ex10-1.htm


    Exhibit 10.1


      
        


         

        


      

      PARTICLE DRILLING
TECHNOLOGIES, INC.

       

      $1,200,000

      Senior
Secured PIK Notes due 2010

       

      Warrants
to Purchase a 19.95% Equity Interest

       

      __________________

       

      PURCHASE
AGREEMENT

      __________________

       

      Dated as
of February 11, 2009

       

      
        


      

      



      
        
          
             

          

           


        

        
           


          
            

          

        

        
           


        

      


      TABLE OF
CONTENTS

       

       

       

      SECTION
1.                                                                                                                                          Authorization
of Notes and Warrants

       

       

      SECTION
2.                                                                                                                                          Sale
and Purchase of Securities

       

      
        	
                  

              	
                2.01

              	
                Purchase Price 

              	
                 

              


      

      
        	
                  

              	
                2.02

              	
                Security Interest 

              	
                 

              


      

       

      SECTION
3.                                                                                                                                          Closing;
Fees

       

      
        	
                  

              	
                3.01

              	
                Closings 

              	
                 

              


      

      
        	
                  

              	
                3.02

              	
                Expenses 

              	
                 

              


      

      
        	
                  

              	
                3.03

              	
                Obligation of the
      Purchasers 

              	
                 

              


      

       

      SECTION
4.                                                                                                                                          Prepayment
of Notes; Payments; Taxes

       

      
        	
                  

              	
                4.01

              	
                Optional Redemption of
      Notes 

              	
                 

              


      

      
        	
                  

              	
                4.02

              	
                Redemption
    Procedure 

              	
                 

              


      

       

      SECTION
5.                                                                                                                                          Conditions
to Purchasers’ Obligations

       

      
        	
                  

              	
                5.01

              	
                Execution of
Notes 

              	
                 

              


      

      
        	
                  

              	
                5.02

              	
                Warrants 

              	
                 

              


      

      
        	
                  

              	
                5.03

              	
                Fees, Expenses,
    Etc 

              	
                 

              


      

      
        	
                  

              	
                5.04

              	
                Opinions of
    Counsel 

              	
                 

              


      

      
        	
                  

              	
                5.05

              	
                Corporate Documents; Proceedings;
      Etc 

              	
                 

              


      

      
        	
                  

              	
                5.06

              	
                Indebtedness 

              	
                 

              


      

      
        	
                  

              	
                5.07

              	
                Security
Agreement 

              	
                 

              


      

      
        	
                  

              	
                5.08

              	
                Collateral
    Deliveries 

              	
                 

              


      

      
        	
                  

              	
                5.09

              	
                Adverse Change,
    Etc 

              	
                 

              


      

      
        	
                  

              	
                5.10

              	
                Litigation 

              	
                 

              


      

      
        	
                  

              	
                5.11

              	
                Representations and
      Warranties 

              	
                 

              


      

      
        	
                  

              	
                5.12

              	
                Good Standing
      Certificates 

              	
                 

              


      

      
        	
                  

              	
                5.13

              	
                No Default 

              	
                 

              


      

      
        	
                  

              	
                5.14

              	
                Securities Laws 

              	
                 

              


      

      
        	
                  

              	
                5.15

              	
                No Outstanding Registration
      Rights 

              	
                 

              


      

      
        	
                  

              	
                5.16

              	
                Subsequent Draw Down
      Conditions 

              	
                 

              


      

       

      SECTION
6.                                                                                                                                          Conditions
to Company’s Obligations

       

      
        	
                  

              	
                6.01

              	
                Sale of
Securities 

              	
                 

              


      

      
        	
                  

              	
                6.02

              	
                Representations and Warranties of the
      Purchasers 

              	
                 

              


      


      
        
            

        

        
            

          
            

          

        

        
            

        

      


      
        	
                  

              	
                SECTION 7.Representations, Warranties
      and Agreements of the Company

              


      

      
        	
                  

              	
                7.01

              	
                Corporate Status 

              	
                 

              


      

      
        	
                  

              	
                7.02

              	
                Valid Agreement 

              	
                 

              


      

      
        	
                  

              	
                7.03

              	
                Capitalization 

              	
                 

              


      

      
        	
                  

              	
                7.04

              	
                Conflicts 

              	
                 

              


      

      
        	
                  

              	
                7.05

              	
                Accuracy of Securities Act
      Filings 

              	
                 

              


      

      
        	
                  

              	
                7.06

              	
                Authorization of
      Securities 

              	
                 

              


      

      
        	
                  

              	
                7.07

              	
                Adverse
    Litigation. 

              	
                 

              


      

      
        	
                  

              	
                7.08

              	
                Taxes 

              	
                 

              


      

      
        	
                  

              	
                7.09

              	
                Disclosure
    Controls 

              	
                 

              


      

      
        	
                  

              	
                7.10

              	
                Investment
Company 

              	
                 

              


      

      
        	
                  

              	
                7.11

              	
                Commissions 

              	
                 

              


      

      
        	
                  

              	
                7.12

              	
                Material Events 

              	
                 

              


      

      
        	
                  

              	
                7.13

              	
                Use of Proceeds 

              	
                 

              


      

      
        	
                  

              	
                7.14

              	
                The Security
      Documents 

              	
                 

              


      

      
        	
                  

              	
                7.15

              	
                Employee Benefit
      Plans 

              	
                 

              


      

      
        	
                  

              	
                7.16

              	
                Environmental
    Matters 

              	
                 

              


      

      
        	
                  

              	
                7.17

              	
                Representations and Warranties in
      Documents 

              	
                 

              


      

       

      SECTION
8.                                                                                                                                          Representations
and Warranties of the Purchasers

       

      
        	
                  

              	
                8.01

              	
                Purchaser Intent 

              	
                 

              


      

      
        	
                  

              	
                8.02

              	
                Status of
    Purchasers 

              	
                 

              


      

      
        	
                  

              	
                8.03

              	
                Authorization; No
      Contravention 

              	
                 

              


      

      
        	
                  

              	
                8.04

              	
                Binding Effect 

              	
                 

              


      

      
        	
                  

              	
                8.05

              	
                Broker’s, Finder’s or Similar
      Fees 

              	
                 

              


      

       

      SECTION
9.                                                                                                                                          Affirmative
Covenants

       

      
        	
                  

              	
                9.01

              	
                Maintenance of Property;
      Insurance 

              	
                 

              


      

      
        	
                  

              	
                9.02

              	
                Compliance with Statutes,
      Etc 

              	
                 

              


      

      
        	
                  

              	
                9.03

              	
                Compliance with Environmental
      Laws 

              	
                 

              


      

      
        	
                  

              	
                9.04

              	
                Employee Benefits 

              	
                 

              


      

      
        	
                  

              	
                9.05

              	
                Performance of
      Obligations 

              	
                 

              


      

      
        	
                  

              	
                9.06

              	
                Payment of Taxes 

              	
                 

              


      

      
        	
                  

              	
                9.07

              	
                Further Assurances; Additional
      Collateral 

              	
                 

              


      

       

      SECTION
10.                                                                                                                                          Negative
Covenants

       

      
        	
                  

              	
                10.01

              	
                Liens 

              	
                 

              


      

      
        	
                  

              	
                10.02

              	
                Consolidation, Merger, Purchase or Sale
      of Assets, Etc 

              	
                 

              


      

      
        	
                  

              	
                10.03

              	
                Dividends 

              	
                 

              


      

      
        	
                  

              	
                10.04

              	
                Indebtedness 

              	
                 

              


      

      
        	
                  

              	
                10.05

              	
                Advances, Investments and
      Loans 

              	
                 

              


      

      
        	
                  

              	
                10.06

              	
                Transactions with
      Affiliates 

              	
                 

              


      


      
        
            

        

        
            

          
            

          

        

        
            

        

      


      
        	
                  

              	
                10.07

              	
                Limitation on Modifications of
      Certificate of Incorporation, By-Laws and Certain Other Agreements;
      Etc 

              	
                 

              


      

      
        	
                  

              	
                10.08

              	
                Limitation on Certain Restrictions on
      Subsidiaries 

              	
                 

              


      

      
        	
                  

              	
                10.09

              	
                Limitation on Creation of
      Subsidiaries 

              	
                 

              


      

      
        	
                  

              	
                10.10

              	
                Business 

              	
                 

              


      

       

      SECTION
11.                                                                                                                                          Events
of Default

       

      
        	
                  

              	
                11.01

              	
                Payments 

              	
                 

              


      

      
        	
                  

              	
                11.02

              	
                Representations,
    Etc 

              	
                 

              


      

      
        	
                  

              	
                11.03

              	
                Covenants 

              	
                 

              


      

      
        	
                  

              	
                11.04

              	
                Default Under Other
      Agreements 

              	
                 

              


      

      
        	
                  

              	
                11.05

              	
                Bankruptcy, Etc 

              	
                 

              


      

      
        	
                  

              	
                11.06

              	
                ERISA 

              	
                 

              


      

      
        	
                  

              	
                11.07

              	
                Security
Documents 

              	
                 

              


      

      
        	
                  

              	
                11.08

              	
                Judgments 

              	
                 

              


      

      
        	
                  

              	
                11.09

              	
                Change of Control 

              	
                 

              


      

      
        	
                  

              	
                11.10

              	
                Conviction 

              	
                 

              


      

      
        	
                  

              	
                11.11

              	
                Non-Performance of the Shell
      Contract 

              	
                 

              


      

       

      SECTION
12.                                                                                                                                          Definitions

       

      
        	
                  

              	
                12.01

              	
                Defined Terms 

              	
                 

              


      

       

      SECTION
13.                                                                                                                                          Appointment
of Agent

       

      
        	
                  

              	
                13.01

              	
                Appointment 

              	
                 

              


      

      
        	
                  

              	
                13.02

              	
                Rights of Agent 

              	
                 

              


      

      
        	
                  

              	
                13.03

              	
                Administration of the
      Collateral 

              	
                 

              


      

      
        	
                  

              	
                13.04

              	
                Application of
      Proceeds 

              	
                 

              


      

      
        	
                  

              	
                13.05

              	
                Duties of Agent 

              	
                 

              


      

      
        	
                  

              	
                13.06

              	
                Reliance by Agent 

              	
                 

              


      

      
        	
                  

              	
                13.07

              	
                Appointment of
      Sub-Agents 

              	
                 

              


      

      
        	
                  

              	
                13.08

              	
                Resignation of
    Agent 

              	
                 

              


      

      
        	
                  

              	
                13.09

              	
                Holder
    Non-Reliance 

              	
                 

              


      

      
        	
                  

              	
                13.10

              	
                Indemnification 

              	
                 

              


      

      
        	
                  

              	
                13.11

              	
                Holders 

              	
                 

              


      

      
        	
                  

              	
                13.12

              	
                Action by Agent 

              	
                 

              


      

       

      SECTION
14.                                                                                                                                          Miscellaneous

       

      
        	
                  

              	
                14.01

              	
                Payment of Expenses,
      Etc 

              	
                 

              


      

      
        	
                  

              	
                14.02

              	
                Right of Setoff 

              	
                 

              


      

      
        	
                  

              	
                14.03

              	
                Notices 

              	
                 

              


      

      
        	
                  

              	
                14.04

              	
                Benefit of
    Agreement 

              	
                 

              


      

      
        	
                  

              	
                14.05

              	
                No Waiver; Remedies
      Cumulative 

              	
                 

              


      


      
        
            

        

        
            

          
            

          

        

        
            

        

      


      
        	
                  

              	
                14.06

              	
                GOVERNING LAW; SUBMISSION TO
      JURISDICTION; VENUE; WAIVER OF JURY TRIAL 

              	
                 

              


      

      
        	
                  

              	
                14.07

              	
                Counterparts 

              	
                 

              


      

      
        	
                  

              	
                14.08

              	
                Headings
    Descriptive 

              	
                 

              


      

      
        	
                  

              	
                14.09

              	
                Amendment or Waiver;
      Etc 

              	
                 

              


      

      
        	
                  

              	
                14.10

              	
                Survival 

              	
                 

              


      

      
        	
                  

              	
                14.11

              	
                Confidentiality 

              	
                 

              


      

      
        
          	
                    

                	
                  14.12

                	
                  Registration of
    Notes 

                	
                   

                


        

      

      


      SCHEDULE
2.01                      Schedule
of Purchasers

      SCHEDULE
5.06                      Schedule
of Existing Indebtedness

      SCHEDULE 5.08(iii)                 Schedule
of Real Property

      


      EXHIBIT A                               Form
of Note

      EXHIBIT B                                Form
of Common Stock Purchase Warrant

      EXHIBIT C-1                             Form
of Opinion of Vinson & Elkins LLP

      EXHIBIT C-2                             Form
of Opinion of Woodburn and Wedge

      EXHIBIT D                                Form
of Compliance Certificate

      EXHIBIT E                                 Form
of Security Agreement


      
        
           


        

        
           


          
            

          

        

        
           


        

      


      PURCHASE
AGREEMENT dated as of February 11, 2009 (the “Agreement”) among
Particle Drilling Technologies, Inc., a Nevada corporation (the “Company”),
Particle Drilling Technologies, Inc., a Delaware corporation and a Subsidiary of
the Company (the “Delaware
Sub”),  LC Capital Master Fund, Ltd., a Cayman Islands exempted
company (“LC”),
Don A. Sanders and Edward F. Hiel, as purchasers (each, a “Purchaser” and
collectively, the “Purchasers”), and LC
Capital Master Fund, Ltd., a Cayman Islands exempted company, as agent and
collateral agent for the holders of the securities issued hereunder (the “Agent”).

       

      The
Company has requested that the Purchasers purchase the Notes and the Warrants
from it and the Purchasers are prepared to purchase the Notes and the Warrants
from the Company upon the terms and conditions hereof, and, accordingly, the
parties hereto agree as follows:

       

      SECTION
1. Authorization of Notes and
Warrants.  The
Company has authorized the:

       

      (a) issuance
and sale of $1,200,000 aggregate principal amount of its Senior Secured PIK
Notes due 2010 (the “Notes”), in
substantially the form of note attached hereto as Exhibit A,
bearing interest at a rate of 10.0% per annum, interest payable quarterly in
arrears on each Quarterly Payment Date with no amortization;

       

      (b) issuance
and sale of 3-year detachable warrants substantially in the form of Exhibit B (the
“Warrants” and,
together with the Notes, the “Securities”) to
purchase an aggregate of up to 19.95% of the Company’s issued and outstanding
Common Stock as of the date of this Agreement (as such number of shares of
Common Stock may be adjusted from time to time in accordance with the terms of
the Warrants, the “Warrant Shares”);
and

       

      (c) issuance
of the Warrant Shares upon exercise of the Warrants.

       

      SECTION
2. Sale and Purchase of
Securities.

       

      2.01 Purchase
Price.  (a)
The Company will issue and sell to the Purchasers and, subject to the terms and
conditions of this Agreement, the Purchasers agree, severally and not jointly,
to buy from the Company, at the date hereof and on each Draw Down Date as
provided for in Section 3, the
Securities in the respective principal amounts (in the case of the Notes) and
exercisable for the number of shares of Common Stock (in the case of the
Warrants) set forth in Schedule 2.01 hereto
opposite their names, for an aggregate purchase price equal to 100% of the
principal amount of the Notes specified therein (the “Purchase Price”); and
in that regard, the parties hereto agree that $1,150,000 of the $1,200,000
aggregate Purchase Price paid for the Notes and the Warrants shall be allocated
to the Notes for United States federal income tax purposes and the remaining
$50,000 of the Purchase Price shall be allocated to the Warrants.

       

      2.02 Security
Interest.  Each
of the Notes shall be an obligation of the Company secured by Liens on the
Company’s and the Delaware Sub’s interests in the Collateral with such Liens
having a first priority to the Collateral, subject to the Permitted
Liens.

       

      



      
        
           


        

        
          1

          
            

          

        

        
           


          
             

             

          

        

      


      Closing;
Fees.

       

      2.03 Closings.  The
sales of the Securities to be purchased by the Purchasers shall take place at
the offices of Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza,
New York, New York, at 10:00 a.m., New York City time, in four closings as
follows:

       

      (a) the
Warrants shall be issued to the Purchasers on the date of this Agreement in
consideration of the execution of this Agreement by the Purchasers;

       

      (b) $400,000
in principal amount of the Notes, subject to the satisfaction of the conditions
set forth in Section 5, shall
be purchased by the Purchasers, with each Purchaser purchasing its pro rata portion of such
Notes, at a closing (the “First Draw Down”) on
March 2, 2009 or on such other Business Day thereafter as may be agreed
upon by the Company and LC;

       

      (c) $400,000
in principal amount of the Notes, subject to the satisfaction of the conditions
set forth in Section 5, shall
be purchased by the Purchasers, with each Purchaser purchasing its pro rata portion of such
Notes, at a closing (the “Second Draw Down”) at
a time as may be agreed upon by the Company and LC which shall be no earlier
than 90 days after the First Draw Down; and

       

      (d) $400,000
in principal amount of the Notes, subject to the satisfaction of the conditions
set forth in Section 5, shall
be purchased by the Purchasers, with each Purchaser purchasing its pro rata portion of such
Notes, at a closing (the “Final Draw Down,”
and, together with the First Draw Down and the Second Draw Down, each a “Draw Down”) at a time
as may be agreed upon by the Company and LC which shall be no earlier than
90 days after the Second Draw Down.

