commission. "Company"has the meaning set forth in the opening paragraph of this Warrant.
  "Conversion
Right"has the meaning set forth in Section 2.3 of this Warrant. "Conversion
Shares"has the meaning set forth in Section 2.3 of this Warrant.
  "Convertible
Securities"means any security convertible into Shares.
  "Credit
Agreement"means the Credit Agreement of the Company dated as of even
date herewith, as the same may be modified, amended or replaced from time to
time.
  "Current Market
Price"means, in respect of any Share on any date herein specified, the
Current Market Value per Share as at such date, or if there shall then be a
public market for the Shares, the average of the daily market prices for the
thirty (30) consecutive Business Days commencing forty-five (45) days before
such date or, at the time of a public offering of the Company's Shares, the
public offering price. The daily market price for each such Business Day shall
be (i) the last sale price on such date on the principal securities exchange on
which the Shares are then listed or admitted to trading, (ii) if no sale takes
place on such day on any such exchange, the average of the last reported closing
bid and asked prices on such day as officially quoted on any such exchange,
(iii) if the Shares are not then listed or admitted to trading on any stock
exchange, the average of the last reported closing bid and asked prices on such
day in the over-the-counter market, as furnished by the National Association of
Securities Dealers Automatic Quotation System or the National Quotation Bureau,
Inc., (iv) if neither such entity at the time is engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business, or (v) if there is no such firm, as furnished by any member of the
NASD selected mutually by the Majority Holders and the Company or, if they
cannot agree upon such selection, as selected by two (2) such members of the
NASD, one of which shall be selected by the Majority Holders and one (1) of
which shall be selected by the Company.
  "Current Market
Value"means, in respect of any Share on any date herein specified, the
current fair market value of each such Share determined without giving effect to
the discount for a minority interest as of the last day of the most recent
fiscal month to end within sixty (60) days prior to such date specified, based
on the equity value of the Company, as determined in good faith by an
Independent Financial Expert, divided by the number of Fully Diluted Outstanding
Shares. If the Independent Financial Expert selected by the Company is not
acceptable to the Majority Holders and the Company and the Majority Holders
cannot agree on a mutually acceptable Independent Financial Expert, then the
Majority Holders and the Company shall each choose one (1) Independent Financial
Expert, and the respective chosen Independent Financial Experts shall agree on
another Independent Financial Expert that shall make the determination. The
Company shall retain, at its sole cost, such Independent Financial Experts as
may be
  2
   necessary
for determining Current Market Value required by the terms of this Warrant.
Notwithstanding the foregoing, if the Current Market Value is to be determined
as a result of or in connection with a cash transaction for the sale or purchase
of Shares with a non-Affiliate third party as a result of the exercise of "drag
along" or "tag along" rights, then the Current Market Value shall be the value
of the Shares in such transaction.
  "Defaulting
Party"has the meaning set forth in Section 15.1 of this
Warrant.
  "Exercise Price"has the meaning set forth in the opening paragraph of this Warrant and as
adjusted as provided herein.
  "Expiration Date"means the fifth anniversary of the Closing Date.
  "Fully Diluted
Outstanding Shares"means at any date when the number of Shares is to be
determined, the total number of Shares outstanding at such date plus any
unexercised Warrant Shares outstanding on such date, plus the number of Shares
convertible from any other options or warrants to purchase, or securities
convertible into, Shares outstanding on such date.
  "Holder"means the Person in whose name the Warrant set forth herein (and any
Warrants resulting from the combination, division or transfer thereof) is
registered on the books of the Company maintained for such purpose.
  "Independent
Financial Expert"means an investment banking firm of nationally
recognized standing mutually chosen by the Company and the Majority Holders or
otherwise selected pursuant to the procedures specified under "Current Market
Value" above.
  "Lender"has the meaning set forth in the opening paragraph of this
Warrant.
  "Majority
Holders"means holders of Warrants exercisable for in excess of 50% of
the aggregate number of Warrant Shares then purchasable upon exercise of all
Warrants, whether or not then exercisable and if at the applicable time there is
no such group of holders, then the holders of Warrants to acquire a plurality of
the Warrant Shares.
  "NASD"means the National Association of Securities Dealers, Inc., or any
successor corporation thereto.
  "Option"means rights, options or warrants to subscribe for, purchase or otherwise
acquire Shares, Convertible Securities or other membership interests in the
Company.
  "Other Boards"has the meaning set forth in Section 14.3 of this Warrant.
  "Other Property"has the meaning set forth in Section 4.8 of this Warrant.
  "Permitted
Shares"means (i) Warrant Shares and (ii) Shares issued or issuable on
conversion or exercise of Convertible Securities or options or warrants
outstanding on the Closing Date.
  "Person"shall mean any individual, corporation, general partnership, limited
partnership, limited liability partnership, joint venture, association,
joint-stock company, trust, limited
  3
   liability
company, unincorporated organization or government or any agency or political
subdivision thereof
  "Privilege
Waiver"shall mean, as reasonably determined by Company counsel and
communicated by such counsel to the relevant Holders or Board Observers, as
applicable, the waiver of any attorney-client privilege (or similar doctrine,
including work product doctrine), the waiver of which the Board of Directors
determines in good faith is not in the Company's interest.
  "Related Funds"means, with respect to any Person that is an investment fund, any other
investment fund that invests in commercial loans and that is managed or advised
by the same investment advisor as such Person or by an Affiliate of such
investment advisor. With respect to Lender or any Affiliate, Related Fund shall
also include any special purpose vehicles purchasing or acquiring security
interests in collateralized loan obligations or any other vehicle through which
such Person may leverage its investments from time to time.
  "Rights"means any restricted stock, restricted stock unit, option, warrant,
convertible security or any other right to acquire Shares.
  "Securities Act"means the Securities Act of 1933, as amended.
  "Shares"has the meaning set forth in the opening paragraph of this
Warrant.
  "Subsidiary"means any corporation, association, trust, limited liability company,
partnership, joint venture or other business association or entity (i) at least
50% of the outstand­ing voting securities of which are at the time owned or
controlled, directly or indirectly, by the Company; or (ii) with respect to
which the Company possesses, directly or indirectly, the power to direct or
cause the direction of the affairs or management of such Person.
  "Transfer"means any disposition of any Warrant or Warrant Shares or of any interest
ineither thereof, which would constitute a sale thereof within the meaning
of the Securities Act.
