**7. Method of Payment**. The Option Price upon exercise of the Option shall be payable to theCompany in full either: (i) in cash or its equivalent, or (ii) subject to priorapproval by the Committee in its discretion, by tendering previously acquired Shares having anaggregate Fair Market Value (as defined in the Plan) at the time of exercise equal to the totalOption Price (provided that the Shares must have been held by the Optionee for at least six (6)months prior to their tender to satisfy the Option Price), or (iii) subject to prior approval bythe Committee in its discretion, by withholding Shares which otherwise would be acquired onexercise having an aggregate Fair Market Value at the time of exercise equal to the total OptionPrice (as determined pursuant to Section 2.3 of the Plan), or (iv) subject to prior approval by theCommittee in its discretion, by a combination of (i), (ii), and (iii) above. Any payment in sharesof Common Stock shall be effected by the delivery of such shares to the Secretary of the Company,duly endorsed in blank or accompanied by stock powers duly executed in blank, together with anyother documents as the Secretary may require. If the payment of the Option Price is remittedpartly in Shares, the balance of the payment of the Option Price shall be paid in either cash,certified check, bank cashiers’ check, or by wire transfer.The Committee, in its discretion, may allow (i) a “cashless exercise” as permitted underFederal Reserve Board’s Regulation T, 12 CFR Part 220 (or its successor), and subject to applicablesecurities law restrictions and tax withholdings, or (ii) any other means of exercise which theCommittee, in its discretion, determines to be consistent with the Plan’s purpose and applicablelaw.As soon as practicable after receipt of a written notification of exercise and full payment,the Company shall deliver to or on behalf of the Optionee, in the name of the Optionee or otherappropriate recipient, Share certificates for the number of Shares purchased under the Option.Such delivery shall be effected for all purposes when a stock transfer agent of the Company shallhave deposited such certificates in the United States mail, addressed to Optionee or otherappropriate recipient.**8. ****Restrictions on Exercise**. The Option may not be exercised if the issuance of suchShares or the method of payment of the consideration for such Shares would constitute a violationof any applicable federal or state securities or other laws or regulations, including any such lawsor regulations or Company policies respecting blackout periods, or any rules or regulations of anystock exchange on which the Common Stock may be listed.**9. ****Termination of Employment**. Voluntary or involuntary termination of Employment andthe death or Disability of Optionee shall affect Optionee’s rights under the Option as follows:(a) Termination for Cause. The vested and non-vested portions of the Optionshall expire on 12:01 am. (CST) on the date of termination of Employment and shall not beexercisable to any extent if Optionee’s Employment with the Company is terminated for Cause(as defined in the Plan at the time of such termination of Employment).(b) Other Involuntary Termination or Voluntary Termination. If Optionee’sEmployment with the Company is terminated for any reason other than for Cause, retirement,death or Disability (as defined in the Plan at the time of termination of Employment), then(i) the non-vested portion of the Option shall immediately expire on the termination date(ii) the vested portion of the Option shall expire to the extent notexercised within three (3) months after the date of such termination of Employment. Inno event may the Option be exercised by anyone after the earlier of (i) the expiration ofthe Option Period or (ii) three (3) months after termination of Employment.
 
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(c) Death or Disability. If Optionee’s Employment with the Company isterminated by death or Disability, then the vesting of the Option will be accelerated andthe entire Option shall be 100% vested on the date of termination of Employment and shallexpire 365 calendar days after the date of such termination of Employment to the extent notexercised by Optionee or, in the case of death, by the person or persons to whom Optionee’srights under the Option have passed by will or by the laws of descent and distribution or,in the case of Disability, by Optionee’s legal representative. In no event may the Optionbe exercised by anyone after the earlier of (i) the expiration of the Option Period or (ii)365 days after Optionee’s death or termination of Employment due to Disability.(d) Retirement. In the event of termination due to retirement, the vestedportion of the Option shall expire on the earlier of (A) the Option Period or (B) three (3)months after the date of retirement, and the unvested portion of the Option shall expire.(e) Change of Control. In the event of a “Change in Control” of the Company(as defined below) the vesting of the Option will be accelerated and the entire Option shallbe 100% vested as of the date immediately preceding a Change in Control and the Option maybe accelerated and the Option shall otherwise be affected as provided in the Plan at suchtime. In addition, notwithstanding anything herein to the contrary, in the event of aChange in Control and to the extent any portion of this is deemed to be a Nonstatutory StockOption on account of the limitation in Section 2.2(f) of the Plan or in the future for anyother reason it is deemed to be a Nonstatutory Stock Option, such portion of the Optionshall remain exercisable for the until the earlier of the expiration of the Option Period orone year after the Optionee’s voluntary or involuntary termination from employment withoutCause or Retirement. For the purposes of this Agreement, a “Change in Control” of theCompany shall include any event as defined in the Plan, and the Board has determined thatpursuant to Section 6.7(f) of the Plan, a “Change in Control” of the Company shall alsoinclude any other event that constitutes a “Change in Control” of the Company as defined inthe Optionee’s Termination Agreement with the Company.**10. ****Qualification as an Incentive Stock Option****.**The Optionee understands that theOption is intended to qualify as an “incentive stock option” within the meaning of Section 422 ofthe Code. The Optionee must meet certain holding periods under Section 422(a) of the Code toobtain the federal income tax treatment applicable to the exercise of incentive stock options andthe disposition of Shares acquired thereby. The Optionee further understands that the exerciseprice of Shares subject to this Option has been set by the Committee at a price that the Committeedetermined to be not less than 100% (or, if the Optionee, at the Grant Date, owned more than 10% ofthe total combined voting power of the Company’s outstanding voting securities, 110%) of the FairMarket Value, as determined in accordance with the Plan, of a share of Common Stock on the GrantDate. The Optionee further understands and agrees, however, that neither the Company nor theCommittee shall be liable or responsible for any additional taxliability incurred by the Optionee in the event that the Internal Revenue Service for anyreason determines that this Option does not qualify as an “incentive stock option” within themeaning of the Code.
 