       

      At each
Draw Down, the Company will deliver to each Purchaser the principal amount of
Notes being purchased by such Purchaser at such Draw Down, registered in such
names as such Purchaser shall instruct the Company dated the date of the
applicable Draw Down against delivery by such Purchaser to the Company of
immediately available funds in the amount of the principal amount
thereof.  If at any Draw Down the Company shall fail to tender such
Securities to the Purchasers as provided above in this Section 3, or
any of the conditions specified in Section 5 shall
not have been satisfied to LC’s satisfaction, the Purchasers shall be relieved
of all further obligations under this Agreement, without thereby waiving any
other rights they may have by reason of such failure to deliver Notes or such
failure of condition precedent.

       

      2.04 Expenses.  Subject
to Section 14.01,
whether or not the Securities are issued, on the First Draw Down, the Company
will pay to LC the reasonable fees and disbursements of legal counsel and
consultants and such other expenses, including search fees, diligence fees and
expenses, documentation fees and filing fees, incurred by LC or them in
connection with the transactions contemplated herein, set forth in a
statement (accompanied by reasonable detail) delivered to the Company on or
prior to the date of the First Draw Down, and thereafter the Company will pay to
LC, promptly upon receipt of a supplemental statement therefor (accompanied by
reasonable detail), such additional reasonable fees and expenses, if any, as LC
may incur in connection with the Second Draw Down and Final Draw
Down.

       


      
        
           


        

        
          2

          
            

          

        

        
           


          
             

             

          

        

      


      Obligation
of the Purchasers.  The
Company hereby acknowledges and agrees that the Purchasers shall have no
obligation to purchase the Notes or otherwise consummate the transactions
contemplated by this Agreement if any of the conditions to the applicable Draw
Down described in Section 5 has
not been satisfied at or prior to such Draw Down.

       

      SECTION
3. Prepayment of Notes;
Payments; Taxes.

       

      3.01 Optional Redemption of
Notes.  (a)
the Company may voluntarily redeem at any time all of the Notes at the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
applicable redemption date without penalty or premium.

       

      (b) The
Company will give each Holder written notice of each optional redemption under
this Section 4.01 not
less than 10 days and not more than 20 days prior to the date fixed
for such redemption, in each case specifying such date, the aggregate principal
amount of the Notes to be redeemed, and the principal amount of each Note held
by such Holder to be redeemed.

       

      3.02 Redemption
Procedure,

       

      (a)  In the case of each
redemption of less than all of the outstanding Notes pursuant to
Section 4.01, the Notes shall be redeemed pro rata among all of the
Notes at the time outstanding in proportion, as nearly as practicable, to the
respective unpaid principal amounts thereof not theretofore called for
redemption, with adjustments, to the extent practicable, to compensate for any
prior redemptions not made exactly in such proportion.

       

      (b)  In
the case of each redemption pursuant to Section 4.01, the principal amount
of each Note to be redeemed shall mature and become due and payable on the date
fixed for such redemption, together with interest on such principal amount
accrued to such date and the applicable premium, if any.  From and
after such date, unless the Company shall fail to pay such principal amount when
so due and payable, together with the interest and premium, if any, as
aforesaid, interest on such principal amount shall cease to
accrue.  Any Note paid or redeemed in full shall be surrendered to the
Company and canceled and shall not be reissued, and no Note shall be issued in
lieu of any redeemed principal amount of any Note.

       

      SECTION
4. Conditions to Purchasers’
Obligations.  The
Purchasers’ obligation to purchase and pay for the Securities as set forth
herein is subject to the fulfillment, to the Purchaser’s satisfaction or written
waiver, on the date of this Agreement or before the First Draw Down, as
indicated below, of the conditions set forth in Section 5.01 to
5.15 below, and
the Purchasers’ obligations to purchase Notes at the Second Draw Down and Final
Draw Down, respectively, is subject to the fulfillment, to the Purchasers’
satisfaction or written waiver, before the applicable Draw Down, as indicated
below, of the conditions set forth in Section 5.16:

       

      4.01 Execution of
Notes.  The
Notes to be delivered at the applicable Draw Down shall have been executed by
the Company, and delivered to the Purchasers, in the amounts, maturity and as
otherwise provided herein.

       


      
        
           


        

        
          3

          
            

          

        

        
           


          
             

             

          

        

      


      Warrants.  The
Warrants shall have been executed by the Company and delivered to the Purchasers
on the date of this Agreement substantially in the form of Exhibit B
hereto.

       

      4.02 Fees, Expenses,
Etc.  The
Company shall have paid to the Purchasers all costs, fees and expenses
(including, without limitation, legal fees and expenses) payable to the
Purchasers to the extent then due and invoiced, including, without limitation
the fees and expenses under Sections 3.02,
and 14.01
hereof.

       

      4.03 Opinions of
Counsel.  The
Purchasers shall have received favorable written opinions, each dated the date
of the First Draw Down and addressed to the Purchasers of (i) Vinson &
Elkins LLP, special counsel to the Company and the Delaware Sub, covering the
matters set forth in Exhibit C-1, and
(ii) Woodburn and Wedge, special counsel to the Company, covering the matters
set forth in Exhibit C-2.

       

      4.04 Corporate Documents;
Proceedings; Etc.  (a)  The
Purchasers shall have received an officer's certificate, dated the date of the
First Draw Down, in the form of Exhibit D
hereto, with appropriate insertions, together with copies of the Certificates of
Incorporation and By-Laws (or equivalent organizational documents) of the
Company and the Delaware Sub and the resolutions of the Company and the Delaware
Sub referred to in such certificate, and the foregoing shall be reasonably
acceptable to the Purchasers.

       

      (b) All
corporate and legal proceedings and all material instruments and agreements in
connection with the Transaction shall be reasonably satisfactory in form and
substance to the Purchasers, and the Purchasers shall have received all
information and copies of all documents and papers, including records of
corporate proceedings, governmental approvals, good standing certificates and
bring-down telegrams or facsimiles, if any, which the Purchasers reasonably may
have requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate or governmental
authorities.

       

      4.05 Indebtedness.  On
the date of the First Draw Down, after giving effect to the consummation of the
Transaction, the Company and its Subsidiaries, if any, shall have no outstanding
Indebtedness except the Notes hereunder and the Indebtedness set forth on Schedule 5.06, and no
such party shall be in default in the observance or performance of any agreement
or condition relating thereto.

       

      4.06 Security
Agreement.  The
Security Agreement shall have been duly executed by the Company and the Delaware
Sub and shall have been delivered to the Purchasers and shall be in full force
and effect on the date of the applicable Draw Down.

       

      4.07 Collateral
Deliveries.  The
Company and the Delaware Sub shall have authorized, executed and/or delivered or
caused to be delivered each of the following to the Purchasers:

       

      (i) UCC
Financing Statements (Form UCC-1 or UCC-2, as appropriate) in appropriate
form for filing under the UCC and any other applicable Requirements of
Law

       


      
        
           


        

        
          4

          
            

          

        

        
           


          
             

          

        

      


      (ii) in each
jurisdiction as may be necessary or appropriate to perfect the Liens created, or
purported to be created, by the Security Documents;

       

      (iii) certified
copies of Requests for Information (Form UCC-11), tax lien, judgment lien
and pending lawsuit searches or equivalent reports or lien search reports, each
of a recent date listing all effective financing statements, lien notices or
comparable documents that name the Company or any of its Subsidiaries as debtor
and that are filed in (w) the State of Nevada, (y) the State of Delaware,
(y) those state and county jurisdictions in which any of the property of
the Company or the Delaware Sub is located, and (z) the state and county
jurisdictions in which the Company or any of its Subsidiaries’ principal place
of business is located, none of which encumber the Collateral covered or
intended to be covered by the Security Documents other than those encumbrances
which constitute Permitted Liens; and

       

      (iv) with
respect to each Real Property to the extent requested by the Agent, copies of
Leases in which the Company and the Delaware Sub hold any
interest.  With respect to each Real Property in which the Company and
the Delaware Sub holds the tenant’s interest thereunder set forth on Schedule 5.08(iii),
the Company or the Delaware Sub, as the case may be, shall use commercially
reasonable efforts to obtain a landlord lien waiver, access agreement and, to
the extent applicable, consent in such form as the Agent shall reasonably
require in order for the landlord to waive its statutory lien.

       

      4.08 Adverse Change,
Etc. (a)
There shall not have occurred or been threatened from the date of this
Agreement to the First Draw Down any change (or a series of changes) that the
Purchasers shall determine has resulted, or could reasonably be expected to
result, in a termination of the Shell Contract or a failure of the Company to
complete the Initial Test Drilling under the Shell Contract
successfully.

       

      (b) All
necessary material court or governmental (domestic and foreign) approvals and/or
consents in connection with the Transaction, any of the other transactions
contemplated by the Transaction Documents and otherwise referred to herein or
therein shall have been obtained and remain in effect, and all applicable
waiting periods shall have expired without any action being taken by any
competent authority which restrains, prevents or imposes materially adverse
conditions upon the consummation of the Transaction or the other transactions
contemplated by this Agreement.  Additionally, there shall not exist
any judgment, order, injunction or other restraint prohibiting or imposing
materially adverse conditions upon the Transaction or the other transactions
contemplated by this Agreement.

       

      4.09 Litigation.  No
litigation by any entity (private or governmental) shall be pending or
threatened as of any Draw Down Date with respect to the Transaction, the Shell
Contract or other transactions contemplated by this Agreement or any
documentation executed in connection therewith, or which the Purchasers shall
determine could reasonably be expected to have a materially adverse effect on
the financial condition, business, operations or prospects of the
Company.

       


      
        
           


        

        
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      Representations
and Warranties.  The
representations and warranties of the Company and the Delaware Sub contained in
this Agreement and those otherwise made in writing by or on behalf of the
Company and the Delaware Sub in connection with the Transaction shall be correct
in all material respects at the date of the First Draw Down.

       

      4.10 Good Standing
Certificates.  Good
standing certificates of the Company and the Delaware Sub from the Secretary of
State of their respective jurisdictions of organization, and certificates of
good standing to conduct business as foreign corporations in each other state in
which the Company or the Delaware Sub has significant operations or facilities
and, to the extent generally available, certificates or other evidence of good
standing as to payment of any applicable franchise or similar taxes from the
appropriate taxing authority of each of such states, each to be dated a recent
date prior to the date of the applicable Draw Down.

       

      4.11 No
Default.  No
Default or Event of Default shall have occurred and be continuing or would exist
after giving effect to the issuance and sale of the Securities

       

      4.12 Securities
Laws.  The
offering and sale of the Securities to the Purchasers shall have complied with
all Requirements of Law and shall be exempt from registration under the
Securities Act.

       

      4.13 No Outstanding Registration
Rights.  The
Company shall not be subject to any obligation to file a registration statement
with the SEC with respect to any securities of the Company other than the
Registrable Securities as defined and provided in the Warrant except for such
obligations in existence as of the date hereof arising from the Existing
Registration Rights.

       

      4.14 Subsequent Draw Down
Conditions.  The
conditions set forth in Sections 5.01, 5.03, 5.05, 5.06, 5.07, 5.09, 5.10,
5.11, 5.12, 5.13, and 5.14 shall be true and correct in all material respects as
if required as of the date of such Draw Down. In addition, the Company shall
have completed the Initial Test Drilling under the Shell Contract prior to the
Second Draw Down and the Second Test Drilling under the Shell Contract prior to
the Final Draw Down, and each of such tests shall have met the standards for
success set forth in Section II of such contract.

       

      SECTION
5. Conditions to Company’s
Obligations.  The
Company’s obligation to sell the Securities to be delivered to the Purchasers on
the date hereof and at each Draw Down is subject to the fulfillment, to the
Company’s satisfaction or waiver, on or before such date, of the following
conditions:

       

      5.01 Sale of
Securities.  Each
of the Purchasers shall have executed this Agreement and on the date of each
Draw Down shall have delivered payment to the Company in respect of its purchase
of the Notes on the date of such Draw Down pursuant to Section 2.01.

       

      5.02 Representations and
Warranties of the Purchasers.  The
representations and warranties of the Purchasers contained in this Agreement and
those otherwise made in writing by or on behalf of the Purchasers in connection
with the Transaction shall be correct in all material respects when made and at
the date of this Agreement or Draw Down, as applicable.

       


      
        
           


        

        
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      Representations,
Warranties and Agreements of the Company.  In
order to induce the Purchasers to purchase the Securities, each of the Company
and the Delaware Sub makes the following representations, warranties and
agreements, in each case after giving effect to the Transaction as consummated
herein, all of which shall survive the execution and delivery of this Agreement
and the Securities, on and as of the date hereof and the date of each Draw
Down.

       

      5.03 Corporate
Status.  Each
of the Company and the Delaware Sub is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has all requisite corporate power and authority to own, lease, use and
operate its properties and to carry on its business as now operated and
conducted.  The Company and each of its Subsidiaries is duly qualified
as a foreign corporation or limited liability company to do business and is in
good standing in each jurisdiction in which its ownership or use of property or
the nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect.  Neither the Company nor any its Subsidiaries
is in violation of any provision of its respective certificate or articles of
incorporation, articles of organization, partnership agreement, bylaws or other
organizational or charter documents, as the same may have been
amended.

       

      5.04 Valid
Agreement.  This
Agreement has been duly and validly authorized, executed and delivered by each
of the Company and the Delaware Sub and constitutes a binding obligation of the
Company and the Delaware Sub enforceable against them in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).

       

      5.05 Capitalization.  As
of the date of this Agreement, (a) the authorized capital of the Company
consists of (i) 100,000,000 shares of Common Stock, par value $0.001 per
share, of which 35,740,349 shares are outstanding  and had outstanding
options and warrants to purchase up to 5,737,341 additional shares of the
Company’s common stock in the aggregate and (ii) 10,000,000 shares of preferred
stock, par value $0.01 per share, of which 100,000 shares have been designated
as Series A Junior Participating Preferred Stock and (b) the authorized capital
of the Delaware Sub consists of  (i)
50,000,000 shares of common stock, par value $0.0001 per share, of which
50,000,000 shares are outstanding and (ii) 20,000,000 shares of preferred stock,
par value $0.0001 per share, of which 10,000,000 shares are designated as Series
A Convertible Preferred Stock, none of which are outstanding.  All of
the outstanding shares of capital stock of the Company and the Delaware Sub have
been duly authorized, are validly issued, fully paid and nonassessable and were
offered, sold and issued in compliance with all applicable federal and state
securities laws and without violating any contractual obligation or other
preemptive or similar rights.

       

      5.06 Conflicts.  The
execution, delivery and performance of this Agreement by the Company and the
Delaware Sub and the consummation by the Company and the Delaware Sub of the
transactions contemplated hereby will not (i) conflict with or result in a
violation of any provision of the certificate of incorporation, as amended, of
the Company or the Delaware

       


      
        
           


        

        
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      Sub or
the bylaws, as amended, of the Company or the Delaware Sub or (ii) result
in a violation of any legal requirement (including federal and state securities
laws and regulations) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected (except for (y) such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect) .  Except with respect to
any filings or notices related to the issuance of the Warrants and Warrant
Shares to be filed with The NASDAQ Stock Market, if any, and as required under
the Securities Act and any applicable state securities laws, neither the Company
nor the Delaware Sub is required to obtain any consent, authorization or order
of, or make any filing or registration with, any court, governmental agency,
regulatory agency, self regulatory organization or stock market or any third
party in order for it to execute, deliver or perform any of its obligations
under this Agreement.  The Company does not believe that The NASDAQ
National Market should require shareholder approval of the issuance and sale of
the Securities under rule 4350 of the NASDAQ Marketplace Rules. All consents,
authorizations, orders, filings and registrations that the Company and the
Delaware Sub are required to effect or obtain pursuant to the preceding sentence
have been obtained or effected on or prior to the date hereof.  Other
than The NASDAQ National Market, the Company and the Delaware Sub are not
subject to the regulations of any other self-regulatory
organizations.