  "Warrant Grant"has the meaning set forth in the opening paragraph of this
Warrant.
  "Warrant Price"means an amount equal to (i) the number of Shares being purchased upon
any exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the
Exercise Price as adjusted pursuant to the terms of this Warrant as of the date
of such exercise.
  "Warrant Shares"means the Shares purchased by Holders of the Warrants upon the exercise
thereof.
  "Warrants"means this Wan-ant
and all warrants issued upon transfer, division or combination of, or in
substitution for, any thereof; provided that all Warrants shall at all times be
identical as to terms and conditions and date, except as to the number of Shares
for which they may be exercised.
  All other
capitalized terms used herein and not otherwise defined herein shall have the
meaning given such term in the Credit Agreement.
  4
   2. 
EXERCISE OF
WARRANT
  2.1 General. From time to
time after the earliest to occur of (i) the second anniversary
of the date hereof, (ii) an Event of Default occurring and the Loans having been
acceleration in connection therewith and (iii) the payment in full of all
principal under the Credit Agreement (such earliest date the "Unlock Date"),and until
5:00 p.m., Houston, Texas time, on the Expiration Date, Holder may exercise this
Warrant, on any Business Day, for all or any part of the number of Shares
purchasable hereunder; provided, however,
that prior to the fourth anniversary of the Closing Date Holder shall not, in
any single month, sell Warrant Shares resulting from the exercise in whole or in
part of this Warrant, in an amount greater than two percent (2%) of the total
number of Shares outstanding of the Company in such month of sale.
  2.2 
Cash Exercise.
Holder may exercise this Warrant, in whole or in part, by delivering
to the Company at the Company's principal offices at 15473 East Freeway,
Channelview, Texas 77530 or at such other office or agency designated by the
Company pursuant to Section 12 the following: (i) a written notice of Holder's
election to exercise this Warrant specifying the number of Shares to be
purchased, (ii) payment of the Warrant Price and (iii) this Warrant Holder's
exercise notice shall be substantially in the form of the subscription form
appearing at the end of this Warrant as Exhibit A, duly executed by Holder or
its agent or attorney. Upon receipt thereof, the Company shall, as promptly as
practicable, and in any event within five (5) Business Days thereafter, execute
or cause tobe executed and deliver or cause to be delivered to Holder a certificate
or certificates reflecting Holder's ownership of the aggregate number of Shares
issuable upon such exercise, together with cash in lieu of any fraction of a
Share, as hereinafter provided in Section 2.5. The Share certificate or
certificates so delivered shall be in such denomination or denominations as such
Holder shall request in the notice and shall be registered in the name of Holder
or, subject to any restrictions on transfer, such other name as shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
Holder or any other Person so designated to be named therein (provided that
evidence reasonably satisfactory to the Company has been provided that the
transfer of such Shares to such Person does not violate any transfer
restrictions applicable to this Warrant or the Warrant Shares) shall be deemed
to have become a holder of record of such Shares for all purposes, as of the
date the notice, together with the cash or check or checks and this Warrant, is
received by the Company as described above and all taxes required to be paid by
Holder, if any, pursuant to Section 2.4 prior to the issuance of such Shares
have been paid. If this Warrant has been exercised in part, the Company shall,
at the time of delivery of the certificate or certificates representing Warrant
Shares, deliver (in exchange for the old Warrant) to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased Shares called for by
this Warrant, which new Warrant shall in all other respects be identical with
this Warrant or, at the request of Holder, appropriate notation may be made on
this Warrant and the same returned to Holder. Payment of the Warrant Price shall
be made at the option of Holder by certified or official bank check or by wire
transfer.
  2.3 
Cashless
Exercise.
  (a) In
lieu of the payment of the Warrant Price, Holder shall have the right (but not
the obligation),
to require the Company to convert this Warrant, in whole or in part, into Shares
(the "Conversion Right")as provided for in this Section 2.3. Upon exercise of theConversion
Right, the Company shall deliver to Holder (without payment by Holder of any of
the Warrant Price) that number
  5
   of Shares
(the "Conversion
Share')equal to the quotient obtained by dividing (x) the value of this
Warrant (or portion thereof as to which the Conversion Right is being exercised
if the Conversion Right is being exercised in part) at the time the Conversion
Right is exercised (determined by subtracting the aggregate Warrant Price of the
Warrant Shares as to which the Conversion Right is being exercised in effect
immediately prior to the exercise of the Conversion Right from the aggregate
Current Market Price of the Warrant Shares as to which the Conversion Right is
being exercised immediately prior to the exercise of the Conversion Right) by
(y) the Current Market Price of one Share immediately prior to the exercise of
the Conversion Right.
  (b) The
Conversion Rights provided under this Section 2.3 may be exercised in whole or
in part and
at any time and from time to time while any Warrant Shares remain outstanding.
In order to exercise the Conversion Right, Holder shall surrender to the
Company, at its offices, this Warrant with Holder's exercise notice
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder along with a written statement
providing that such exercise is in accordance with this Section 2.3. The
presentation and surrender of such notice and this Warrant shall be deemed a
waiver of Holder's obligation to pay all or any portion of the aggregate
purchase price payable for the Warrant Shares as to which such Conversion Right
is being exercised. This Warrant (or so much thereof as shall have been
surrendered for conversion) shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Warrant for
conversion in accordance with the foregoing provisions.
  2.4 Payment of Taxes.
When the Warrant Price is paid to the Company, all such Warrant Shares shall be
validly issued, fully paid and nonassessable and without any preemptive rights.
The Company shall pay all expenses in connection with, and all taxes (other than
income taxes) and other governmental charges that may be imposed with respect
to, the issue or delivery thereof, unless such tax or charge is imposed by law
upon Holder, in which case, Holder shall pay such taxes or charges. The Company
shall not be required to pay any tax or other charge imposed in connection with
any transfer involved in the issue or delivery of any certificate for Shares
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case, the Company shall not be required to register such Shares in
any name other than Holder until such tax or other charge has been paid or it
has been established to the reasonable satisfaction of the Company that no such
tax or other charge is due.
  2.5 Fractional Shares.
The Company shall not be required to issue a fractional Share upon the
exercise of this Warrant. As to any fraction of a Share which Holder would
otherwise be entitled to purchase upon such exercise, the Company shall pay a
cash adjustment in respect of such fraction in an amount equal to the same
fraction of the Current Market Price per Share of such Share on the date of
exercise.