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**11. ****Independent Legal and Tax Advice**. Optionee acknowledges that the Company hasadvised Optionee to obtain independent legal and tax advice regarding the grant and exercise of theOption and the disposition of any Shares acquired thereby.**12. ****Reorganization of Company**. The existence of the Option shall not affect in anyway the right or power of the Company or its stockholders to make or authorize any or alladjustments, recapitalizations, reorganizations or other changes in Company’s capital structure orits business, or any merger or consolidation of the Company, or any issue of bonds, debentures,preferred or prior preference stock ahead of or affecting the Shares or the rights thereof, or thedissolution or liquidation of the Company, or any sale or transfer of all or any part of its assetsor business, or any other corporate act or proceeding, whether of a similar character or otherwise.**13. ****Adjustment of Shares**. In the event of stock dividends, spin-offs of assets orother extraordinary dividends, stock splits, combinations of shares, recapitalizations, mergers,consolidations, reorganizations, liquidations, issuances of rights or warrants and similartransactions or events involving Company, appropriate adjustments shall be made to the terms andprovisions of this Option as provided in the Plan.**14. ****No Rights in Shares**. Optionee shall have no rights as a stockholder in respect ofthe Shares until the Optionee becomes the record holder of such Shares.**15. ****Investment Representation**. Optionee will enter into such written representations,warranties and agreements as Company may reasonably request in order to comply with any federal orstate securities law. Moreover, any stock certificate for any Shares issued to Optionee hereundermay contain a legend restricting their transferability as determined by the Company in itsdiscretion. Optionee agrees that Company shall not be obligated to take any affirmative action inorder to cause the issuance or transfer of Shares hereunder to comply with any law, rule orregulation that applies to the Shares subject to the Option.**16. ****NoGuarantee of Employment**. The Option shall not confer upon Optionee any rightto continued Employment with the Company or any subsidiary or affiliate thereof.**17. ****Withholding of Taxes**. This Option is subject to and the Company shall have theright to take any action as may be necessary or appropriate to satisfy any federal, state, or localtax withholding obligations, including at the Committee’s discretion, to make deductions from thenumber of Shares otherwise deliverable upon exercise of the Option in an amount sufficient tosatisfy withholding of any federal, state or local taxes required by law.
 
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**18.****General****.**(a) Notices. All notices under this Agreement shall be mailed or delivered byhand to the parties at their respective addresses set forth beneath their signatures belowor at such other address as may be designated in writing by either of the parties to oneanother. Notices shall be effective upon receipt.(b) Shares Reserved. Company shall at all times during the Option Periodreserve and keep available under the Plan such number of Shares as shall be sufficient tosatisfy the requirements of this Option.(c) Nontransferability of Option. The Option granted pursuant to thisAgreement is not transferable other than by will, the laws of descent and distribution. TheOption will be exercisable during Optionee’s lifetime only by Optionee or by Optionee’slegal representative in the event of Optionee’s Disability. No right or benefit hereundershall in any manner be liable for or subject to any debts, contracts, liabilities,obligations or torts of Optionee.(d) Amendment and Termination. No amendment, modification or termination ofthe Option or this Agreement shall be made at any time without the written consent ofOptionee and Company.(e) No Guarantee of Tax Consequences. The Company and the Committee make nocommitment or guarantee that any federal or state tax treatment will apply or be availableto any person eligible for benefits under the Option. The Optionee has been advised andbeen provided the opportunity to obtain independent legal and tax advice regarding the grantand exercise of the Option and the disposition of any Shares acquired thereby.(f) Severability. In the event that any provision of this Agreement shall beheld illegal, invalid, or unenforceable for any reason, such provision shall be fullyseverable, but shall not affect the remaining provisions of the Agreement, and the Agreementshall be construed and enforced as if the illegal, invalid, or unenforceable provision hadnot been included herein.(g) Supersedes Prior Agreements. This Agreement shall supersede and replaceall prior agreements and understandings, oral or written, between the Company and theOptionee regarding the grant of the Options covered hereby.(h) Governing Law. The Option shall be construed in accordance with the lawsof the State of Louisiana without regard to its conflict of law provisions, to the extentfederal law does not supersede and preempt Louisiana law.**19. ****Counterparts and Electronic Execution by Optionee.** This Agreement may be executedin multiple original counterparts, each of which shall be deemed an original, but all of whichtogether shall constitute but one and the same instrument. Optionee’s electronic acceptance of theAward Notice shall be deemed to be Optionee’s execution and acceptance of this Agreement.**[COMPANY SIGNATURE PAGE FOLLOWS]**
 
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**IN WITNESS WHEREOF,**the Company has caused this Agreement to be executed on its behalf by itsduly authorized officer.      **PETROQUEST ENERGY, INC.**