       

      5.07 Accuracy of Securities Act
Filings.  Since
October 1, 2007, the Company has filed with the SEC all forms, reports,
schedules, statements and other documents required to be filed by it through the
date hereof under the Exchange Act or the Securities Act (all such documents, as
supplemented and amended since the time of filing, collectively, the “Company SEC
Documents”).  The Company SEC Documents, including without
limitation all financial statements and schedules included in the Company SEC
Documents, at the time filed (and, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively, and in the case of any Company SEC Document amended or superseded
by a filing prior to the date of this Agreement, then on the date of such
amending or superseding filing), (i) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and
(ii) complied in all material respects with the applicable requirements of
the Exchange Act and the Securities Act, as applicable.  The audited
consolidated financial statements of Company included in the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during the periods
involved, and present fairly in all material respects, the consolidated
financial position of the Company and its consolidated subsidiaries as at the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended.

       

      5.08 Authorization of
Securities.  All
of the Securities will have been duly authorized for issuance prior to the date
of this Agreement.  The Warrant Shares, when issued and sold as set
forth in the Warrants, will be validly issued, fully paid and non-assessable;
and none of the Securities or  Warrant Shares will have been issued in
violation of the preemptive rights of any security holders of the Company
arising as a matter of law or under or pursuant to the Co

       


      
        
           


        

        
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      pany’s
certificate of incorporation, as amended, the Company’s bylaws, as amended, or
any material agreement or instrument to which the Company is a party or by which
it is bound.

       

      5.09 Adverse
Litigation.  There
is no litigation pending or, to the knowledge of the Company or any of its
Subsidiaries, threatened against or affecting the Company or any of its
Subsidiaries that (i) adversely affects or challenges the legality,
validity or enforceability of this Agreement, or (ii) would, if there were
an unfavorable decision, have or reasonably be expected to have a Material
Adverse Effect.  There has not been, and to the knowledge of the
Company, there is not pending any investigation by the Commission involving the
Company or any current or former director or officer of the Company (in his or
her capacity as such).  The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company under the Exchange Act or the Securities Act.

       

      5.10 Taxes.  The
Company and each Subsidiary has made or filed all federal, state and foreign
income and all other material tax returns, reports and declarations required by
any jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim.  Neither the Company nor the
Delaware Sub has executed a waiver with respect to the statute of limitations
relating to the assessment or collection of any foreign, federal, state or local
tax.

       

      5.11 Disclosure
Controls.  The
Company has established and maintains disclosure controls and procedures (as
such term is defined in Rule 13a-15(e) under the Exchange
Act).

       

      5.12 Investment
Company.  Neither
the Company nor the Delaware Sub is, and upon the issuance and following the
transactions contemplated by this Agreement will be, an “investment company” as
defined under the Investment Company Act of 1940 (“Investment
Company”).  Neither the Company nor the Delaware Sub is
controlled by an Investment Company.

       

      5.13 Commissions.  Neither
the Company nor the Delaware Sub has taken any action which would give rise to
any claim by any person for brokerage commissions, transaction fees or similar
payments relating to this Agreement or the transactions contemplated
hereby.

       

      5.14 Material
Events.  Since
December 31, 2008, there have not been any events, changes, occurrences or state
of facts that, individually or in the aggregate, have had or would reasonably be
expected to have a Material Adverse Effect, except as disclosed in the Company
SEC Documents.

       


      
        
           


        

        
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      Use of
Proceeds.  The
proceeds of the Securities shall be used for working capital and to complete the
Company’s obligations under the Shell Contract.

       

      5.15 The Security
Documents.  (a)  The
Security Agreement is effective to create in favor of the Purchasers a legal,
valid and enforceable security interest in the Collateral, and when the
financing statements and other filings in appropriate form are filed as required
by Section 5 of the Security Agreement, the Liens created pursuant to the
Security Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the grantors thereunder in such
Collateral (other than the Intellectual Property, as defined in the Security
Agreement), in each case prior and superior in right to any other person except
as provided in this Agreement and subject to no other Liens except for Permitted
Liens.  In addition to the financing statements and other filings
contemplated in the preceding sentence, when the Security Agreement is filed in
the United States Patent and Trademark Office and the United States Copyright
Office, the Security Agreement shall constitute a fully perfected Lien on, and
security interest in, all right, title and interest of the grantors thereunder
in the Intellectual Property Collateral (as defined in the Security Agreement),
in each case prior and superior in right to any other person except as provided
in this Agreement (it being understood that subsequent recordings in the United
States Patent and Trademark Office and the United States Copyright Office may be
necessary to perfect a lien on registered trademarks, trademark applications and
copyrights acquired by the grantors after the date hereof), and subject to no
other Liens except for Permitted Liens.

       

      (b) Each
Security Document delivered pursuant to Section 9.07
will, upon execution and delivery thereof, be effective to create in favor of
the Purchasers, a legal, valid and enforceable Lien on all of the Company’s and
the Delaware Sub’s right, title and interest in and to the Collateral, and when
such Security Document is filed or recorded in the appropriate offices as may be
required under applicable law, such Security Document will constitute a fully
perfected Lien on, and security interest in, all right, title and interest of
the Company and the Delaware Sub in such Collateral, in each case prior and
superior in right to any other Person except as provided in this Agreement, and
subject to no other Liens.

       

      5.16 Employee Benefit
Plans.  Each
of the Company and its ERISA Affiliates is in compliance in all material
respects with the applicable provisions of ERISA and the Code and the
regulations and published interpretations thereunder with respect to all Plans.
Neither the Company nor any ERISA Affiliate maintains, contributes to, or has
any liability with respect to a Pension Plan.

       

      5.17 Environmental
Matters.  To
the best knowledge of the Company after due inquiry, neither the Company nor the
Delaware Sub (i) has failed to comply with any Environmental Law or to obtain,
maintain or comply with any permit, license or other approval required under any
Environmental Law, (ii) has become subject to any Environmental Claim,
(iii) has received notice of any claim with respect to any Environmental
Claim or (iv) knows of any basis for any Environmental Claim.

       

      5.18 Representations and
Warranties in Documents.  On
each Draw Down Date, all representations and warranties of the Company and the
Delaware Sub set forth in the

       


      
        
           


        

        
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      other
Transaction Documents were true and correct in all material respects at the time
as of which such representations and warranties were made (or deemed
made).

       

      SECTION
6. Representations and
Warranties of the Purchasers.  In
order to induce the Company to sell the Securities, each of the Purchasers,
severally and not jointly,  makes the following representations and
warranties as of the date hereof and as of the date of each Draw
Down.

       

      6.01 Purchaser
Intent.  Each
Purchaser represents that it is purchasing the Securities hereunder for its own
account, not with a view to the distribution thereof or with any present
intention of distributing or selling any of such Securities except in compliance
with the Securities Act and any applicable state securities laws, provided that
the disposition of such Purchaser’s property shall at all times be within its
control.

       

      6.02 Status of
Purchasers.  Each
Purchaser represents that it is an “accredited investor” within the meaning of
Rule 501 of the Securities Act, with such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of a prospective investment in the Securities and that it is capable of
bearing the economic risks of such investment.  Each Purchaser
understands that no public market now exists for the Securities and there can be
no assurance that a public market will ever exist for such
Securities.  Each Purchaser represents that it has had an opportunity
to discuss the Company’s business, management and financial affairs with the
Company’s management and an opportunity to review the Company’s
facilities.  Each Purchaser agrees to the imprinting of a legend on
certificates representing all of the Securities held by it to the following
effect:  “THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT AND SUCH LAWS.”

       

      6.03 Authorization; No
Contravention.  The
execution, delivery and performance of this Agreement by each
Purchaser:  (a) is within its power and authority and has been
duly authorized by all necessary action and (b) does not contravene the
terms of its organizational documents or any amendment thereof.

       

      6.04 Binding
Effect.  This
Agreement has been duly executed and delivered by each Purchaser and this
Agreement constitutes the legal, valid and binding obligation, enforceable
against it in accordance with its terms, except to the extent that the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws
generally affecting creditors’ rights and by equitable principles (regardless of
whether enforcement is sought in equity or at law).

       

      6.05 Broker’s, Finder’s or
Similar Fees.  There
are no brokerage commissions, finder’s fees or similar fees or commissions
payable by the Company or the Delaware Sub in

       


      
        
           


        

        
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      connection
with the transactions contemplated hereby based on any agreement, arrangement or
understanding with any Purchaser or any action taken by any
Purchaser.

       

      SECTION
7. Affirmative
Covenants.  Each
of the Company and the Delaware Sub hereby covenants and agrees that absent the
prior written consent of the Required Holders:

       

      7.01 Maintenance of Property;
Insurance.  (a)  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, (i) keep all property necessary in their respective business in good
working order and condition (ordinary wear and tear and loss or damage by
casualty or condemnation excepted), (ii) maintain insurance on all of their
respective property in at least such amounts and against at least such risks as
is consistent and in accordance with industry practice and (iii) furnish to
the Holders, upon written request, full information as to the insurance
carried.

       

      (b) The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, do all things necessary to obtain, preserve, renew, extend and keep in
full force and effect the rights, licenses, permits, franchises, authorizations,
patents, copyrights, trademarks and trade names material to the conduct of their
respective business; maintain and operate such business in substantially the
manner in which it is presently conducted and operated (and reasonable
extensions thereof); comply with all applicable Requirements of Law (including
any zoning, building, Environmental Law, ordinance, code or approval or any
building permits or any restrictions of record or agreements affecting the Real
Property) and decrees and orders of any Governmental Authority, whether now in
effect or hereafter enacted, except where the failure to comply could not
reasonably be expected to have a Material Adverse Effect; and at all times
maintain and preserve all property material to the conduct of such business and
keep such property in good repair, working order and condition and from time to
time make, or cause to be made, all needful and proper repairs, renewals,
additions, improvements and replacements thereto necessary in order that the
business carried on in connection therewith may be properly conducted at all
times; provided, however, that nothing
in this Section 9.01(b)
shall prevent (i) the withdrawal by the Company or any Subsidiary of its
qualification as a foreign corporation in any jurisdiction where such withdrawal
could not reasonably be expected to have a Material Adverse Effect; or
(iii) the abandonment by the Company or any Subsidiary of any rights,
franchises, licenses and patents that such Person reasonably determines are not
useful to its business.

       

      (c) The
Company will and will cause its Subsidiaries to, and the Delaware Sub will, at
all times keep their respective property insured in favor of the Agent, and all
policies or certificates (or certified copies thereof) with respect to such
insurance (and any other insurance maintained by the Company or any of its
Subsidiaries) (i) shall be endorsed to the Agent’s reasonable satisfaction
for the benefit of the Agent (including, without limitation, by naming the Agent
as loss payee or as an additional insured as its interest may appear together
with a “standard” or “New York” lender’s loss payable endorsement),
(ii) shall state that such insurance policies shall not be cancelled
without 30 days’ prior written notice thereof by the respective insurer to
the Agent, (iii) if reasonably available, shall provide that the respective
insurers irrevocably waive any and all rights of subrogation with respect to the
Agent and the Holders, (iv) shall contain the standard non-contributing
mortgagee clause endorsement in favor of the Agent with respect to hazard
liability insurance, (v) shall, except in the case of public liability
insurance, pr

       


      
        
           


        

        
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      (d) vide that
any losses shall be payable notwithstanding (A) any act or neglect of the
Company or any of its Subsidiaries, (B) the occupation or use of the
properties for purposes more hazardous than those permitted by the terms of the
respective policy, (C) any foreclosure or other proceeding relating to the
insured properties or (D) any change in the title to or ownership or
possession of the insured properties and (vi) shall comply with the
insurance requirements contained in each applicable Security
Document.

       

      (e) If the
Company, the Delaware Sub or any of the Company’s other Subsidiaries shall fail
to maintain all insurance in accordance with this Section 9.01,
the Holders shall have the right (but shall be under no obligation), upon ten
days’ advance notice to the Company or any of its Subsidiaries, as the case may
be, to procure such insurance and the Company agrees to reimburse the Holders
for all reasonable costs and expenses of procuring such insurance.

       

      7.02 Compliance with Statutes,
Etc.  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, comply with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of their respective business and the
ownership of their respective property, except such noncompliances as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

       

      7.03 Compliance with
Environmental Laws.  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, comply in all material respects, with all Environmental Laws applicable to
their respective business and operations and to the ownership, operation or use
of their respective business, assets and Real Property and other assets now or
hereafter owned or operated by the Company or any of its Subsidiaries or the
Delaware Sub, as applicable, will promptly pay or cause to be paid all costs and
expenses incurred in connection with such compliance (except to the extent being
contested in good faith, in which case, adequate reserves shall be maintained),
and will keep or cause to be kept all such Real Property and other assets free
and clear of any Liens imposed pursuant to such Environmental
Laws.  None of the Company, the Delaware Sub or any of the Company’s
other Subsidiaries will generate, use, treat, store, Release or dispose of, or
permit the generation, use, treatment, storage, Release or disposal of Hazardous
Materials on, under, at or from any Real Property and other assets now or
hereafter owned or operated by the Company, the Delaware Sub or any of the
Company’s other Subsidiaries, or transport or permit the transportation of
Hazardous Materials to or from any such Real Property except in material
compliance with all applicable Environmental Laws and reasonably required in
connection with the operation, use and maintenance of any such Real Property or
otherwise in connection with their businesses.

       

      7.04 Employee
Benefits.  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, comply in all material respects with the applicable provisions of ERISA
and the Code with respect to all Plans.

       

      7.05 Performance of
Obligations.  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, perform all of their respective obligations under the terms of each
mortgage, indenture, security agreement and other debt instrument by which
they

       


      
        
           


        

        
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      are
bound, except such non-performances as could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect.

       

      7.06 Payment of
Taxes.  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, pay and discharge, all material (individually or in the aggregate) taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any properties belonging to it or them, prior to the
date on which penalties attach thereto, and all lawful claims for sums that have
become due and payable which, if unpaid, might become a Lien not otherwise
permitted; provided that none of
the Company, the Delaware Sub or any of its other Subsidiaries shall be required
to pay any such tax, assessment, charge, levy or claim which is being contested
in good faith and by proper proceedings if it has maintained adequate reserves
with respect thereto in accordance with GAAP.

       

      7.07 Further Assurances;
Additional Collateral.  (a)  The
Company will and will cause each of its Subsidiaries to, and the Delaware Sub
will, execute any and all further documents, financing statements, agreements
and instruments, and take all further action (including, without limitation,
filing UCC and other financing statements, recording assignments of leases and
rents, mortgages, deeds of trust and memoranda of leases and filings with the
United States Patent and Trademark Office and the United States Copyright
Office) that may be required under applicable law, or that the Required Holders
may reasonably request, in order to effectuate the transactions contemplated by
the Transaction Documents and in order to grant, preserve, protect and perfect
the validity and first priority of the security interests created or intended to
be created by the Security Documents.

       

      (b) The
parties hereto acknowledge and agree that it is their intention that the
Obligations shall be secured by, among other things, a first priority Lien, on
substantially all the property of the Company and the Delaware Sub (including,
without limitation, real and other property acquired subsequent to the date of
the First Draw Down).  Any property acquired after the date of the
First Draw Down (other than Real Properties having an aggregate value of $25,000
or less) by the Company or the Delaware Sub,  the Company or the
Delaware Sub, as applicable, will, at its cost and expense, within 90 days
of such acquisition, secure the Obligations by pledging or creating, or causing
to be pledged or created, perfected first priority security interests with
respect to such property.  Such security interests and Liens will be
created under the Security Documents and other security agreements, mortgages,
deeds of trust and other instruments and documents in form and substance
satisfactory to the Agent, and the Company and the Delaware Sub shall deliver or
cause to be delivered to the Agent all such instruments and documents
(including, without limitation, legal opinions, title insurance policies,
surveys, appraisals, certificates of title, consents, lien waivers,
subordination, non-disturbance and attornment agreements and lien searches) as
the Required Holders shall reasonably request to evidence compliance with this
Section 9.07.  The
Company and the Delaware Sub shall take all further action of the type described
in Section 9.07(a)
in order to grant, preserve, protect and perfect such Lien and security
interest.

       

      (c) Each of
the Company and the Delaware Sub agrees, from time to time, to provide such
evidence as the Agent shall reasonably request as to the perfection and priority
status of each security interest and Lien contemplated herein.