  3. 
TRANSFER, DIVISION AND
COMBINATION
   3.1 Transfer. Subject to
Section 15.3, transfer of this Warrant and all rights hereunder,
in whole or in part, shall be registered on the books of the Company to be
maintained for such purpose, upon surrender of this Warrant at the principal
office of the Company referred to in Section 2.2 or the office or agency
designated by the Company pursuant to Section 12, together with (i) a written
assignment of this Warrant substantially in the form of Exhibit B hereto duly
executed by Holder or its agent or attorney and (ii) evidence reasonably
satisfactory to the Company that the transfer of this Warrant to such person
does not violate any transfer
  6
   restrictions
applicable to this Warrant or any laws of the United States or States thereof
Upon such surrender the Company shall execute and deliver a new Warrant or
Warrants substantially in the form hereof in the name of the assignee or
assignees and in the denomination specified in such instrument of assignment,
and shall issue to the assignor a new Warrant evidencing the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled. Such
Warrant, if properly assigned in compliance with any restrictions on transfer
and properly registered on the books of the Company, may be exercised by a new
Holder for the purchase of Shares without having a new Warrant
issued.
  3.2 
Division and
Combination. This Warrant may be divided or combined with other warrants
with the same terms and conditions upon presentation hereof at the aforesaid
office or agency of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued, signed by
Holder. Subject to compliance with Section 3.1, as to any Transfer that may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for this Warrant or Warrants to be divided
or combined in accordance with such notice.
  3.3 
Expenses. The
Company shall prepare, issue and deliver at its own cost and expense
(other than transfer taxes) the new Warrant or Warrants under this Section
3.
  3.4 
Maintenance of
Books. The Company agrees to maintain, at its aforesaid office or
agency, books for the registration of transfer of this Warrant or
Warrants.
  4. 
ADJUSTMENTS.
The number of Shares for which this Warrant is exercisable, or the price at
which such Shares may be purchased upon exercise of this Warrant, shall be
subject to adjustment from time to time as set forth in this Section 4. The
Company shall give each Holder notice of any event described below, which
requires an adjustment pursuant to this Section 4 at the time of such
event.
  4.1 
Distributions,
Subdivisions and Combinations. If, at any time, the Company:
  (a)  takes a
record of holders of its Shares for the purpose of entitling them to receive a distribution
payable in, or other distribution of, Additional Shares,
  (b)  subdivides
its outstanding Shares into a larger number of Shares, or
  (c)
combines its outstanding Shares into a smaller number of Shares,
  then (i)
the number of Shares for which this Warrant is exercisable immediately after the
occurrence of any such event shall be adjusted to equal the number of Shares
that a record holder of the same number of Shares for which this Warrant is
exercisable immediately prior to the occurrence of such event would own or be
entitled to receive after the happening of such event, and (ii) the Exercise
Price shall be adjusted to equal (A) the Exercise Price multiplied by the number
of Shares for which this Warrant is exercisable immediately prior to the
adjustment divided by (B) the number of Shares for which this Warrant is
exercisable immediately after such adjustment; provided that if any adjustment
would reduce the Exercise Price to below the par value of the Shares, the
Company will first reduce the par value to below such adjusted Exercise
Price.
  7
   4.2 Certain Other
Distributions. If at any time the Company takes a record of holders of its
Shares for the purpose of entitling them to receive any distribution
of
  (a)  any
evidences of its indebtedness, or any other securities of any nature whatsoever
(other than
Additional Shares), or
  (b)  any
Options to subscribe for or purchase any evidences of its indebtedness, or any
other securities
of any nature whatsoever (other than Additional Shares),
  then (i)
the number of Shares for which this Warrant is exercisable shall be adjusted to
equal the product of the number of Shares for which this Warrant is exercisable
immediately prior to such adjustment multiplied by a fraction (A) the numerator
of which shall be the Current Market Price per Share at the date of taking such
record and (B) the denominator of which shall be such Current Market Price per
Share minus the amount allocable to one Share of the fair value (as determined
in good faith by the Board and supported by an opinion from an Independent
Financial Expert) of any and all such evidences of indebtedness, Shares, other
securities or property or warrants or other subscription or purchase rights so
distributable, and (ii) the Exercise Price shall be adjusted to equal (A) the
Exercise Price multiplied by the number of Shares for which this Warrant is
exercisable immediately prior to the adjustment divided by (B) the number of
Shares for which this Warrant is exercisable immediately after such adjustment;
provided that if any adjustment would reduce the Exercise Price to below the par
value of the Shares, the Company will first reduce the par value to below such
adjusted Exercise Price. A reclassification of the Shares into Shares of any
other class of equity shall be deemed a distribution by the Company to holders
of its Shares of such shares or Shares of such other class of equity within the
meaning of this Section 4.2 and, if the outstanding Shares shall be changed into
a larger or smaller number of Shares as a part of such reclassification, such
change shall be deemed a subdivision or combination, as the case may be, of the
outstanding Shares within the meaning of Section 4.1.
  4.3 
Issuance of Additional
Shares. Prior to the second anniversary of the date hereof, if at any
time Company (except as hereinafter provided) issues or sells any Additional
Shares other than Permitted Shares, in exchange for consideration in an amount
per Additional Share less than the Current Market Price at the time the
Additional Shares are issued (provided that the
following shall not apply in connection with (i) the issuance of Shares to the
public, (ii) the issuance of shares a private placement to an unaffiliated third
party or (iii) the issuance of Shares as consideration in connection with the
acquisition of, or merger with, any other Person), then:
  (a) the
Exercise Price for which this Warrant is exercisable shall be reduced to a price
equal to the
price obtained by multiplying (i) the Exercise Price in effect immediately prior
to the issuance of such Additional Shares by (ii) a fraction of which (x) the
numerator equals the sum of (i) the number of Fully Diluted Outstanding Shares
immediately prior to such issue or sale and (ii) the number of additional Shares
that the aggregate consideration received by Company upon such issue or sale
would purchase at the Current Market Price in effect immediately prior to such
issuance and (y) the denominator equals the total number of Shares outstanding
immediately after such issue or sale; provided that if any adjustment would
reduce the Exercise Price to below the par value of the Shares, the Company will
first reduce the par value to below such adjusted Exercise Price;
and
  8
   (b) the
number of Shares for which this Warrant is exercisable shall be adjusted to
equal the product
obtained by multiplying the Exercise Price in effect immediately prior to such
issue or sale by the number of Shares for which this Warrant is exercisable
immediately prior to such issue or sale and dividing the product thereof by the
Exercise Price resulting from the adjustment made pursuant to clause (i)
above.