       


      
        
           


        

        
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      (d) Negative
Covenants.  Each
of the Company and the Delaware Sub hereby covenants and agrees that, absent the
prior written consent of the Required Holders:

       

      7.08 Liens.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, (i) create, incur, assume or permit to exist any
Liens upon or with respect to any Collateral and (ii) create, incur, assume
or permit to exist any Lien upon or with respect to any property of the Company,
the Delaware Sub or any of the Company’s other Subsidiaries, whether now owned
or hereafter acquired, or on any income or revenues or rights in respect of any
thereof, except for the following (the “Permitted
Liens”):

       

      (i) inchoate
Liens for taxes, assessments or governmental charges or levies not yet due and
payable or Liens for taxes, assessments or governmental charges or levies being
contested in good faith and by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP (or the equivalent
thereof in any country in which a foreign Subsidiary is doing business, as
applicable);

       

      (ii) Liens in
respect of property of the Company or any of its Subsidiaries imposed by law,
which were incurred in the ordinary course of business and do not secure
Indebtedness for borrowed money, such as carriers’, warehousemen’s,
materialmen’s and mechanics’ liens and other similar Liens arising in the
ordinary course of business, and (x) which do not in the aggregate
materially detract from the value of the property of the Company or such
Subsidiary and do not materially impair the use thereof in the operation of the
business of the Company or such Subsidiary or (y) which are being contested
in good faith by appropriate proceedings, which proceedings (or orders entered
in connection with such proceedings) have the effect of preventing the
forfeiture or sale of the property subject to any such Lien;

       

      (iii) Liens
created pursuant to the Security Documents;

       

      (iv) Liens
arising pursuant to licenses, leases or subleases granted to other Persons in
the ordinary course of business not materially interfering with the conduct of
the business of the Company and its Subsidiaries taken as a whole;

       

      (v) with
respect to the Company only, Liens arising pursuant to Capitalized Lease
Obligations and Purchase Money Obligations or security interests securing
Indebtedness representing the purchase price (or financing of the purchase price
within 90 days after the respective purchase) of assets acquired after the
First Draw Down Date; provided that
(x) any such Liens attach only to the assets so purchased and do not
encumber any other asset of the Company or any of its Subsidiaries, (y) the
Indebtedness secured by any such Lien (including refinancings thereof) does not
exceed 100% of the lesser of the fair market value or the purchase price of the
property being purchased at the time of the incurrence of such Indebtedness and
(z) the aggregate outstanding principal amount of all Indebtedness secured
by Liens permitted by this clause (vi) shall not at any time exceed
$25,000;

       


      
        
           


        

        
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      (vi) easements,
rights-of-way, restrictions (including zoning restrictions), covenants,
encroachments, protrusions and other similar charges or encumbrances, and minor
title deficiencies, in each case whether now or hereafter in existence, not
securing Indebtedness and not materially interfering with the conduct of the
business of the Company and its Subsidiaries taken as a whole;

       

      (vii) Liens
arising from precautionary UCC financing statement filings regarding operating
leases entered into by the Company in the ordinary course of
business;

       

      (viii) Liens
arising out of judgments or awards in respect of which the Company or any of its
Subsidiaries shall in good faith be prosecuting an appeal or proceedings for
review in respect of which there shall have been secured a subsisting stay of
execution pending such appeal or proceedings, provided that the aggregate amount
of all such judgments or awards does not exceed $25,000 at any time
outstanding;

       

      (ix) Liens
(other than any Lien imposed by ERISA) (x) incurred or deposits made in the
ordinary course of business in connection with workers’ compensation,
unemployment insurance and other types of social security, (y) to secure
the performance of tenders, statutory obligations (other than excise taxes),
surety, stay, customs and appeal bonds, statutory bonds, bids, leases,
government contracts, trade contracts, performance and return of money bonds and
other similar obligations incurred in the ordinary course of business (exclusive
of obligations for the payment of borrowed money) or (z) arising by virtue
of deposits made in the ordinary course of business to secure liability for
premiums to insurance carriers; and

       

      (x) Liens
consisting of set-off of a customary nature or bankers’ liens on amounts on
deposit, whether arising by contract or operation of law, incurred in the
ordinary course of business.

       

      7.09 Consolidation, Merger,
Purchase or Sale of Assets, Etc.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, wind up, liquidate or dissolve their respective affairs
or enter into any transaction of merger or consolidation, or convey, sell, lease
or otherwise dispose of (or agree to do any of the foregoing at any future time)
all or any part of their respective property, or enter into any sale-leaseback
transactions, or purchase or otherwise acquire (in one or a series of related
transactions) any part of the property (other than purchases or other
acquisitions of inventory, materials, equipment and intangible assets in the
ordinary course of business or reinvestments in assets of any Person (or agree
to do any of the foregoing at any future time), except that:

       

      (i) Capital
Expenditures by the Company and its Subsidiaries shall be permitted to the
extent they are made in the ordinary course of business;

       

      (ii) each of
the Company and its Subsidiaries may (x) in the ordinary course of
business, sell, lease or otherwise dispose of any property which, in the
reasonable judgment of such Person, is obsolete, worn out or otherwise no longer
useful in the conduct of such Person’s business and (y) sell, lease or
otherwise dispose of any other property; pr

       


      
        
           


        

        
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      (iii) vided that the
aggregate net cash proceeds of all assets subject to sales or other dispositions
pursuant to this sub-clause (ii)(y) shall not exceed $25,000 in the
aggregate for any four consecutive fiscal quarters of the Company;

       

      (iv) investments
may be made to the extent permitted by Section 10.05;

       

      (v) each of
the Company and its Subsidiaries may lease (as lessee) real or personal property
in the ordinary course of business (so long as any such lease does not create a
Capitalized Lease Obligation except to the extent permitted by Section 10.04
(v));

       

      (vi) each of
the Company and its Subsidiaries may make sales or transfers of inventory in the
ordinary course of business that are consistent with past
practices;

       

      (vii) the
Company and its Subsidiaries may sell or discount, in each case without recourse
and in the ordinary course of business, overdue accounts receivable arising in
the ordinary course of business, but only in connection with the compromise or
collection thereof consistent with customary industry practice (and not as part
of any bulk sale);

       

      (viii) the
disposition of Cash Equivalents and other investments to the extent permitted
under Section 10.05(ii);
and

       

      (ix) the
Company and its Subsidiaries may sell non-core assets; provided that the
aggregate amount of such sales shall not exceed $25,000 in any fiscal year of
the Company, the Company shall receive consideration equal to the fair market
value (as reasonably determined by the board of directors of the Company or the
senior management thereof) of the property sold.

       

      7.10 Dividends.  The
Company will not authorize, declare or pay any Dividends.

       

      7.11 Indebtedness.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, contract, create, incur, assume or suffer to exist any
Indebtedness, except:

       

      (i) Indebtedness
incurred pursuant to this Agreement;

       

      (ii) accrued
expenses and trade accounts payable incurred in the ordinary
course;

       

      (iii) [Reserved];

       

      (iv) Indebtedness
under guarantees, surety, performance bonds, letter of credit obligations to
provide security for worker’s compensation claims and bank overdrafts, in each
case incurred in the ordinary course of business; provided that any
obligations arising in connection with such bank overdraft Indebtedness is
extinguished within five Business Days;

       


      
        
           


        

        
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      (v) Indebtedness
consisting of guarantees (y) by the Company of Indebtedness, leases and
other obligations permitted to be incurred by any of its Subsidiaries under this
Agreement, and (z) by any Subsidiary of the Company of the existing
Indebtedness, leases and other obligations permitted to be incurred by the
Company or other Subsidiaries of the Company under this Agreement;
and

       

                    
(vi)           unsecured
Indebtedness not to exceed $108,000 incurred in connection with the renewal of
the directors’ and officers’ liability insurance policy in existence as of the
date hereof.

      


      7.12 Advances, Investments and
Loans.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, directly or indirectly, lend money or credit or make
advances to any Person, or purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital contribution to,
any other Person, or purchase or own a futures contract or otherwise become
liable for the purchase or sale of currency or other commodities at a future
date in the nature of a futures contract, or hold any cash or Cash Equivalents
or Foreign Cash Equivalents (each of the foregoing an “Investment” and,
collectively, “Investments”), except
that the following shall be permitted:

       

      (i) the
Company and its Subsidiaries (other than the Delaware Sub) may acquire and hold
accounts receivable, notes receivable, retention balances, deposits and advances
owing to any of them;

       

      (ii) the
Company and its Subsidiaries may acquire and hold cash and Cash
Equivalents;

       

      (iii) the
Company and its Subsidiaries may purchase, sell or transfer assets (including
equity) to the extent permitted by Section 10.02;
and

       

      (iv) the
Company and its Subsidiaries may acquire and hold promissory notes and other
non-cash consideration issued by the purchaser of assets in connection with a
sale of such assets to the extent permitted by Section 10.02(ii);

       

      7.13 Transactions with
Affiliates.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, enter into any transaction or series of related
transactions, whether or not in the ordinary course of business, with any
Affiliate of the Company, the Delaware Sub or any of the Company’s other
Subsidiaries, other than in the ordinary course of business and on terms and
conditions substantially as favorable to the Company, the Delaware Sub or such
Subsidiary as would reasonably be obtained by the Company, the Delaware Sub or
such Subsidiary at that time in a comparable arm’s-length transaction with a
Person other than an Affiliate, except, solely with respect to the Company1, that:

       

      

        

      

        
        1 For
purposes of this and certain other negative covenants, we assume the Delaware
Sub has no operations. V&E to identify any exceptions that are applicable to
the Delaware Sub.

      


      
        
           


        

        
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      employment
arrangements may be entered into in the ordinary course of business with
officers of the Company and its Subsidiaries;

       

      (i) customary
fees paid to, and reimbursement of out-of-pocket expenses of, and
indemnification and similar arrangements may be made with, members of the Board
of Directors of the Company; and

       

      (ii) the
issuance by the Company of its capital stock or options exercisable for its
capital stock.

       

      7.14 Limitation on Modifications
of Certificate of Incorporation, By-Laws and Certain Other Agreements;
Etc.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not:

       

      (i) amend or
modify, or permit the amendment or modification of, any provision of any
agreement (including, without limitation, the Shell Contract, any purchase
agreement, indenture, loan agreement or security agreement) relating thereto;
or

       

      (ii) amend,
modify, change or replace their respective Certificates of Incorporation
(including, without limitation, by the filing or modification of any certificate
of designation) or By-Laws (or equivalent organizational documents) or any
agreement entered into by the Company or the Delaware Sub, as applicable, with
respect to the capital stock (or equivalent interests) of the Company or the
Delaware Sub, as applicable, or enter into any new agreement with respect to its
capital stock, other than any amendments, modifications, changes or replacements
pursuant to this clause (ii) or any such new agreements pursuant to this
clause (ii) which do not adversely affect in any material respect the
interests of the Holders.

       

      7.15 Limitation on Certain
Restrictions on Subsidiaries.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any such Subsidiary or the Delaware Sub, as the case may be,
to

       

      (a) pay
dividends or make any other distributions on its capital stock or any other
interest or participation in its profits owned by the Company or any Subsidiary
of the Company, or pay any Indebtedness owed to the Company or a Subsidiary of
the Company,

       

      (b) make
loans or advances to the Company or any of the Company’s Subsidiaries
or

       


      
        
           


        

        
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      (c) transfer
any of its properties or assets to the Company or any of the Company’s
Subsidiaries,

       

      except
for such encumbrances or restrictions existing under or by reason of
(i) applicable law, (ii) this Agreement, (iii) customary
provisions restricting subletting or assignment of any Lease governing a
leasehold interest of the Company or a Subsidiary of the Company,
(iv) customary provisions restricting assignment of any agreement entered
into by the Company or a Subsidiary of the Company in the ordinary course of
business, (v) Permitted Liens restricting the transfer of the asset or
assets subject thereto and (vi) restrictions which are not more restrictive
than those contained in this Agreement contained in any documents governing any
Indebtedness incurred after the First Draw Down Date in accordance with the
provisions of this Agreement.

       

      7.16 Limitation on Creation of
Subsidiaries.  Neither
the Company nor the Delaware Sub will establish, create or acquire any
additional Subsidiaries without the prior written consent of the Required
Holders.

       

      7.17 Business.  The
Company will not and will not permit any of its Subsidiaries to, and the
Delaware Sub will not, engage (directly or indirectly) in any business other
than as currently engaged and other businesses reasonably related
thereto.

       

      SECTION
8. Events of
Default.  (a)  Upon
the occurrence of any of the following specified events (each an “Event of
Default”):

       

      8.01 Payments.  The
Company shall (i) default in the payment when due of any principal of any
Note or (ii) default, and such default shall continue unremedied for three
or more Business Days, in the payment when due of any interest on any Note, or
any Fees or any other amounts owing hereunder; or

       

      8.02 Representations,
Etc.  Any
representation, warranty or statement made by the Company, the Delaware Sub or
any of the Company’s other Subsidiaries herein or in any other Transaction
Document or in any certificate delivered pursuant hereto or thereto shall prove
to be untrue in any material respect (or, with respect to any representation and
warranty that is qualified as to “materiality” or “Material Adverse Effect,”
shall prove to be untrue in any respect) on the date as of which made or deemed
made; or

       

      8.03 Covenants.  (i) The
Company, the Delaware Sub or any of the Company’s other Subsidiaries shall
default in the due performance or observance by it of any term, covenant or
agreement contained in 9.08 or Section 10,
(ii) the Company or the Delaware Sub shall default in the due observance or
performance of the covenants to be observed or performed pursuant to Section 9.01 and
such default shall continue for a period of (x) five Business Days after
delivery by the Required Holders or the Agent (at the request of the Required
Holders) of notice thereof and (y) 30 days, or (iii) the Company, the
Delaware Sub or any of the Company’s other Subsidiaries shall default in the due
performance or observance by it of any other term, covenant or agreement
contained in this Agreement and such default shall continue unremedied for a
period of 30 days after notice thereof is given to the Company, the
Delaware Sub or such other Subsid

       


      
        
           


        

        
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      ary of
the Company, as the case may be, by the Required Holders or the Agent (at the
request of the Required Holders); or

       

      8.04 Default Under Other
Agreements.  The
Company, the Delaware Sub or any of the Company’s other Subsidiaries
shall:

       

      (i)  default
in any payment of any Indebtedness (other than the Obligations) beyond the
period of grace, if any, provided in the instrument or agreement under which
such Indebtedness was created or

       

      (ii)  default
in the observance or performance of any agreement or condition relating to any
Indebtedness (other than the Obligations) or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause (determined
without regard to whether any notice is required), any such Indebtedness to
become due prior to its stated maturity or

       

      (iii)  any
Indebtedness (other than the Obligations) of the Company, the Delaware Sub or
any of the Company’s other Subsidiaries shall be declared to be due and payable,
or required to be prepaid other than by a regularly scheduled required
prepayment, prior to the stated maturity thereof;

       

      provided that it
shall not be a Default or Event of Default under this Section 11.04
unless the aggregate principal amount of all Indebtedness as described in
preceding clauses (i) through (iii), inclusive, is at least $50,000;
or

       

      8.05 Bankruptcy,
Etc.  The
Company, the Delaware Sub or any of the Company’s other Subsidiaries (other than
an Immaterial Subsidiary) shall commence a voluntary case concerning itself
under Title 11 of the United States Code entitled “Bankruptcy,” as now or
hereafter in effect, or any successor thereto (the “Bankruptcy Code”); or
an involuntary case is commenced against the Company or any of its Subsidiaries
(other than an Immaterial Subsidiary) and the petition is not controverted
within 15 days, or is not dismissed within 60 days, after commencement
of the case; or a custodian (as defined in the Bankruptcy Code) is appointed
for, or takes charge of, all or substantially all of the property of the
Company, the Delaware Sub or any of the Company’s other Subsidiaries (other than
an Immaterial Subsidiary) or the Company, the Delaware Sub or any of the
Company’s other Subsidiaries (other than an Immaterial Subsidiary) commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company, the
Delaware Sub or any of the Company’s other Subsidiaries (other than an
Immaterial Subsidiary) or there is commenced against the Company, the Delaware
Sub or any of the Company’s other Subsidiaries (other than an Immaterial
Subsidiary) any such proceeding which remains undismissed for a period of
60 days, or the Company, the Delaware Sub or any of the Company’s other
Subsidiaries (other than an Immaterial Subsidiary) is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company, the Delaware Sub or any of
the

       


      
        
           


        

        
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      Company’s
other Subsidiaries (other than an Immaterial Subsidiary) suffers any appointment
of any custodian or the like for it or any substantial part of its property to
continue undischarged or unstayed for a period of 60 days; or the Company,
the Delaware Sub or any of the Company’s other Subsidiaries (other than an
Immaterial Subsidiary) makes a general assignment for the benefit of creditors;
or any corporate action is taken by the Company, the Delaware Sub or any of the
Company’s other Subsidiaries (other than an Immaterial Subsidiary) for the
purpose of effecting any of the foregoing; or

       

      8.06 ERISA.  Either
the Company or any ERISA Affiliate shall maintain, contribute to, or have any
liability with respect to a Pension Plan; or

       

      8.07 Security
Documents.  At
any time after the execution and delivery thereof, any of the Security Documents
shall cease to be in full force and effect, or shall cease in any material
respect to give the Agent for the benefit of the Secured Parties the liens,
rights, powers and privileges purported to be created thereby (including,
without limitation, a perfected security interest in, and lien on, all of the
Collateral), in favor of the Agent, superior to and prior to the rights of all
third Persons (except as permitted by Section 10.01),
and subject to no other Liens (except as permitted by Section 10.01),
or the Company, the Delaware Sub or any of the Company’s other Subsidiaries
shall default in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to any of the
Security Documents and such default shall continue beyond any grace period (if
any) specifically applicable thereto pursuant to the terms of such Security
Document; or

       

      8.08 Judgments.  One
or more judgments or decrees shall be entered against the Company, the Delaware
Sub or any of the Company’s other Subsidiaries and such judgments and decrees
either shall be final and non-appealable or shall not be vacated, discharged or
stayed for any period of 30 consecutive days, and the aggregate amount of all
such judgments (to the extent not paid or to the extent not covered by insurance
provided by a carrier that has acknowledged coverage) equals or exceeds $25,000
(or in the case of non-monetary judgments or decrees, has or is reasonably
likely to have a Material Adverse Effect); or

       

      8.09 Change of
Control.  A
Change of Control shall occur; or

       

      8.10 Conviction.  The
Company, the Delaware Sub or any of the Company’s other Subsidiaries shall be
convicted under any criminal law that could lead to a forfeiture of any property
of such entity.

       

      8.11 Non-Performance of the Shell
Contract.  Either
the Company or Shell Exploration & Production Co. shall have ceased
performing its respective obligations in accordance with the terms of the Shell
Contract for a period of thirty (30) days.

       

      (b)           Upon
the occurrence of any such Event of Default, and in any such event, and at any
time thereafter, if any Event of Default shall then be continuing, the Agent
shall (at the request of the Required Holders), by written notice to the
Company, take any or all of the following actions, without prejudice to the
rights of any Holder to enforce its claims against the Company, the Delaware Sub
or any of the Company’s other Subsidiaries (provided that, if an Event
of


      
        
           


        

        
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      Default
specified in Section 11.05 shall occur with respect to the Company, the
Delaware Sub or any of the Company’s other Subsidiaries, the result which would
occur upon the giving of written notice by the Agent to the Company as specified
in clause (i) below shall occur automatically without the giving of any
such notice):

      


      (i)  declare
the principal of and any accrued interest in respect of all Notes and all
Obligations owing hereunder and thereunder to be, whereupon the same shall
become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Company and each of
its Subsidiaries; and

       

      (ii)  enforce
all of the liens and security interests created pursuant to the Security
Documents.

       

      (c)           If
any Holder has instituted any proceeding to enforce any right or remedy under
this Agreement and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to such Holder, then and in every such
case the Company, the Delaware Sub and the Holders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Holders shall continue as though no such proceeding had been
instituted.

      


      SECTION
9. Definitions

       

      9.01 Defined
Terms.  As
used in this Agreement, the following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):

       

      “Affiliate” shall
mean, with respect to any Person, any other Person (including, for purposes of
Section 11.06
only, all directors, officers and partners of such Person) directly or
indirectly Controlling, Controlled by, or under direct or indirect common
Control with, such Person; provided, however, that for
purposes of Section 11.06,
an Affiliate of the Company shall include any Person that directly or indirectly
owns more than 10% of any class of the capital stock of the Company and any
officer or director of the Company or any of its Subsidiaries.

       

      “Agent” shall have the
meaning given thereto in the first paragraph hereof.

       

      “Agreement” shall have
the meaning given thereto in the first paragraph hereof.

       

       “Bankruptcy Code”
shall have the meaning provided in Section 11.05.

       

       “Business Day” shall
mean a day (other than a Saturday or Sunday) on which banks generally are open
in New York for the conduct of substantially all of their commercial lending
activities.

       

      “Capital Expenditures”
shall mean, with respect to any Person, all expenditures by such Person which
are or are required to be capitalized in accordance with GAAP, including all
such expenditures with respect to fixed or capital assets (including, without
limitation, expend

       


      
        
           


        

        
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      tures for
maintenance and repairs which should be capitalized in accordance with GAAP) and
the amount of Capitalized Lease Obligations incurred by such
Person.  Capital Expenditures shall be calculated without giving
effect to any impact that FIN 46, as issued by the Federal Accounting Standards
Board relating to variable interest entities may have.

       

      “Capitalized Lease
Obligations” of any Person shall mean all rental obligations which, under
GAAP, are or will be required to be capitalized on the books of such Person, in
each case taken at the amount thereof accounted for as indebtedness in
accordance with such principles.  Capitalized Lease Obligations shall
be calculated without giving effect to any impact that FIN 46, as issued by the
Federal Accounting Standards Board relating to variable interest entities may
have.

       

      “Cash Equivalents”
shall mean, as to any Person, (i) securities issued or directly and fully
guaranteed or insured by the United States or any agency or instrumentality
thereof (provided that the
full faith and credit of the United States is pledged in support thereof) having
maturities of not more than one year from the date of acquisition,
(ii) time deposits and certificates of deposit of any commercial bank
having, or which is the principal banking subsidiary of a bank holding company
organized under the laws of the United States, any State thereof or the District
of Columbia having capital, surplus and undivided profits aggregating in excess
of $500,000,000, with maturities of not more than one year from the date of
acquisition by such Person, (iii) repurchase obligations with a term of not
more than 90 days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications
specified in clause (ii) above, (iv) commercial paper issued by any
Person incorporated in the United States rated at least A-1 or the equivalent
thereof by Standard & Poor’s Ratings Services or at least P-1 or the
equivalent thereof by Moody’s Investors Service, Inc. and in each case maturing
not more than one year after the date of acquisition by such
Person,  (v) investments in money market funds substantially all
of whose assets are comprised of securities of the types described in
clauses (i) through (iv) above, and (vi) certificates of deposit or
bankers acceptances of any bank organized under the laws of Canada, Japan or any
country that is a member of the European Economic Community whose short term
commercial paper rating from Standard & Poor’s Rating Services is at least
A-1 or equivalent thereof or from Moody’s Investors Service, Inc. is at least
P-1 or the equivalent thereof, in each case with maturities of not more than
twelve months from the date of acquisition.

       

      “CERCLA” shall mean
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as the same may be amended from time to time, 42 U.S.C. §§ 9601 et seq.

       

      “Change of Control”
shall mean the occurrence, other than in connection with the Transactions, of
any of the following on or after the date of this Agreement:

       

      (a) the
direct or indirect sale, lease, transfer conveyance or other disposition, in one
or a series of related transactions, of all or substantially all of the assets
of the Company and its Subsidiaries, taken as a whole;

       


      
        
           


        

        
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      (b) any
“person” or “group” (within the meaning of Sections 13(d) and 14(d)(2)
of the Exchange Act) becomes the “beneficial owner” (within the meaning of
Rule 13d-3 of the SEC under the Exchange Act) of more than 20% of the
equity interests of the Company having the right to vote for the election of
members of the board of directors thereof;

       

      (c) individuals
who on the date of this Agreement constitute the board of directors of the
Company (together with any new directors whose appointment by the board of
directors of the Company or whose nomination by the board of directors of the
Company for election by the Company’s stockholders was approved by a vote of at
least a majority of the members of the board of directors then in office who
either were members of the board of directors on the First Draw Down Date or
whose appointment or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the board of directors
then in office; and

       

      (d) any
change in control (or similar event, however denominated) with respect to the
Company or any of its Subsidiary shall occur under and as defined in any
indenture or agreement in respect of Indebtedness to which the Company or any of
its Subsidiary is a party.

       

      “Code” shall mean the
Internal Revenue Code of 1986, as amended from time to time, and the regulations
promulgated and rulings issued thereunder.  Section references to the
Code are to the Code, as in effect at the date of this Agreement and any
subsequent provisions of the Code, amendatory thereof, supplemental thereto or
substituted therefor.

       

      “Collateral” shall
mean all of the Collateral (as such term is defined in the Security Agreement)
and all other property of whatever kind and nature pledged as collateral under
any Security Document.

       

      “Collateral Agent”
shall have the meaning provided in the Security Agreement.

       

      “Common Stock” shall
mean common stock of the Company, par value $0.001 per share.

       

      “Company” shall have
the meaning set forth in the first paragraph of this Agreement.

       

      “Company SEC
Documents” shall have the meaning given thereto in Section 7.05.

       

      “Control” shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the ability
to exercise voting power, by contract or otherwise.  The terms
“Controlling” and “Controlled” have meanings correlative thereto.

       

      “Default” shall mean
any event, act or condition which with notice or lapse of time, or both, would
constitute an Event of Default.

       


      
        
           


        

        
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      “Delaware Sub” shall
have the meaning set forth in the first paragraph of this
Agreement.

       

      “Dividend” with
respect to any Person, shall mean that such Person has declared or paid a
dividend or returned any equity capital to its stockholders or members or
authorized or made any other distribution, payment or delivery of property
(other than common stock of such Person) or cash to its stockholders or members
as such, or redeemed, retired, purchased or otherwise acquired, directly or
indirectly, for consideration any shares of any class of its capital stock or
membership interests outstanding on or after the First Draw Down Date (or any
options or warrants issued by such Person with respect to its capital stock), or
set aside any funds for any of the foregoing purposes, or shall have permitted
any of its Subsidiaries to purchase or otherwise acquire for consideration any
shares of any class of the capital stock of such Person outstanding on or after
the First Draw Down Date (or any options or warrants issued by such Person with
respect to its capital stock).  Without limiting the foregoing,
“Dividends” with respect to any Person shall also include all payments made or
required to be made by such Person with respect to any stock appreciation
rights, plans, equity incentive or achievement plans or any similar plans or
setting aside of any funds for the foregoing purposes.

       

      “Dollars” and the sign
“$” shall each
mean lawful money of the United States.

       

      “Draw Down” shall have
the meaning given thereto in Section 3.01(d).

       

      “Draw Down Date” shall
mean the date upon which a Draw Down shall occur.

       

      “Eligible Transferee”
shall mean and include a commercial bank, insurance company, financial
institution, fund or other Person which regularly purchases interests in notes
of the type made pursuant to this Agreement, any other Person which would
constitute a “qualified institutional buyer” within the meaning of
Rule 144A under the Securities Act as in effect on the First Draw Down Date
or other institutional “accredited investor” (as defined in Regulation D of
the Securities Act).

       

      “Environmental Claims”
shall mean any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, directives, claims, liens, notices of noncompliance or
violation, investigations or proceedings relating in any way to any
Environmental Law or any permit issued, or any approval given, under any such
Environmental Law (hereafter, “Claims”), including, without limitation,
(a) any and all Claims by governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial or other actions or damages
(including, without limitation, natural resources damages) pursuant to any
applicable Environmental Law, and (b) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief in connection with alleged injury or threat of injury to
health, safety or the environment, or personal injury or property damage, due to
the presence of Hazardous Materials.

       

      “Environmental Law”
shall mean any applicable Federal, state, foreign or local statute, law, rule,
regulation, ordinance, code, binding and enforceable guideline, binding and
enforceable written policy and rule of common law now or hereafter in effect and
in each case as

       


      
        
           


        

        
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      amended,
and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, to the extent
binding on the Company or any of its Subsidiaries, relating to the environment,
employee health and safety or Hazardous Materials, including, without
limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, 33 U.S.C.
§§ 1251 et
seq.; the Toxic
Substances Control Act, 15 U.S.C. §§ 2601 et seq.; the Clean Air
Act, 42 U.S.C. §§ 7401 et seq.; the Safe
Drinking Water Act, 42 U.S.C. §§ 3803 et seq.; the Oil
Pollution Act of 1990, 33 U.S.C. §§ 2701 et seq.; the Emergency
Planning and the Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001
et seq.; the Hazardous
Material Transportation Act, 49 U.S.C. §§ 1801 et seq. and the
Occupational Safety and Health Act, 29 U.S.C. §§ 651 et seq.; and any state
and local or foreign counterparts or equivalents, in each case as amended from
time to time.

       

      “ERISA” shall mean the
Employee Retirement Income Security Act of 1974, as amended from time to time,
and the regulations promulgated and rulings issued
thereunder.  Section references to ERISA are to ERISA, as in effect at
the date of this Agreement and any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.

       

      “ERISA Affiliate”
shall mean each person (as defined in Section 3(9) of ERISA) which together
with the Company or a Subsidiary of the Company would be deemed to be a “single
employer” within the meaning of Section 414(b), (c), (m) or
(o) of the Code.

       

       “Event of Default”
shall have the meaning provided in Section 11.

       

      “Exchange Act” shall
mean the Securities Exchange Act of 1934, as amended.

       

      “Existing Registration
Rights” shall mean the registration rights granted to certain holders of
the Company’s common stock pursuant to those Registration Rights Agreements
dated as of February 9, 2005 and October 19, 2006, respectively.

       

       “Final Draw Down”
shall have the meaning given thereto in Section 3.01(c).

       

      “First Draw Down”
shall have the meaning given thereto in Section 3.01(b).

       

      “First Draw Down Date”
shall mean the date upon which the First Draw Down occurs.

       

       “GAAP” shall mean
generally accepted accounting principals in the United States.

       

      “Governmental
Authority” shall mean any Federal, state, local or foreign court or
governmental agency, authority, instrumentality or regulatory body.

       

      “Hazardous Materials”
shall mean (a) any petroleum or petroleum products, radioactive materials,
asbestos in any form that is friable, ureaformaldehyde foam insulation,
polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or
substances defined as or included in the definition of “hazardous substances,”
“hazardous waste,” “hazar­dous materials” “extremely hazardous substances,”
“restricted hazardous waste,” “toxic substances,” “toxic po

       


      
        
           


        

        
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      lutants”
“contaminants,” or “pollutants,” under any applicable Environmental Law; and
(c) any other chemical, material or substance subject to regulation or
which can give rise to liability under Environmental Laws.

       

      “Holder” means, with
respect to any Note, the Person in whose name such Note is registered in the
register maintained by the Company pursuant to Section 14.12.

       

      “Immaterial
Subsidiary” shall mean any Subsidiary of the Company who represents less
than 2.5% of Net Worth.

       

      “Indebtedness” shall
mean, as to any Person, without duplication, (i) all indebtedness
(including principal, interest, fees and charges) of such Person for borrowed
money or for the deferred purchase price of property or services, (ii) the
maximum amount available to be drawn under all letters of credit issued for the
account of such Person and all unpaid drawings in respect of such letters of
credit, (iii) all Indebtedness of the types described in clause (i),
(ii), (iv) or (v) of this definition secured by any lien on any property owned
by such Person, whether or not such Indebtedness has been assumed by such Person
(to the extent of the value of the respective property), (iv) the aggregate
amount required to be capitalized under leases under which such Person is the
lessee, and (v) all obligations of such Person to pay a specified purchase
price for goods or services, whether or not delivered or accepted, i.e., take-or-pay and
similar obligations.

       

      “Initial Test
Drilling” shall mean "Field Trial 1" as referenced in paragraph 5 of that
certain letter attached as Attachment 1 to the Shell Contract.

       

      “Investment Company”
shall have the meaning given thereto in Section 7.10.

       

      “Investments” shall
have the meaning provided in Section 10.05.

       

      “Leases” shall mean
any and all leases, subleases, tenancies, options, concession agreements, rental
agreements, occupancy agreements, franchise agreements and any other agreements
(including, without limitation, all amendments, extensions, replacements,
renewals, modifications and/or guarantees thereof), whether or not of record and
whether now in existence or hereafter entered into, affecting the use or
occupancy of all or any portion of any Real Property.

       

      “Lien” shall mean,
with respect to any property, any mortgage, deed of trust, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), preference, priority, claim, charge or other security interest of any
kind or nature whatsoever (including, without limitation, any conditional sale
agreement, capital lease or other title retention agreement, any financing or
similar statement or notice filed under the UCC or any other similar recording
or notice statute, including any easement, right-of-way or other encumbrance on
title to Real Property, and any lease having substantially the same effect as
any of the foregoing), in each of the foregoing cases whether voluntary or
imposed by law, and any agreement to give any of the foregoing.

       

      “Material Adverse
Effect” shall mean a material adverse effect on (x) the financial
condition, business, operations or prospects of the Company and its Subsidiaries
taken as a

       


      
        
           


        

        
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      whole,
(y) the ability of the Company to pay the Obligations or perform its
agreements under the Transaction Documents or (z) the validity or
enforceability of this Agreement or any of the other Transaction Documents or
any of the material rights or remedies of the Purchasers or any Holder hereunder
or thereunder.

       

      “Maturity Date” shall
mean the date one year from the date of the First Draw Down.