  4.4 Issuance of Warrants or
Other Rights. Prior to the second anniversary of the date hereof,
if at any time Company shall take a record of holders of its Shares for the
purpose of entitling them to receive a distribution of, or shall in any manner
(whether directly or by assumption in a merger where Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Shares or any Convertible Securities other than
Permitted Shares, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per Share for which Shares are
issuable upon the exercise of such Warrants or other rights or upon conversion
or exchange of such Convertible Securities shall be less than the Exercise Price
in effect immediately prior to the time of such issue or sale, then the number
of Shares for which this Warrant is exercisable and the Exercise Price shall be
adjusted as provided in Section 4.3 on the basis that the maximum number of
Additional Shares issuable pursuant to all such warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and Company shall
have received all of the consideration payable therefor, if any, as of the date
of the actual issuance of the number of Shares for which this Warrant is
exercisable and such warrants or other rights; provided that if any adjustment
would reduce the Exercise Price to below the par value of the Shares, the
Company will first reduce the par value to below such adjusted Exercise Price.
No further adjustments of the Exercise Price shall be made upon the actual issue
of such Shares or of such Convertible Securities upon exercise of such warrants
or other rights or upon the actual issue of such Shares upon such conversion or
exchange of such Convertible Securities.
  4.5 
Issuance of
Convertible Securities. Prior to the second anniversary of the date hereof,
if at any time Company shall take a record of holders of its Shares for the
purpose of entitling them to receive a distribution of or shall in any manner
(whether directly or by assumption in a merger where Company is the surviving
corporation) issue or sell, any Convertible Securities other than Permitted
Shares, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per Share for which Shares are issuable
upon such conversion or exchange shall be less than the Exercise Price in effect
immediately prior to the time of such issue or sale, then the number of Shares
for which this Warrant is exercisable and the Exercise Price shall be adjusted
as provided in Section 4.3 on the basis that the maximum number of Additional
Shares necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and Company shall
have received all of the consideration payable therefor, if any, as of the date
of actual issuance of such Convertible Securities; provided that if any
adjustment would reduce the Exercise Price to below the par value of the Shares,
the Company will first reduce the par value to below such adjusted Exercise
Price. No adjustment of the number of Shares for which this Warrant is
exercisable and the Exercise Price shall be made under this Section 4.5 upon the
issuance of any Convertible Securities that are issued pursuant to the exercise
of any warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights pursuant to Section 4.4. No further adjustments of the number of
Shares for which this Warrant is exercisable and the Exercise Price
  9
   shall be
made upon the actual issue of such Shares upon conversion or exchange of such
Convertible Securities and, if any issue or sale of such Convertible Securities
is made upon exercise of any warrant or other right to subscribe for or to
purchase any such Convertible Securities for which adjustments of the number of
Shares for which this Warrant is exercisable and the Exercise Price have been or
are to be made pursuant to other provisions of this Section 4, no further
adjustments of the number of Shares for which this Warrant is exercisable and
the Exercise Price shall be made by reason of such issue or sale.
  4.6 
Superseding
Adjustment. Prior to the second anniversary of the date hereof, if, at any time
after any adjustment of the number of Shares for which this Warrant is
exercisable and the Exercise Price has been made pursuant to Section 4.4 or
Section 4.5 as the result of any issuance of warrants, Rights or Convertible
Securities:
  (a)  such
warrants or Rights, or the right of conversion or exchange in such other
Convertible Securities,
shall expire, and all or a portion of such warrants or Rights, or the right of
conversion or exchange with respect to all or a portion of such other
Convertible Securities, as the case may be, shall not have been exercised,
or
  (b)  the
consideration per Share for which Shares are issuable pursuant to such warrants
or Rights,
or the terms of such other Convertible Securities, shall be increased solely by
virtue of provisions therein contained for an automatic increase in such
consideration per Share upon the occurrence of a specified date or
event,
  then for
each outstanding Warrant such previous adjustment shall be rescinded and
annulled and the Additional Shares that were deemed to have been issued by
virtue of the computation made in connection with the adjustment so rescinded
and annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
rights or options or other Convertible Securities on the basis of:
  (i)  treating
the number of Additional Shares or other property, if any, theretofore
actually issued or issuable pursuant to the previous exercise of any such
warrants or rights or any such right of conversion or exchange, as having been
issued on the date or dates of any such exercise and for the consideration
actually received and receivable therefor, and
  (ii)  treating
any such warrants or Rights or any such other Convertible Securities
that then remain outstanding as having been granted or issued immediately after
the time of such increase of the consideration per Share for which Shares or
other property are issuable under such warrants or Rights or other Convertible
Securities, whereupon a new adjustment of the number
of Shares for which this Warrant is exercisable and the Exercise Priceshall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.