       

       “Net Worth” shall mean
the amount, computed as of the most recent fiscal quarter of the Company for
which financial statements are available, equal to the Company’s and its
consolidated Subsidiaries’ assets minus  all of its
liabilities.

       

      “Notes” shall have the
meaning provided in Section 1(a).

       

      “Obligations” shall
mean all amounts, direct or indirect, contingent or absolute, of every type or
description, and at any time existing, owing to the Holders or the Agent or
their respective successors, transferees or assignees pursuant to the terms of
the Notes or secured by any of the Security Documents, whether or not the right
of such person to payment in respect of such obligations and liabilities is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or unsecured and
whether or not such claim is discharged, stayed or otherwise affected by any
bankruptcy case or insolvency or liquidation proceeding.

       

      “Pension Plan” shall
mean any pension plan as defined in Section 3(2) of ERISA that is subject to
Title IV of ERISA which is maintained or contributed to by (or to which there is
an obligation to contribute of) the Company or one of its Subsidiaries or an
ERISA Affiliate and each such plan for the five year period immediately
following the latest date on which the Company or one of its Subsidiaries or an
ERISA Affiliate maintained, contributed to or had an obligation to contribute to
such plan

       

      “Permitted Liens”
shall have the meaning provided in Section 10.01.

       

      “Person” shall mean
any individual, partnership, joint venture, firm, corporation, association,
trust or other enterprise or any government or political subdivision or any
agency, department or instrumentality thereof.

       

      “Plan” shall mean any
employee benefit plan as defined in Section 3(3) of ERISA which is
maintained or contributed to by (or to which there is an obligation to
contribute of) the Company or one of its Subsidiaries or an ERISA Affiliate, and
each such plan for the five year period immediately following the latest date on
which the Company or one of its Subsidiaries or an ERISA Affiliate maintained,
contributed to or had an obligation to contribute to such plan.

       

       “property” shall mean
any right, title or interest in or to property or assets of any kind whatsoever,
whether real, personal or mixed and whether tangible or intangible and including
equity interests or other ownership interests of any Person and whether now in
existence or owned or hereafter entered into or acquired.

       


      
        
           


        

        
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      “Purchase Money
Obligation” of any Person shall mean (i) Indebtedness for the
payment of all or any part of the purchase price of any fixed assets or
(ii) any Indebtedness incurred at the time of or within 90 days prior
to or after the acquisition of any fixed assets for the purpose of financing all
or any part of the purchase price thereof.

       

      “Purchase Price” shall
have the meaning provided in Section 2.01.

       

      “Purchaser” and “Purchasers” shall
have the meaning provided in the first paragraph of this Agreement.

       

       “Quarterly Payment
Date” shall mean the last Business Day of March, June, September and
December occurring after the First Draw Down Date.

       

      “RCRA” shall mean the
Resource Conservation and Recovery Act, as the same may be amended from time to
time, 42 U.S.C. §§ 6901 et seq.

       

      “Real Property” shall
mean, collectively, all right, title and interest (including, without
limitation, any Leases) in and to any and all parcels of or interests in real
property owned, leased or operated by any Person, whether by lease, license or
other use agreement, together with, in each case, all easements, hereditaments
and appurtenances relating thereto, all improvements and appurtenant fixtures
and equipment, all general intangibles and contract rights and other property
and rights incidental to the ownership, lease or operation thereof.

       

      “Recovery Event” shall
mean, with respect to any property (including Real Property) of the Company or
any Subsidiary, any loss of title with respect to Real Property or any theft,
loss or destruction of or damage to, or any condemnation or other taking
(including by any Governmental Authority) of, such property (including Real
Property) for which the Company or any Subsidiary receives insurance proceeds or
proceeds of a condemnation award or other compensation.  “Recovery
Event” shall include but not be limited to any taking of any Real Property of
the Company or any Subsidiary or any part thereof, in or by condemnation or
other eminent domain proceedings pursuant to any law, general or special, or by
reason of the temporary requisition of the use or occupancy of any Real Property
of the Company or any Subsidiary or any part thereof, by any Governmental
Authority, civil or military, but shall not include business interruption
insurance.

       

      “Regulation D”
shall mean Regulation D of the Board of Governors of the Federal Reserve
System as from time to time in effect and any successor to all or a portion
thereof establishing reserve requirements.

       

      “Release” shall mean
any spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping, disposing or migration into the
environment.

       

      “Required Holders”
means, as of any date of determination, Holders holding in the aggregate more
than 50% of the Notes outstanding.

       


      
        
           


        

        
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      “Requirements of Law”
shall mean, collectively, any and all requirements of any Governmental
Authority, including, without limitation, any and all laws, ordinances, rules,
regulations or similar statutes or case law.

       

      “SEC” shall have the
meaning provided in Section 9.01(h).

       

      “Second Draw Down”
shall have the meaning given thereto in Section 3.01(c).

       

      “Second Test Drilling”
shall mean "Field Trial 2" as contemplated in paragraph 6 of that certain letter
attached as Attachment 1 to the Shell Contract.

       

      “Secured Parties”
shall have the meaning assigned to that term in the Security
Agreement.

       

      “Securities” shall
have the meaning given thereto in Section 1(b).

       

      “Securities Act” shall
mean the Securities Act of 1933, as amended.

       

      “Security Agreement”
shall mean the Security Agreement, substantially in the form of Exhibit E, among
the Company, the Delaware Sub and the Agent for the benefit of the Secured
Parties, as the same may be amended in accordance with the terms thereof and
hereof or such other agreements acceptable to the Agent as shall be necessary to
comply with applicable Requirements of Law and effective to grant to the Agent a
perfected first priority Lien on and security interest in the
Collateral.

       

      “Security Documents”
shall mean the Security Agreement and each other security document or pledge
agreement required by applicable Requirements of Law to grant a valid, perfected
first priority Lien on and security interest in any property required to be made
subject to the Lien of the Security Documents pursuant to Section 9.07,
and all UCC or other financing statements or instruments of perfection required
by this Agreement, the Security Agreement or any Mortgage to be filed with
respect to the security interests in property created pursuant to any Security
Agreement or any Mortgage and any other document or instrument utilized to
pledge or grant a security interest in any property of whatever kind or nature
as Collateral for the Obligations, including, without limitation, any and all
documents or instruments delivered pursuant to Section 9.07.

       

      “Shell Contract” shall
mean the outline agreement no. 4610021484 and purchase order no. 4900006232
between Shell Exploration & Production Co. and Particle Drilling
Technologies, Inc., dated December 2, 2008 including any exhibits,
amendments and supplements thereto.

       

      “Subsidiary” shall
mean, as to any Person, (i) any corporation more than 50% of whose stock of
any class or classes having by the terms thereof ordinary voting power to elect
a majority of the directors of such corporation (irrespective of whether or not
at the time stock of any class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time owned by such Person and/or one or more Subsidiaries of such Person and
(ii) any partnership, association, joint venture or other entity in
which

       


      
        
           


        

        
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      such
Person and/or one or more Subsidiaries of such Person has more than a 50% equity
interest at the time.

       

      “Taxes” shall have the
meaning provided in Section 4.03.

       

      “Transaction” shall
mean, collectively, (i) the consummation of this Agreement,
(ii) issuance of the Notes and Warrants hereunder and (iii) the
payment of fees and expenses owing in connection with the
foregoing.

       

      “Transaction
Documents” shall mean this Agreement and, after the execution and
delivery thereof pursuant to the terms of this Agreement, each Note, the
Warrants, each Security Document, and, after the execution and delivery thereof,
each additional guaranty or security document executed pursuant to Section 9.07.

       

      “UCC” shall mean the
Uniform Commercial Code as from time to time in effect in the relevant
jurisdiction.

       

      “United States” and
“U.S.” shall
each mean the United States of America.

       

      “Warrants” shall have
the meaning given thereto in Section 1(b).

       

      “Warrant Shares” shall
have the meaning given thereto in Section 1(b).

       

      SECTION
10. Appointment of
Agent

       

       

      10.01 Appointment.  Each
Holder hereby irrevocably appoints the Agent as its agent hereunder and under
the other Transaction Documents, and to act as the Collateral Agent on behalf of
the Holders hereunder and under the other Transaction Documents, and in each
case authorizes the Agent to take such actions on its behalf and to exercise
such powers as are delegated to the Agent by the terms hereof or thereof,
together with such actions and powers as are reasonably incidental
thereto.  Any reference herein to the Agent shall include the Agent in
its capacity as Agent hereunder and as Collateral Agent under any Transaction
Document.  Each Holder does hereby make, constitute and appoint the
Agent its true and lawful attorney-in-fact with full powers of substitution and
resubstitution for such Holder and in its name, place and stead, in any and all
capacities, to execute for such Holder and on its behalf any document or
agreement for which the Agent is empowered to act on behalf of such Holder under
this Section 13,
granting to the Agent full power and authority to do and perform each act
requisite and necessary to be done, as fully to all intents and purposes as the
Holder could do in person, provided that such power shall be granted only to the
extent necessary to undertake the actions permitted to be done or taken by the
Agent under this Section 13.  Each
of the Holders hereby irrevocably authorizes, and each Holder of any Note by the
acceptance of such Note shall be deemed irrevocably to authorize, the Agent to
take such action on their behalf under the provisions of this Agreement, the
other Transaction Documents and any other instruments and agreements referred to
herein or therein and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Agent by the terms hereof and thereof and such other powers as are reasonably
incidental hereto and thereto.  The Agent may perform any of its
duties hereunder by or through its officers, directors, agents, employees
or

       


      
        
           


        

        
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      affiliates.  The
Agent shall not have, by reason of this Agreement or any of the other
Transaction Documents, a fiduciary relationship in respect of any Holder, the
Company or the Delaware Sub, and nothing in this Agreement or any of the other
Transaction Documents, expressed or implied, is intended to or shall be so
construed as to impose upon the Agent any obligations in respect of this
Agreement or any of the other Transaction Documents expect as expressly set
forth herein or therein.  Each Holder hereby accepts the pledges,
mortgages and fiduciary assignments created for its benefit under the Security
Agreement and empowers the Agent to enter into such agreements and act as
Collateral Agent on behalf and for the benefit of each Holder.  The
provisions of this Section 13 are solely for the benefit of the Agent and
the Holders, and none of the Company, the Delaware Sub or any of the Company’s
other Subsidiaries or Affiliates shall have any rights as a third party
beneficiary of any of the provisions hereof.  In performing its
functions and duties under this Agreement, the Agent shall act solely as agent
of the Holders and the Agent does not assume and shall not be deemed to have
assumed any fiduciary relationship or other obligation or relationship of agency
or trust with the Company or the Delaware Sub or for any of their respective
Subsidiaries or Affiliates.

       

      10.02 Rights of
Agent.  With
respect to its obligation to purchase Notes under this Agreement, the Agent
shall have the rights and powers specified herein for a “Holder” and may
exercise the same rights and powers as though it were not performing the duties
specified herein; and the term “Holders,” “Required Holders,” “holders of Notes”
or any similar terms shall, unless the context clearly otherwise indicates,
include the Agent in its individual capacity.  The Agent and its
Affiliates may accept deposits from, lend money to, and generally engage in any
kind of banking, investment banking, trust or other business with, or provide
debt financing, equity capital or other services (including financial advisory
services) to, the Company, the Delaware Sub or any of the Company’s other
Subsidiaries or Affiliates (or any Person engaged in similar business with the
Company or any Subsidiary or Affiliate thereof) as if they were not performing
the duties specified herein, and may accept fees and other consideration from
the Company, the Delaware Sub or any of the Company’s other Subsidiaries or
Affiliates for services in connection with this Agreement and otherwise without
having to account for the same to the Holders.

       

      10.03 Administration of the
Collateral.  The
Agent as Collateral Agent shall administer the Collateral and any Lien thereon
for the benefit of the Holders in the manner provided herein and in the Security
Agreement and in any other related Transaction Documents; provided, however, that in the
event of conflict between the provisions relating to administration of
Collateral included in this Agreement and those included in the Security
Agreement, the latter shall prevail.  The Agent shall exercise such
rights and remedies with respect to the Collateral as are granted to it
hereunder and as Collateral Agent under the Security Agreement and related
documents and applicable law and as shall be directed by the Required
Holders.  Upon payment in full of all Obligations under the
Transaction Documents, the Agent and its Affiliates shall promptly release any
and all Liens, Collateral and other security arrangements entered into in
connection with this Agreement, the Transaction Documents and the transactions
contemplated hereby and thereby.

       


      
        
           


        

        
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      Application
of Proceeds.  The
Agent shall apply the proceeds of any collection, sale, disposition, foreclosure
or other realization of all or any part of the Collateral in the manner provided
in the Security Agreement. 

       

      10.04 Duties of
Agent.  The
Agent shall not have any duties or obligations except those expressly set forth
herein and in the other Transaction Documents.  Without limiting the
generality of the foregoing, (a) the Agent shall not be subject to any
fiduciary or other implied duties, regardless of whether a Default has occurred
and is continuing, (b) the Agent shall not have any duty to take any
discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby or by the other Transaction
Documents that the Agent is required to exercise in writing by the Required
Holders, and (c) except as expressly set forth herein and in the other
Transaction Documents, the Agent shall not have any duty to disclose, and shall
not be liable for the failure to disclose, any information relating to the
Company, the Delaware Sub or any of the Company’s other Subsidiaries that is
communicated to or obtained by the bank serving as Agent or any of its
Affiliates in any capacity.  The Agent shall not be liable for any
action taken or not taken by it with the consent or at the request of the
Required Holders or in the absence of its own gross negligence or willful
misconduct.  The Agent shall be deemed not to have knowledge of any
Default unless and until notice thereof is given to the Agent by the Company,
the Delaware Sub or a Holder, and the Agent shall not be responsible for or have
any duty to ascertain or inquire into (v) any statement, warranty or
representation made in or in connection with this Agreement or any other
Transaction Document, (w) the contents of any certificate, report or other
document delivered hereunder or thereunder or in connection herewith or
therewith, (x) the performance or observance of any of the covenants,
agreements or other terms or conditions set forth herein or therein,
(y) the validity, enforceability, effectiveness or genuineness of this
Agreement, any other Transaction Document or any other agreement, instrument or
document, or (z) the satisfaction of any condition set forth herein or
therein, other than to confirm receipt of items expressly required to be
delivered to the Agent.  In the event that the Agent receives such a
notice, the Agent shall give prompt notice thereof to the other Holders and
the  (if received from a Holder) or to the Holders (if received from
the Company or the Delaware Sub).

       

      10.05 Reliance by
Agent.  The
Agent shall be entitled to rely upon, and shall not incur any liability for
relying upon, any notice, request, certificate, consent, statement, instrument,
document or other writing believed by it to be genuine and to have been signed
or sent by the proper Person.  The Agent also may rely upon any
statement made to it orally or by telephone and believed by it to be made by the
proper Person, and shall not incur any liability for relying
thereon.  The Agent may consult with legal counsel (who may be counsel
for the Company, the Delaware Sub or any of the Company’s other Subsidiaries),
independent accountants and other experts selected by it, and shall not be
liable for any action taken or not taken by it in accordance with the advice of
any such counsel, accountants or experts.

       

      10.06 Appointment of
Sub-Agents.  The
Agent may perform any and all its duties and exercise its rights and powers by
or through any one or more sub-agents appointed by the Agent.  The
Agent and any such sub-agent may perform any and all its duties and exercise its
rights and powers through their respective Affiliates.  The
exculpatory provisions of the preceding paragraphs shall apply to any such
sub-agent and to the Affiliates of the Agent and any such

       


      
        
           


        

        
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      sub-agent,
an shall apply to their respective activities in connection with the syndication
of the credit facilities provided for herein as well as activities as
Agent.

       

      10.07 Resignation of
Agent.  Subject
to the appointment and acceptance of a successor Agent as provided below, the
Agent may resign at any time by notifying the Holders and the
Company.  Upon any such resignation, the Required Holders shall have
the right to appoint a successor.  If no successor shall have been so
appointed by the Required Holders and shall have accepted such appointment
within 30 days after the retiring Agent gives notice of its resignation,
then the retiring Agent may, upon not less than ten days’ notice, on behalf of
the Holders, appoint a successor Agent, which institution shall be a bank with
an office in New York, New York, with a combined capital and surplus of at least
$50,000,000.  Upon the acceptance of its appointment as Agent
hereunder by a successor, such successor shall succeed to and become vested with
all the rights, powers, privileges and duties of the retiring (or retired) Agent
and the retiring Agent shall be discharged from its duties and obligations
hereunder.  The fees payable by the Company to a successor Agent shall
be the same as those payable to its predecessor unless otherwise agreed between
the Issuer and such successor.  After the Agent’s resignation
hereunder, the provisions of this Section shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as Agent.