  4.7 Other Provisions Applicable
to Adjustments under this Section. Prior to the second
anniversary of the date hereof, the following provisions shall be applicable to
making adjustments to the number of Shares for which this Warrant is exercisable
and the Exercise Price provided for in this Section 4:
  (a) Computation of Consideration.To the extent that any Additional Shares or any Convertible
Securities or any warrants or other Rights to subscribe for or purchase any
Additional
  10
   Shares or
any Convertible Securities are issued for cash consideration (including pursuant
to a private placement of such Additional Shares or Convertible Securities), the
consideration received by Company therefor shall equal the amount of such cash
consideration, or, if such Additional Shares or Convertible Securities are
offered by Company for subscription, the subscription price, or, if such
Additional Shares or Convertible Securities are sold to underwriters or dealers
for public offering without a subscription offering, the consideration received
by the Company therefor shall equal the public offering price or the price
received in a private placement as provided for above thereof, as applicable.(in
any such case subtracting any amounts paid or receivable for accrued interest or
accrued distributions and without taking into account any compensation,
discounts or expenses paid or incurred by Company for and in the underwriting
of, or otherwise in connection with, the issuance thereof). To the extent that
such issuance is for a consideration other than cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be deemed
to be the fair market value of such consideration at the time of such issuance
as determined in good faith by the Board and supported by an opinion from an
Independent Financial Expert. In case any Additional Shares or any Convertible
Securities or any warrants or other Rights to subscribe for or purchase such
Additional Shares or Convertible Securities shall be issued in connection with
any merger where Company issues any securities, the amount of consideration
therefor shall be deemed to be the fair market value, as determined in good
faith by the Board and supported by an opinion from an Independent Financial
Expert of such portion of the assets and business of the nonsurviving
corporation as the Board in good faith shall determine to be attributable to
such Additional Shares, Convertible Securities, warrants or other rights, as the
case may be. The consideration for any Additional Shares issuable pursuant to
any warrants or other Rights to subscribe for or purchase the same shall be the
consideration received by Company for issuing such warrants or other rights plus
the additional consideration payable to Company upon exercise of such warrants
or other rights. The consideration for any Additional Shares issuable pursuant
to the terms of any Convertible Securities shall be the consideration received
by Company for issuing warrants or other rights to subscribe for or purchase
such Convertible Securities, plus the consideration paid or payable to Company
in respect of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to Company upon the exercise
of the right of conversion or exchange in such Convertible Securities. If any
Additional Shares or Convertible Securities are issued at any time in payment or
satisfaction of any distributions upon any class of Shares other than Shares,
Company shall be deemed to have received for such Additional Shares or
Convertible Securities a consideration equal to the amount of such distribution
so paid or satisfied.
  (b)  When Adjustments to Be Made.The adjustments required by this Section 4 shall be made whenever
and as often as any specified event requiring an adjustment shall occur, except
that any adjustment of the number of Shares for which this Warrant is
exercisable that would otherwise be required may be postponed (except in the
case of a subdivision or combination of the Shares, as provided for in Section
4.1) up to, but not beyond the date of exercise if such adjustment either by
itself or with other adjustments not previously made adds or subtracts less than
1% of the Shares for which this Warrant is exercisable immediately prior to the
making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) that is postponed shall be carried
forward and made as soon as such adjustment, together with other adjustments
required by this Section 4 and not previously made, would result in a minimum
adjustment on the date of exercise. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business on the
date of its occurrence.
  (c)  Fractional Interests.In
computing adjustments under this Section 4, fractional interests in Shares
shall be taken into account to the nearest 1/10th of a Share.
  11
   (d)  When Adjustment Not Required.If the Company takes a record of holders of its Shares for the
purpose of entitling them to receive a distribution or subscription or purchase
rights and, thereafter and before the distribution to holders thereof, legally
abandons its plan to pay or deliver such distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof shall
be rescinded and annulled.
  (e)  Challenge to Good Faith
Determination.Whenever the Board is required to make a determination
in good faith of the fair market value of any item under this Section 4, the
Majority Holders may challenge such determination in good faith, and an
Independent Financial Expert shall resolve any such dispute.
  4.8 Reorganization,
Reclassification, Merger, Consolidation or Disposition of
Assets. If
the Company reorganizes its capital, reclassifies its capital securities,
consolidates or merges with or into another Person (where the Company is not the
surviving Person or where there is a change in or distribution with respect to
the Shares of the Company), or sells, transfers or otherwise disposes of all or
substantially all its property, assets or business to another Person and,
pursuant to the terms of such reorganization, reclassification, merger,
consolidation or disposition of assets, Shares or stock of the successor or
acquiring Person, or any cash, units or shares of stock or other securities or
property of any nature whatsoever (including warrants or other subscription or
purchase rights) in addition to or in lieu of the units or shares of stock of
the successor or acquiring Person ("Other
Property"),are to be received by or distributed to holders of the Shares
of the Company, then each Holder shall have the right thereafter to receive,
upon exercise of a Warrant, the number of Shares, units or shares of stock of
the successor or acquiring Person or of the Company, if it is the surviving
Person, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of Shares for which this Warrant is exercisable
immediately prior to such event. If any such reorganization, reclassification,
merger, consolidation or disposition of assets occurs, the successor or
acquiring Person (if other than the Company) shall expressly assume the due and
punctual observance and performance of each and every covenant and condition of
this Warrant to be performed and observed by the Company and all the obligations
and liabilities hereunder, subject to such modifications as may be deemed
appropriate (as determined by the Board and supported by an opinion from an
Independent Financial Expert) in order to provide for adjustments of the Shares
for which this Warrant is exercisable, which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For purposes of
this Section 4.8, "units or shares of stock of the successor or acquiring
Person" includes units or shares of stock of such Person of any class that is
not preferred as to distributions or assets over any other class of units or
shares of stock of such corporation and that is not subject to redemption and
shall also include any evidences of indebtedness, units or shares of stock or
other securities that are convertible into or exchangeable for any such units or
shares of stock, either immediately or upon the arrival of a specified date or
the happening of a specified event and any warrants or other rights to subscribe
for or purchase any such units or shares of stock. The foregoing provisions of
this Section 4.8 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations, or disposition of
assets.
  12
   5.
 NOTICES TO
WARRANT HOLDERS
  5.1 Notice of
Adjustments. Whenever the number of Shares for which this Warrant is exercisable,
or whenever the price at which such Shares may be purchased upon exercise of the
Warrants, is adjusted pursuant to Section 4, the Company shall prepare a
certificate to be executed by its chief financial officer, if any, or its
principal financial officer(s) in case there is no chief financial officer,
setting forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated (including a description of the
basis on which the Board determined the fair market value of any evidences of
indebtedness, Shares or stock, other securities or property or warrants or other
subscription or purchase rights referred to in Section 4.2), specifying the
number of Shares for which this Warrant is exercisable and describing the number
and kind of any other Shares or Other Property for which this Warrant is
exercisable, and any change in the purchase price or prices thereof, after
giving effect to such adjustment or change. The Company shall promptly cause a
signed copy of such certificate to be delivered to each Holder in accordance
with Section 15.2. The Company shall keep at its office or agency designated
pursuant to Section 12 copies of all such certificates and cause the same to be
available for inspection at said office during normal business hours by any
Holder or any prospective purchaser of a Warrant designated by a Holder
thereof.