       

      10.08 Holder
Non-Reliance.  Independently
and without reliance upon the Agent, each Holder, to the extent it deems
appropriate, has made and shall continue to make (i) its own independent
investigation of the financial condition and affairs of the Company, the
Delaware Sub and the Company’s other Subsidiaries in connection with the
issuance of the Notes and the taking or not taking of any action in connection
herewith and (ii) its own appraisal of the creditworthiness of the Company,
the Delaware Sub and the Company’s other Subsidiaries and, except as expressly
provided in this Agreement, the Agent shall not have any duty or responsibility,
either initially or on continuing basis, to provide any Holder with any credit
or other information with respect thereto, whether coming into its possession
before the issuance of the Notes or at any time or times
thereafter.  The Agent shall not be responsible to any Holder for any
recitals, statements, information, representations or warranties herein or in
any document, certificate or other writing delivered in connection herewith or
for the execution, effectiveness, genuineness, validity, enforceability,
perfection, collectibility, priority or sufficiency of this Agreement or any
other Transaction Document or the financial condition of the Company, the
Delaware Sub and any of the Company’s other Subsidiaries or be required to make
any inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Transaction document, or
the financial condition of the Company, the Delaware Sub and any of the
Company’s other Subsidiaries or the existence or possible existence of any
Default or Event of Default.  

       

      10.09 Indemnification.  To
the extent the Agent is not reimbursed and indemnified by the Company, the
Holders will reimburse and indemnify the Agent in proportion to their respective
“percentage” as used in determining the Required Holders for and against any and
all liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, costs, expenses or disbursements of whatsoever kind or nature
(including fees and disbursements of any counsel or financial advisor engaged by
the Agent) which may be imposed on, asserted against or incurred by the Agent in
performing its duties hereunder or under any other Transaction Document or
in

       


      
        
           


        

        
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      any way
relating to or arising out of this Agreement or any other Transaction Document;
provided, however, that no
Holder shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from such Agent’s gross negligence or willful
misconduct.  If the indemnity furnished to any Agent by any Holder for
any purpose shall, in the opinion of such Agent be insufficient or become
impaired, such Agent may call for additional indemnity from such Holder (but not
any other Holder) and cease, or not commence, to do the acts indemnified against
until such additional indemnity is furnished.  The agreements in this
Section 13.10
shall survive the payment of all Obligations.

       

      10.10 Holders.  The
Agent may deem and treat the payee of any Note as the owner thereof for all
purposes hereof unless and until a written notice of the assignment, transfer or
endorsement thereof, as the case may be, shall have been recorded in the
register maintained by the Company in accordance with Section 14.12.  Any
request, authority or consent of any Person who, at the time of making such
request or giving such authority or consent, is the holder of any Note shall be
conclusive and binding on any subsequent holder, transferee, assignee or
endorsee, as the case may be, of such Note or of any Note or Notes issued in
exchange therefore.

       

      10.11 Action by
Agent.  The
Agent may take any action on behalf of the Required Holders that has been
approved by the Required Holders.  For the avoidance of doubt, the
Agent may, with the prior consent of the Required Holders (but not otherwise)
consent to any amendment, restatement, supplement, waiver or other modification
under any of the Transaction Documents.

       

      SECTION
11. Miscellaneous.

       

      11.01 Payment of Expenses,
Etc.  The
Company shall:  (i) whether or not the transactions herein
contemplated are consummated, pay all reasonable out-of-pocket costs and
expenses of LC and the Agent (including, without limitation, the reasonable fees
and disbursements of Milbank, Tweed, Hadley & McCloy LLP and local counsel)
in connection with the preparation, execution and delivery of this Agreement and
the other Transaction Documents and the documents and instruments referred to
herein and therein, (ii) pay for all reasonable out-of-pocket expenses
incurred by LC and the Agent in connection with any amendment, waiver or consent
relating hereto or thereto (whether or not such amendment, waiver or consent
shall become effective), and, after an Event of Default, reimburse the Agent in
connection with the enforcement of this Agreement and the other Transaction
Documents and the documents and instruments referred to herein and therein
(including, without limitation, the reasonable fees and disbursements of counsel
(including in-house counsel) for LC and the Agent); (iii) pay and hold the
Holders and the Agent harmless from and against any and all present and future
stamp, excise and other similar taxes with respect to the foregoing matters and
save the Holders and the Agent harmless from and against any and all liabilities
with respect to or resulting from any delay or omission (other than to the
extent attributable to the Holders or the Agent, as applicable) to pay such
taxes; and (iv) indemnify the Holders and the Agent, and their respective
officers, directors, trustees, employees, representatives and agents from and
hold each of them harmless against any and all liabilities, obligations
(including removal or remedial actions), losses, damages, penalties, claims,
actions, judgments, suits, costs, expenses and disbursements (including
reasonable atto

       


      
        
           


        

        
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      neys’ and
consultants’ fees and disbursements) incurred by, imposed on or assessed against
any of them as a result of, or arising out of, or in any way related to, or by
reason of, (a) any investigation, litigation or other proceeding (whether
or not any Holder or the Agent is a party thereto) related to the entering into
and/or performance of this Agreement or any other Transaction Document or the
use of any proceeds of any Notes hereunder or the consummation of any
transactions contemplated herein (including, without limitation, the
Transaction), or in any other Transaction Document, or (b) the exercise of
any of their rights or remedies provided herein or in the other Transaction
Documents, or (c) the actual or alleged presence or Release of Hazardous
Materials in the air, surface water or groundwater or on the surface or
subsurface of any Real Property or at or emanating from any facility or
equipment owned or at any time operated by the Company, the Delaware Sub or any
of the Company’s other Subsidiaries, the generation, storage, transportation,
handling, disposal or Release of Hazardous Materials by the Company, the
Delaware Sub or any of the Company’s other Subsidiaries at any location, whether
or not owned or operated by the Company, the Delaware Sub or any of the
Company’s other Subsidiaries, the noncompliance by the Company, the Delaware Sub
or any of the Company’s other Subsidiaries or of any Real Property owned or
operated by the Company, the Delaware Sub or any of the Company’s other
Subsidiaries with Environmental Laws, or any Environmental Claim asserted
against the Company, the Delaware Sub or any of the Company’s other Subsidiaries
or any Real Property owned or at any time operated by the Company, the Delaware
Sub or any of the Company’s other Subsidiaries, including, in each case, without
limitation, the reasonable fees and disbursements of counsel and other
consultants incurred in connection with any such investigation, litigation or
other proceeding (but excluding any losses, liabilities, claims, damages or
expenses to the extent incurred by reason of the gross negligence or willful
misconduct of the Person to be indemnified).  To the extent that the
undertaking to indemnify, pay or hold harmless the Holders or the Agent set
forth in the preceding sentence may be unenforceable because it is violative of
any law or public policy, the Company shall make the maximum contribution to the
payment and satisfaction of each of the indemnified liabilities which is
permissible under applicable law.

       

      11.02 Right of
Setoff.  In
addition to any rights now or hereafter granted under applicable law or
otherwise, and not by way of limitation of any such rights, upon the occurrence
of an Event of Default, each Holder is hereby authorized at any time or from
time to time, without presentment, demand, protest or other notice of any kind
to the Company, the Delaware Sub or to any other Person, any such notice being
hereby expressly waived, to set off and to appropriate and apply any and all
deposits (general or special) and any other Indebtedness at any time held or
owing by the Holders (including, without limitation, by its branches and
agencies) to or for the credit or the account of the Company but in any event
excluding assets held in trust for any such Person against and on account of the
Obligations and liabilities of the Company, as applicable, to the Holders under
this Agreement or under any of the other Transaction Documents and all other
claims of any nature or description arising out of or connected with this
Agreement or any other Transaction Document, irrespective of whether or not the
Holders shall have made any demand hereunder and although said Obligations,
liabilities or claims, or any of them, shall be contingent or
unmatured.

       

      11.03 Notices.  Except
as otherwise expressly provided herein, all notices and other communications
provided for hereunder shall be in writing (including telexed,
telegraphic,

       


      
        
           


        

        
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      telex,
telecopier or cable communication) and mailed, telexed, telecopied, cabled or
delivered:  if to the Company or the Delaware Sub, at the Company’s
address specified below its signature below; if to a Purchaser, at its address
specified below its signature below, if to the Agent, at its address specified
below its signature below, or as to any other Subsidiary of the Company or any
Holder, at such other address as shall be designated by such party in a written
notice to the other parties hereto.  All such notices and
communications shall, when mailed, telexed, telecopied or sent by overnight
courier, be effective when deposited in the mails or delivered to the overnight
courier, prepaid and properly addressed for delivery on such or the next
Business Day, or sent by telex or telecopier, except that notices and
communications to either of Purchasers, the Agent, the Company or any of its
Subsidiaries (including the Delaware Sub) shall not be effective until received
by such Purchaser, the Agent, the Company or such Subsidiary, as the case may
be.

       

      11.04 Benefit of
Agreement.  This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto; provided, however, that the
Company and the Delaware Sub may not assign or transfer any of their respective
rights, obligations or interest hereunder or under any other Transaction
Document without the prior written consent of the Purchasers.

       

      11.05 No Waiver; Remedies
Cumulative.  No
failure or delay on the part of any Holder in exercising any right, power or
privilege hereunder or under any other Transaction Document and no course of
dealing between the Company, the Delaware Sub or any of the Company’s other
Subsidiaries and any Holder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or under
any other Transaction Document preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder or
thereunder.  The rights, powers and remedies herein or in any other
Transaction Document expressly provided are cumulative and not exclusive of any
rights, powers or remedies which the holder of any Note would otherwise
have.  No notice to or demand on the Company, the Delaware Sub or any
of the Company’s other Subsidiaries in any case shall entitle the Company, the
Delaware Sub or any of the Company’s other Subsidiaries to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Holders to any other or further action in any circumstances
without notice or demand.

       

      11.06 GOVERNING LAW; SUBMISSION TO
JURISDICTION; VENUE; WAIVER OF JURY TRIAL.  (a)  THIS
AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.  ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT MAY
BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE COMPANY, THE DELAWARE SUB AND THE COMPANY’S OTHER
SUBSIDIARIES HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS.  EACH OF THE COMPANY, THE DELAWARE SUB AND THE COMPANY’S OTHER
SUBSID

       


      
        
           


        

        
          38

          
            

          

        

        
           


          
             

          

        

      


      ARIES
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES AT ITS ADDRESS SET FORTH BELOW ITS SIGNATURE BELOW, SUCH SERVICE TO
BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING.  NOTHING HEREIN
SHALL AFFECT THE RIGHT OF THE AGENT UNDER THIS AGREEMENT, THE HOLDER OF ANY NOTE
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY, THE DELAWARE SUB OR ANY OF
THE COMPANY’S OTHER SUBSIDIARIES IN ANY OTHER JURISDICTION.

       

      (b)  EACH
OF THE COMPANY, THE DELAWARE SUB AND THE COMPANY’S OTHER SUBSIDIARIES HEREBY
IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR
IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN
THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY
WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.

       

      (c) EACH OF
THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.

       

      11.07 Counterparts.  This
Agreement may be executed in any number of counterparts and by the different
parties hereto on separate counterparts, each of which when so executed and
delivered shall be an original, but all of which shall together constitute one
and the same instrument.  A set of counterparts executed by all the
parties hereto shall be lodged with the Company and the Agent.

       

      11.08 Headings
Descriptive.  The
headings of the several sections and subsections of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any provision of this Agreement.

       

      11.09 Amendment or Waiver;
Etc.   Neither
this Agreement nor any other Transaction Document nor any terms hereof or
thereof may be changed, waived, discharged or terminated unless such change,
waiver, discharge or termination is in writing signed by the Company, the
Delaware Sub, the Purchasers and the Agent (at the direction of the Required
Holders).

       

      11.10 Survival.  All
indemnities set forth herein including, without limitation, in Sections 4.04, and 14.01 shall survive
the execution, delivery and termination of this Agreement, the Warrants and the
Notes.

       


      
        
           


        

        
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      Confidentiality.  (a)  Subject
to the provisions of clause (b) of this Section 14.11,
each Holder agrees that it will use its best efforts not to disclose without the
prior consent of the Company (other than to its employees, auditors, advisors or
counsel) any information with respect to the Company or any of its Subsidiaries
which is now or in the future furnished pursuant to this Agreement or any other
Transaction Document, provided that each
Holder may disclose any such information (a) as has become generally
available to the public other than by virtue of a breach of this Section 14.11(a)
by such Holder, (b) as may be required or appropriate in any report,
statement or testimony submitted to any municipal, state or Federal regulatory
body having or claiming to have jurisdiction over such Holder or to the Federal
Reserve Board or the Federal Deposit Insurance Corporation or similar
organizations (whether in the United States or elsewhere) or their successors,
(c) as may be required or appropriate in respect to any summons or subpoena
or in connection with any litigation, (d) in order to comply with any law,
order, regulation or ruling applicable to such Holder, (e) to the national
association of insurance commissioners or any similar organization or any
nationally recognized rating agency that requires access to information about
the Holder’s investment portfolio in connection with the ratings issued with
respect to such Holder, (f) to any prospective or actual transferee or
participant in connection with any contemplated transfer or participation of any
of the Notes or any interest therein by any Holder or any other direct or
indirect contractual counterparty in swap agreements or such contractual
counterparty's professional advisors; provided that such
prospective transferee or contractual counterparty agrees to be bound by the
confidentiality provisions contained in this Section 14.11
and (g) as may be used in good faith by the Agent for its marketing
purposes in a manner consistent with customary industry practice (provided that
whenever the Holder has received notice that the Company is engaged in or
reasonably intends to engage in a registered or unregistered offering of its
securities, then the Agent agrees, until completion of such offering, not to
disclose any terms relating to such offering (except for such terms as already
disclosed publicly by the Company) and not to engage in any general solicitation
or advertising (as used in Rule 502 under the Securities Act) in respect of
any securities of the Company; and, provided further,
that so long as the Company remains subject to the reporting requirements of
Section 13 or 15 of the Securities Exchange Act of 1934, as amended, the
Agent agrees not to disclose any material nonpublic information except to
persons who agree to maintain such nonpublic information in
confidence).

       

      Notwithstanding
the foregoing, the Purchasers, each Holder, the Agent, the Company and each of
its Subsidiaries (including the Delaware Sub) (and each of their respective
officers, directors, employees, accountants, attorneys and other advisors,
agents and representatives) may disclose to any and all persons, without
limitation of any kind, the U.S. tax treatment and U.S. tax structure of the
transactions contemplated by this Agreement and all materials of any kind
(including opinions or other tax analyses) that are provided to such person
relating to such tax treatment or tax structure, other than any information for
which nondisclosure is reasonably necessary in order to comply with applicable
securities laws, and except that, with respect to any document or similar item
that in either case contains information concerning the U.S. tax treatment or
U.S. tax structure of such transactions as well as other information, this
paragraph shall only apply to such portions of the document or similar item that
relate to such tax treatment or tax structure.  The Agent, the
Purchasers and each Holder agree to make commercially reasonable efforts, if to
do so would not, in the opinion of counsel to the Agent, the Purchasers and
such

       


      
        
           


        

        
          40

          
            

          

        

        
           


          
             

             

          

        

      


      Holder,
as applicable, violate any law or regulation applicable to the Agent, the
Purchasers or such Holder, to provide notice to the Company at least five days
prior to disclosing financial statements of the Company and other financial
information of the Company pursuant to this paragraph in order that the Company
may take such action as it deems appropriate to prevent such
disclosure.

       

      (b) The
Company hereby acknowledges and agrees that the Purchasers and any Holder may
share with any of its affiliates any information related to the Company or any
of its Subsidiaries (including, without limitation, any nonpublic customer
information regarding the creditworthiness of the Company and its Subsidiaries,
provided such Persons shall be subject to the provisions of this Section 13.11 to
the same extent as the Agent).

       

      11.11 Registration of
Notes.  The
Company shall keep at its principal executive office a register for the
registration and registration of transfers or partial transfers of
Notes.  The name and address of each holder of one or more Notes, each
transfer thereof and the name and address of each transferee of one or more
Notes shall be registered in such register.  Upon surrender for
registration of transfer or exchange of a Note at the principal offices of the
Company, the Company shall, at its expense, execute and deliver one or more new
Notes of like tenor and of denominations of at least $100,000 (except as may be
necessary to reflect any principal amount not evenly divisible by $100,000) of a
like aggregate principal amount, registered in the name of the Holder or a
transferee or transferees.  Prior to due presentment for registration
of transfer, the Person in whose name any Note shall be registered shall be
deemed and treated as the owner and holder thereof for all purposes hereof, and
the Company shall not be affected by any notice or knowledge to the
contrary.