  5.2 Notice of Company
Action. If at any time:
  (a)  the
Company takes a record of holders of its Shares for the purpose of entitling
them to receive a
distribution of any type including cash, property, or any Right to subscribe for
or purchase any evidences of its indebtedness, any Shares of any class or series
or any other securities or property, or to receive any other right,
or
  (b)  there is
any capital reorganization of the Company, any reclassification or
recapitalization of the
Company or any consolidation or merger of the Company with, or any sale,
transfer or other disposition of all or substantially all the property, assets
or business of the Company to, another business entity not affiliated with the
Company, or
  (c) there
is a voluntary or involuntary dissolution, liquidation or winding up of the
Company,
  then, in
any one (1) or more of such cases, the Company shall give to Holder: (i) at
least twenty (20) days' prior written notice of the record date selected for
such distribution or Right or for determining rights to vote in respect of any
such reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, and (ii) if any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up occurs, at
least twenty (20) days' prior written notice ofthe date when the same
shall take place. Such notice also shall specify: (i) the date on which any such
record is to be taken for the purpose of such distribution or Right, the date on
which Holders of Shares shall be entitled to any such distribution or Right, and
the amount and character thereof, and (ii) the date on which any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which Holders of Shares shall be
entitled to exchange their Shares for securities or other property deliverable
upon such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up. Each such written
notice shall be deemed sufficiently given if addressed to Holder
  13
    at the
last address of Holder appearing on the books of the Company and delivered in
accordance with Section 15.2.
  6. NO IMPAIRMENT. The
Company shall not by any action, including, without limitation, through
any amendment to its articles of incorporation or bylaws through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in carrying out all such actions as may be reasonably
necessary or appropriate to protect the rights of Holder against impairment.
Without limiting the generality of the foregoing, the Company will (a) take all
such action as may be reasonably necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Shares upon
the exercise of this Warrant, and (b) use its reasonable efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
  7. RESERVATION AND
AUTHORIZATION OF COMMON SHARES. From and after the Closing Date, the
Company shall at all times reserve and keep available for issue upon the
exercise of Warrants such number of its authorized but unissued Shares as will
be sufficient to permit the exercise in full of all outstanding Warrants. All
Shares, when issued upon exercise of any Warrant and payment therefor in
accordance with the terms of such Warrant, shall be duly and validly issued and
fully paid and nonassessable, and not subject to preemptive rights.
  Before
taking any action that would result in an adjustment in the number of Shares for
which this Warrant is exercisable or in the Exercise Price, the Company shall
obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having jurisdiction
thereof.
  If any
Shares required to be reserved for issuance upon exercise of Warrants require
registration or qualification with any governmental authority or other
governmental approval or filing under any federal or state law before such
Shares may be so issued, the Company will in good faith and as expeditiously as
possible and at its expense endeavor to cause such Shares to be duly
registered.
  8. TAKING OF RECORD; COMMON
SHARES AND WARRANT TRANSFER BOOKS.In the case of all distributions by
the Company to holders of its Shares with respect to which any provision of
Section 4 refers to the taking of a record of such holders, the Company will in
each such case take such a record as of the close of business on a Business Day.
The Company will not at any time, except upon dissolution, liquidation or
winding up of the Company, close its transfer books so as to result in
preventing or delaying the exercise or transfer of any Warrant.
  9. RESTRICTIVE LEGEND.
This Warrant and any Warrant issued upon transfer or partial exercise
of this Warrant shall be imprinted with the following legend, in addition to any
legend required under applicable state securities laws:
  "THIS
WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED
OR
  14
    QUALIFIED
UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE
SOLD, PLEDGED, TRANSFERRED OR OTHERWISE ASSIGNED IN VIOLATION OF SUCH ACT AND
LAWS OR THE PROVISIONS OF THIS WARRANT."
  "THIS
WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF ARE SUBJECT TO
ADDITIONAL AGREEMENTS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, BY AND AMONG
THE PARTIES THERETO. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE."
  Each
Share certificate representing Warrant Shares shall bear the following
legend:
  "THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER THE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE ASSIGNED IN VIOLATION OF SUCH ACT AND LAWS OR THE
PROVISIONS OF THIS WARRANT."
  "THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ADDITIONAL AGREEMENTS
SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, BY AND AMONG THE PARTIES THERETO.
A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
  Upon
request of the holder of a Share certificate, the Company shall issue to that
holder a new certificate free of the foregoing legend, if, with such request,
such holder provides the Company with an opinion of counsel (including in-house
counsel) reasonably acceptable to the Company to the effect that the securities
evidenced by such certificate may be sold without restriction under Rule 144 (or
any other rule permitting resales of securities without restriction) promulgated
by the Commission under the Securities Act.
  10. SUPPLYING
INFORMATION. The Company shall cooperate with each Holder and each holder
of Warrant Shares in supplying such information as may be reasonably necessary
for such holder to complete and file any information reporting forms presently
or hereafter required by the Commission as a condition to the availability of an
exemption from the Securities Act for the sale or transfer of any Warrant or
Warrant Shares.
  11. LOSS
OR MUTILATION. Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant (which evidence shall be, in the case of an
institutional investor, registration of such Holder on the books of the Company,
notice from such institutional investor of such ownership and such loss, theft,
destruction or mutilation), and
  15
    (a)  in the
case of loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the
Company (provided that if
Holder has a minimum net worth of at least $500,000, such Holder's own unsecured
agreement of indemnity shall be deemed to be satisfactory), or
  (b)  in the
case of mutilation, upon surrender and cancellation thereof, the Company at its own
expense shall execute and deliver, in lieu thereof, a new Warrant, dated the
date of the original Warrant.
  12. OFFICE OF THE
COMPANY. As long as any of the Warrants remain outstanding, the Company
shall maintain an office or agency (which may be the principal executive offices
of the Company) where a registry showing the name and address of each Holder
will be kept, and the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant. The Company shall
be entitled to rely in all respects, prior to written notice to the contrary,
upon such registry.
  13. SECURITIES ACT
MATTERS.
  13.1
Representations and
Warranties of Holder. Holder hereby represents and warrants to the
Company as of the date hereof that:
  (a)  it is
acquiring this Warrant and, upon exercise of this Warrant, the Warrant Shares,
for its own account, without a view to the distribution thereof.
  (b)  it is an
"accredited investor" within the meaning of Regulation D, promulgated by the
Commission under the Securities Act.
  13.2
Representations and
Warranties of the Company. The Company represents and warrants to Holder
as of the date hereof and on the date of issuance of any additional rights to
additional Warrant Shares that:
  (a)  The
Company is duly organized, validly existing and in good standing under the laws of
its jurisdiction of formation or organization and has the requisite corporate
and authority to own and operate its properties and assets and to carry on its
business as presently conducted.
  (b)  The
Company has the requisite corporate power and authority and has taken the requisite
corporate action, necessary in order to execute, deliver and perform its
obligations under this Warrant. This Warrant has been duly executed and
delivered by the Company and this Warrant (assuming due and valid authorization,
execution and delivery hereof by the counterparties hereto) constitutes the
valid and binding obligation of the Company and is enforceable against the
Company, in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
  (c) The
authorized capital stock of the Company consists of Four Hundred Ninety Million
(490,000,000) shares of common stock, par value $0.001 per share, and Ten
Million (10,000,000) shares of preferred stock, par value $0.001 per share.
There are no shares of any other class or series of stock authorized by the
Company's articles of incorporation. As of the Closing Date, there are Sixty
Seven Million Eight Hundred Seventy Thousand One Hundred
  16
   Seventy
One (67,870,171) Shares issued and outstanding and no Shares are held as
treasury stock. As of the Closing Date and after giving effect to the issuance
of any other Shares pursuant to any other Rights there are Ninety Nine Million
Two Hundred Eleven Thousand Seven Hundred (99,211,700) Fully Diluted Outstanding
Shares. The authorization, execution and delivery of this Warrant, and the
performance by the Company of its obligations under this Warrant, including the
issuance of the Warrants in accordance with this Warrant or the issuance of
Shares upon exercise of the Warrants in accordance with the terms hereof, will
not result in or trigger any adjustment or modification of the rights of any
holder of outstanding Rights, including without limitation any anti-dilution
provisions relating to such securities. All of the outstanding Shares are duly
authorized, validly issued, fully paid and non-assessable. All Warrant Shares,
when issued in accordance with the terms of the Warrants and for the
consideration contemplated thereby, which is not less per share than the par
value thereof, will be duly authorized, validly issued fully paid and
non-assessable. Except as set forth in this Section 13 or in Schedule 13.2(c),
there are no existing (i) Rights, agreements, arrangements or commitments of any
character obligating the Company to issue, transfer or sell any shares of
capital stock or other equity interest in, the Company or securities convertible
into or exchangeable for such shares or equity interests; (ii) contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
capital stock of the Company (except for any cashless exercise provisions that
are substantially similar to those set forth in this Warrant); or (iii)
stockholder agreements, registration rights agreements, stock transfer
restriction agreements (other than restrictions arising in connection with the
Securities Act), voting trusts or similar agreements to which the Company or, to
the knowledge of the Company, any other person is a party with respect to
Shares.
  (d)  Except as
set forth in Schedule 13.2(d), neither the execution, delivery or p erformance
of this Warrant by the Company, nor the consummation by it of the obligations
and transactions contemplated hereby (including, without limitation, the
issuance, the reservation for issuance and the delivery of the Warrant Shares)
requires any consent of, authorization by, exemption from, filing with or notice
to any governmental authority or any other Person, excluding the Company or any
Holder, but including, without limitation, any stock exchange or quotation
system on which the Shares are listed or traded.
  (e)  The
execution, delivery and performance of the Warrants and the consummation of the
transactions contemplated hereby (including, without limitation, the issuance
and reservation for issuance, as applicable, of the Warrant Shares) will not (i)
result in a violation of the articles of incorporation or bylaws of the Company,
in each case as amended, (ii) conflict with or result in the breach of the
terms, conditions or provisions of or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give rise
to any right of termination, acceleration or cancellation under, any material
contract to which the Company or any Subsidiary is a party, (iii) assuming the
accuracy of the representations and warranties set forth in Section 13.1 of this
Warrant, result in a violation of any law, rule, regulation, order, judgment or
decree (including, without limitation, U.S. federal and state securities laws
and regulations) applicable to the Company or any Subsidiary or by which any
property or asset of the Company or any Subsidiary is bound or affected, or (iv)
result in the creation of any material Lien (as defined in the Credit Agreement)
upon any of their respective assets.
  17
    (f)
Assuming the truth and accuracy of Holder's representations and warranties contained
in Section 13.1, the issuance of this Warrant and the issuance of Warrant Shares
pursuant to this Warrant are exempt from the registration and prospectus
delivery requirements of the Securities Act.
  (g)The
Company agrees that neither it nor any Person acting on its behalf has offered
or will offer
this Warrant or the Warrant Shares or any part thereof or any similar securities
for issue or sale to, or has solicited or will solicit any offer to acquire any
of the same from, any Person so as to bring the issuance and sale of this
Warrant or the Warrant Shares hereunder within the provisions of the
registration and prospectus delivery requirements of the Securities
Act.
  14. SHAREHOLDER AND BUSINESS
INFORMATION
  14.1
Shareholder
Documents. At the request of the Holder, at any time after the Credit
Agreement has been terminated, Company shall deliver to the Holder
simultaneously with any distribution of any document to the shareholders of the
Company generally, any such document so distributed.
  15. MISCELLANEOUS
  15.1
Nonwaiver and
Expenses. If either party (the "Defaulting Party")fails to comply with
any provision of this Warrant, it shall pay to the other party such amounts as
shall be sufficient to cover any costs and expenses including, but not limited
to, reasonable attorneys' fees, including those of appellate proceedings,
incurred by the other party in enforcing any of its rights, powers or remedies
hereunder. No course of dealing or any delay or failure to exercise any right
hereunder on the part of a party shall operate as a waiver of such right or
otherwise prejudice its rights, powers or remedies.
  15.2
Notice
Generally. Any notice, demand, request, consent, approval, declaration,
delivery or other communication to be made pursuant to the provisions of this
Warrant shall be deemed sufficiently given or made if in writing and either
delivered in person with receipt acknowledged or sent by registered or certified
mail, return receipt requested, postage prepaid, or by facsimile and confirmed
by facsimile answerback, addressed as follows:
  (a)  If to any
Holder or holder of Warrant Shares, at its last known address appearing on the books of
the Company maintained for such purpose.
  (b)  If to the
Company at:
  Deep
Down, Inc.
 15473
East Freeway
 Channelview,
Texas 77530
 Attention:
Ronald Smith
  with a
copy to:
  Craig
Welscher, Attorney
 The
Welscher Law Firm
 1111
North Loop West, Suite 702
 Houston,
Texas 77008
  18
  or at
such address as may be substituted by written notice given as herein provided.
The party entitled to receive any notice required hereunder may waive such
notice in writing. Every notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder shall be deemed to have
been duly given or served on the date on which personally delivered, with
receipt acknowledged, faxed and confirmed by fax answerback, or three (3)
Business Days after the same shall have been deposited in the United States
mail. Notice by electronic mail shall not constitute effective notice
hereunder.
  15.3
Successors and
Assigns. Subject to the provisions of Sections 3.1, this Warrant and the
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder (provided
that this Warrant would otherwise be eligible for Transfer to such successor or
assign). This Warrant and all rights evidenced hereby may be transferred by
Holder to any Person in accordance with law, including without limitation, the
Securities Act at any time on and after the Unlock Date.
  15.4
Remedies. Each
Holder or holder of Warrant Shares, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under Section 11 of this Warrant. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by the Company of the provisions of Section 11 of
this Warrant and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
  15.5
Amendment. This
Warrant and all other Warrants may be modified or amended or the provisions
hereof waived with the written consent of the Company and the Majority Holders;
provided that no such Warrant may be modified or amended to reduce the number of
Shares for which such Warrant is exercisable or to increase the price at which
such Shares may be purchased upon exercise of such Warrant (before giving effect
to any adjustment as provided therein) without the prior written consent of the
relevant Holder.
  15.6
Severability.
Wherever possible, each provision of this Warrant shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Warrant.
  15.7
Headings. The
headings used in this Warrant are for the convenience of reference only and
shall not, for any purpose, affect the meaning or interpretation of this
Warrant.
  15.8
Governing Law.
This Warrant shall be governed by the laws of the State of New York, without
regard to the provisions thereof relating to conflict of laws.
  15.9
Facsimile
Signature. The signature on this Warrant may be delivered by telecopy,
facsimile or other electronic transmission, with original signature page to be
subsequently substituted therefor.
  19
   15.10
Non-Survival.
The parties hereby agree that all the provisions of this Warrant shall
terminate, be null and void, and be of no further force or effect on the earlier
of the exercise in full of this Warrant and/or the Expiration Date, whichever
comes first.
  15.11
Counterparts.
This Warrant may be executed in any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
  [Signature
page follows.]
  20
   DEEP
      DOWN, INC.By:
      /s/ Ronald E. SmithName:
      Ronald E. SmithTitle:
      CEOPROSPECT CAPTIAL CORPORATIONBy:
      /s/ M. Grier EliasekName:
      M. Grier EliasekTitle:
      President
  21
 EXHIBIT
A
 SUBSCRIPTION
FORM
  [To be
executed only upon exercise of Warrant]
  The
undersigned registered Holder of the attached Warrant irrevocably elects to
exercise such Warrant for purchase of _________ Shares of Deep Down, Inc., a
Nevada corporation, and [herewith makes payment therefor, all
at the price] [hereby elects to make a cashlessexercise pursuant to Section 2.23 of
the Warrant]and on the terms and conditions specified in this Warrant
and requests that certificates for the Shares hereby purchased (and any
securities or property issuable upon such exercise) to be issued in the name of
the undersigned and delivered to the undersigned as follows:
  Name                                                                                                                      
Address
  If the
certificates representing the Shares being purchased pursuant hereto are to be
registered in a name or names other than the name of the holder of this Warrant,
all transfer taxes payable upon such transfer shall be paid by the undersigned
at the time of delivering the notice of exercise and such request.
  The
undersigned acknowledges that each certificate for Warrant Shares issued upon
exercise of the Warrant shall bear a legend to the effect that such Warrant
Shares may not be transferred except upon compliance with the provisions of the
Securities Act and applicable state securities laws, and each certificate for
Warrant Shares transferred shall bear such a legend unless, in the opinion of
counsel for the Company, such legend is not required.
  If the
number of Shares shall not be all the Warrant Shares purchasable under this
Warrant, a new Warrant of like tenor is to be issued in the name of and
delivered to the undersigned for the remaining balance of the Shares purchasable
thereunder. Capitalized terms used herein but not defined herein shall have the
meanings set forth for such terms in the attached Warrant.
  (Name
      of Registered Owner)(Signature
      of Registered Owner)(Street
      Address)(City)             
      (State)            
      (Zip Code)
   NOTICE:
The signature on this subscription must correspond with the names as written upon the
face of the attached Warrant.
  Exhibit
A
  22
   EXHIBIT
B
  ASSIGNMENT
FORM
  FOR VALUE
RECEIVED the undersigned registered Holder of the attached Warrant hereby sells,
assigns and transfers unto the Assignee named below all of the rights of the
undersigned under such Warrant, with respect to the number of Shares set forth
below:
  Name and Address of
Assignee
                
                No. of
Shares
   and does
hereby irrevocably constitute and appoint ____________ attorney-in-fact to
register such
transfer on the books of Deep Down, Inc., with full power of substitution in the
premises.
  If the
number of Shares is not all of the Warrant Shares represented by the Warrant, a
new Warrant of like tenor is to be issued in the name of and delivered to the
undersigned for the balance remaining of the Shares represented by such
Warrant.
  Capitalized
terms used herein but not defined herein shall have the meanings set forth for
such terms in the attached Warrant.
  Dated:
      _______________________________
              
              Print
      Name:
              ___________________________________Signature:
              ___________________________________Witness:
              ___________________________________
  NOTICE: 
The signature on this assignment must correspond with the name as written upon the face
of the attached Warrant.
    Exhibit B
 23
  Schedule
13.2(c)
  CAPITALIZATION
  (i) As of
the date hereof, there are currently outstanding:
  ·  Options
to purchase Five Million Five Hundred Thousand (5,500,000) shares of common
stock of the Company
 ·  Zero (0)
Warrants to purchase shares of common stock of the Company
 ·  Zero (0)
Convertible Notes
  (ii) None
  (iii) As
of the date hereof, there are no holders of options and warrant to purchase
shares of common stock of the Company and no holders of the Company's
Convertible Notes.
   Schedule
13.2(c)
 24
 Schedule
13.2(d)
  None.