       

      [SIGNATURES
APPEAR ON THE FOLLOWING PAGE]

       


      
        
           


        

        
          41

          
            

          

        

        
           


        

      


      IN
WITNESS WHEREOF, the parties hereto have caused their duly authorized officers
to execute and deliver this Agreement as of the date first above
written.

       

      
        	
                 
      

              	
                PARTICLE DRILLING
      TECHNOLOGIES, INC.,

              


      

       

      
        	
                 
      

              	
                  as
      Company

              


      

       

      
        
          	
                   
      

                	
                  By:
      /s/ JIM B. TERRY

                


        

      

       

      
        	
                 
      

              	
                Name:
      Jim B. Terry

              


      

       

      
        	
                 
      

              	
                Title:   Chief
      Executive Officer

              


      

       

      Address
for Notices:

      5611 Baird Court

      Houston, Texas 77041

      


      Attention:  Chief
Executive Officer

       

      
        	
                 
      

              	
                PARTICLE DRILLING
      TECHNOLOGIES, INC.,

              


      

       

      
        	
                 
      

              	
                  as
      Delaware Sub

              


      

       

      
        
          	
                   

                	
                  By: /s/ JIM B.
      TERRY

                


        

      

       

      
        	
                 
      

              	
                Name:
      Jim B. Terry

              


      

       

      
        	
                 
      

              	
                Title:   President

              


      

       

      Address
for Notices:

      5611 Baird Court

      Houston, Texas 77041

      


      Attention:  President

       


      
        
          
            Purchase Agreement –
Signature Page 

          

           


        

        
          42

          
            

          

        

        
           


        

      


      LC CAPITAL MASTER FUND,
LTD.,

      as
Purchaser

      


      
        
          	
                   
      

                	
                  By:
      /s/ STEVE LAMPE

                


        

      

       

      
        	
                 
      

              	
                Name:
      Steve Lampe

              


      

       

      
        	
                 
      

              	
                Title:
      Managing Member of General Partner

              


      

       

      
        	
                 
      

              	
                Address
      for Notices:

              


      

      680 5th
Avenue, 12TH
Floor

      New York,
NY 10019

      Attention:  Steve
Lampe

       

      
        	
                 
      

              	
                DON A. SANDERS, as
      Purchaser

              


      

      


      
        
          	
                   
      

                	
                  By: /s/
      DON A. SANDERS

                


        

      

      
        	
                 
      

              	
                Name:
      Don A. Sanders

              


      

      


      
        	
                 
      

              	
                Address
      for Notices:

              


      

      
        	
                 
      

              	
                5800
      JP Morgan Chase Tower

              


      

      600
Travis, Suite 5800

      Houston,
Texas 77002

      Attention:  Don
A. Sanders

      


      
        	
                 
      

              	
                EDWARD F. HEIL, as
      Purchaser

              


      

      


      
        
          	
                   
      

                	
                  By:  /s/
      EDWARD F. HEIL

                


        

      

       

      
        	
                 
      

              	
                Name:
      Edward F. Heil

              


      

       

      
        	
                 
      

              	
                Address
      for Notices:

              


      

      
        	
                 
      

              	
                c/o
      Don A. Sanders

              


      

      5800 JP
Morgan Chase Tower

      600 Travis, Suite 5800

      Houston, Texas 77002

      Attention:  Edward
F. Heil

      


      
        	
                 
      

              	
                LC CAPITAL MASTER FUND,
      LTD., as Agent

              


      

      


      
        
          	
                   
      

                	
                  By:  /s/
      STEVE LAMPE

                


        

      

       

      
        	
                 
      

              	
                Name:
      Steve Lampe

              


      

       

      
        	
                 
      

              	
                Title:
      Managing Member of General Partner

              


      

       

      
        	
                 
      

              	
                Address
      for Notices:

              


      

      680 5th
Avenue, 12th
Floor

      New York,
NY 10019

      Attention:  Steve
Lampe


      
        
          
            Purchase Agreement –
Signature Page 

          

           


        

        
          43

          
            

          

        

        
           


        

      


      Schedule
2.01

       

      


       

      
        	
                Purchasers

              	
                
                  Aggregate
      Principal Amount of Notes to be Purchased

                   

                

              	
                
                  Warrants
      to be Purchased (Representing Exercisable  Number of
      Shares)

                   

                

              
	
                LC
      Capital Master Fund, Ltd..

              	
                  U.S.$  1,020,000

              	
                6,060,670

              
	
                Don
      A. Sanders

              	
                                90,000

              	
                   534,765

              
	
                Edward
      F. Heil

              	
                                90,000

              	
                   534,765

              
	
                Total

              	
                  U.S.$
      1,200,000

              	
                7,130,200

              


      


      
        
           


        

        
          44

          
            

          

        

        
           


        

      


      SCHEDULE
5.06

      


      Existing
Indebtedness

      (As of
February 9, 2009)

      


      
        	
                Description of Indebtedness

              	
                Outstanding Amount (in US$)

              	
                Secured/Unsecured

              
	
                Automobile
      loans

              	
                      1,893

              	
                Secured

              
	
                D&O
      Insurance Note

              	
                   
      48,542

              	
                Unsecured

              
	
                Phone
      system

              	
                    
      4,096

              	
                Unsecured

              
	
                Phone
      system

              	
                   
      14,310

              	
                Unsecured

              
	 
      	
                   
      68,841

              	 
      


      


      
        
           


        

        
          45

          
            

          

        

        
           


        

      


      SCHEDULE
5.08(iii)

      


      Real
Property

      (As of
February 9, 2009)

      


       

      In April
2007, the Company entered into a 60-month lease agreement that commenced in
September 2007 for a new corporate office and operating facility located at 5611
Baird Court, Houston, Texas 77041 and delivered to the lessor a security deposit
of $41,144.  The total future minimum lease payments under this lease
were $1,741,443 at December 31, 2008.  Attached as Annex 5.08(iii) is
the list of personal property located on the premises and the related book value
of each item as of December 31, 2008.

       


      
        
           


        

        
          46

          
            

          

        

        
           


        

      


      EXHIBIT
A

       

       

      DELAYED DRAW
NOTE

       

      THE
PARTIES IN INTEREST HERETO HAVE AGREED THAT THIS NOTE SHALL BE TREATED AS A
CONTINGENT PAYMENT UNDER TREASURY REGULATION 1.1275-4(c)(4) PROMULGATED UNDER
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.

       

      THE
INTEREST THAT ACCRUES ON THIS NOTE IS PAYABLE IN-KIND AND WILL EFFECTIVELY
INCREASE THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE.  ACCORDINGLY,
THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE GREATER THAN
THE AMOUNT SHOWN ON THE FACE HEREOF.

       

      THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR (2) PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS, IN WHICH
CASE THE ISSUER HAS RECEIVED, IF REQUESTED, AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IT TO THE EFFECT THAT SUCH EXEMPTION IS APPLICABLE.

       

      


       

      PARTICLE
DRILLING TECHNOLOGIES, INC.

       

      10% SENIOR SECURED PIK NOTES DUE
2010

       

      $_____NEW YORK, NEW
YORK

       

                    [_____], 2009

       

      


      Particle Drilling Technologies, Inc.
(the “Issuer”),
a Nevada corporation, hereby promises to pay in full to the order of
_________________ (the “Holder”) the principal sum of _______ ($_____) (which
amount shall be subject to adjustment as herein provided), together with
Interest (as defined below) thereon as herein provided, in lawful money of the
United States on the terms and subject to the conditions set forth in this
promissory note (this “Note”).

       

      This Note is one of a duly authorized
issue of notes of the Issuer designated as its 10% Senior Secured PIK Notes Due
2010 (herein called  the “Notes” and each,
individually, a “Note”), issued in an
aggregate principal amount limited to $1,200,000 plus Interest thereon pursuant
to that certain Purchase Agreement (the “Purchase Agreement”),
dated as of February 11, 2009, entered into by and among the Issuer, Particle
Drilling Technologies, Inc., a Delaware co

       


      
        
          
            


            A-1

          

           


        

        
           


          
            

          

        

        
           


        

      


      poration
and a subsidiary of the Issuer, the Purchasers named therein and LC Capital
Master Fund, Ltd., as Agent of the holders of securities issued thereunder.
Capitalized terms used herein but not defined herein have the meanings ascribed
to them in the Purchase Agreement.

       

      1. Payments of
Principal.  Except as otherwise provided in Section 3, all unpaid
principal, fees and accrued and unpaid Interest on this Note shall be due and
payable in full in cash on the earlier of (a) [_____], 20102 or (b) the termination or abandonment of that
certain agreement, dated as of December 2, 2008 entered into by and between the
Issuer and Shell Exploration & Production Co. (such date, the “Maturity
Date”).

       

      2. Interest.

       

      (a) The
Issuer promises to pay interest (“Interest”) on the
unpaid principal amount of this Note to the Holder, in the manner hereinafter
provided, computed on the basis of a 365- or 366-day year, as appropriate in
light of the actual number of days in any applicable calendar year, at the rate
of TEN PERCENT (10.0%) per annum (as adjusted from time to time as provided in
this Section 2(a), the “Interest
Rate”).  Notwithstanding the foregoing, if the Interest Rate
payable under this Note is limited by applicable Law, then the Interest Rate
shall be the lesser of (i) the rate provided for in this Note and (ii) the
maximum rate permitted by applicable Law.  Interest shall be payable
quarterly in arrears on the Maturity Date, on any other date that all principal
amounts of the Notes shall be due and payable, and on the last Business Day of
each March, June, September and December of each year, commencing
on  March 31, 2009 (each date upon which interest shall be so payable,
an “Interest Payment
Date”). Interest shall accrue from the most recent Interest Payment Date
or, if no Interest Payment Date has yet occurred, from the date on which this
Note was issued.

       

      (b) On each
Interest Payment Date, the outstanding principal amount of this Note shall be
automatically increased by the amount of Interest to be paid on such Interest
Payment Date, which Interest shall be payable in arrears.  If the
payment of Interest by addition to the principal amount of this Note in the
manner set forth in the immediately preceding sentence shall for any reason be
prohibited by applicable Law on any Interest Payment Date, the Issuer shall
instead deliver to the Holder an additional promissory note (a “PIK Note”),
containing substantially the same terms and conditions as are set forth herein,
in an aggregate principal amount equal to the Interest due on this Note as of
such Interest Payment Date.

       

      3. Redemption.  This
Note is subject to prepayment at the option of the Issuer at the times and on
the terms specified in Section 4 of the Purchase Agreement, but not
otherwise.

       

      4. Payment
Terms.

       

      

        

      

        
        2 Date
that is the first anniversary of the first draw down.

      


      
        
          
            


            A-2

          

           


        

        
           


          
            

          

        

        
           


        

      


      5. All
payments of principal of, and cash Interest upon, this Note shall be made by the
Issuer to the Holder in immediately available lawful money of the United States
by wire transfer to the account or accounts designated by the Holder from time
to time.  All payments under this Note shall be made without
withholding, defense, set-off, counterclaim or other deduction.

       

      (a) Payments,
redemptions and prepayments made to the Holder by the Issuer hereunder shall be
applied first to expenses recoverable under Section 14.01 of the Purchase
Agreement, then to accrued Interest and then to principal.

       

      6. Events of
Default.  Upon the occurrence of any Event of Default specified
in Section 11.05 of the Purchase Agreement, the principal amount of this Note,
together with any Interest thereon, shall automatically become immediately due
and payable, without presentment, demand, notice, protest or other requirements
of any kind (all of which are hereby expressly waived by the
Issuer).  Upon the occurrence and during the continuance of any other
Event of Default specified in Section 11 of the Purchase Agreement, the Holder
may, by written notice to the Issuer, declare the principal amount of this Note
together with any Interest thereon to be due and payable, and the principal
amount of this Note together with any such Interest shall thereupon immediately
become due and payable without presentment, further notice, protest or other
requirements of any kind (all of which are hereby expressly waived by the
Issuer).  Following any such demand, the Issuer shall immediately pay
to the Holder all amounts due and payable with respect to this
Note.

       

      7. Security; Ranking;
Relationship to Operative Agreements.

       

      (a) This Note
is a senior secured obligation of the Issuer, secured by a first lien perfected
security interest in all of the assets and property of the Issuer as provided in
the Security Documents.

       

      (b) This Note
shall in all respects rank pari passu with all other Notes issued
pursuant to the Purchase Agreement and all Notes issued upon transfer of or
exchange for this Note and such other Notes and shall rank senior in
right of payment to all other Indebtedness of the Issuer.

       

      (c) This Note
is entitled to the benefits provided by the Purchase Agreement and the Security
Documents.

       

      8. Amendments;
Waivers.  This Note may not be changed, modified or terminated
orally, but only by an agreement in writing signed by the Issuer and the Holder
or any subsequent holder
hereof.              

       

      9. Transfer; Registration of
Transfer and Exchange; Transfer Notes.  The Holder may sell,
assign, transfer or otherwise dispose of this Note (or any portion thereof),
subject to compliance by the Holder of applicable law.

       

      10. Governing
Law.

       

      (a) THIS NOTE
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND

       


      
        
          
            


            A-3

          

           


        

        
           


          
            

          

        

        
           


        

      


      (b) BE
GOVERNED BY THE LAW OF THE STATE OF NEW YORK.  ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE
OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND,
BY EXECUTION AND DELIVERY OF THIS NOTE, THE ISSUER HEREBY IRREVOCABLY ACCEPTS
FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. THE ISSUER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO THE ISSUER AT ITS ADDRESS SET FORTH BELOW ITS SIGNATURE
BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH
MAILING.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT UNDER
THIS AGREEMENT, THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE COMPANY OR ANY OF ITS SUBSIDIARIES IN ANY OTHER JURISDICTION.

       

      (c) THE
ISSUER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS
ARISING OUT OF OR IN CONNECTION WITH THIS NOTE BROUGHT IN THE COURTS REFERRED TO
IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO
PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

       

      (d) THE
ISSUER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

       

      [Remainder
of page intentionally left blank - Signature pages follow]

       


      
        
          
            


            A-4

          

           


        

        
           


          
            

          

        

        
           


        

      


      IN WITNESS WHEREOF, the Issuer
has caused this Note to be executed and delivered by its duly authorized
officers as of the date and year and at the place first above
written.

       

      


      


      PARTICLE
DRILLING TECHNOLOGIES, INC.

      


      


      


      
        	
                 
      

              	
                By:

              	
                ___________________________

              


      

      
        	
                 
      

              	
                Name:

              	 


      

      
        	
                 
      

              	
                Title:

              	 


      

      


       


      
        
          
            


            A-5

          

           


        

        
           


          
            

          

        

        
           


        

      


      EXHIBIT
B

       

      Form of
Common Stock Purchase Warrant

       

      


       

      THIS
WARRANT AND ANY SHARES OF COMMON STOCK ISSUED UPON ANY EXERCISE HEREOF (THE
“WARRANT SHARES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (“THE SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS (1)
EITHER (A) A REGISTRATION STATEMENT WITH RESPECT THERETO SHALL BE EFFECTIVE
UNDER THE SECURITIES ACT, OR (B) AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT IS AVAILABLE, AND (2) THERE SHALL HAVE BEEN COMPLIANCE WITH ALL
APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.

       

      THE
SALE, TRANSFER, ASSIGNMENT, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION
(COLLECTIVELY, A “TRANSFER”) OF THIS WARRANT AND ANY WARRANT SHARES IS SUBJECT
TO CERTAIN RESTRICTIONS SET FORTH SECTION 10 OF THIS WARRANT.  BY
ACCEPTING ANY INTEREST IN THIS WARRANT, THE RECIPIENT OF SUCH WARRANT SHALL BE
DEEMED TO HAVE AGREED TO, AND SHALL BECOME BOUND BY, ALL OF THE TRANSFER
RESTRICTIONS CONTAINED HEREIN.  THE COMPANY WILL NOT REGISTER THE
TRANSFER OF THIS WARRANT OR ANY WARRANT SHARES ON THE BOOKS OF THE COMPANY
UNLESS AND UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF THIS
WARRANT.

       


      
        
          
            B-1

          

           


        

        
           


          
            

          

        

        
           


        

      


      Warrant
No._____

      Dated as
of February 11, 2009

      


      COMMON
STOCK PURCHASE WARRANT

      TO
PURCHASE SHARES OF COMMON STOCK OF

      PARTICLE
DRILLING TECHNOLOGIES, INC.

      PARTICLE
DRILLING TECHNOLOGIES, INC., a Nevada corporation (the “Company”),
for value received, hereby certifies that [_____] (the “Purchaser”)
or successors or registered assigns is entitled to purchase from the Company
_______3 duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock, par value $0.001 per share (the “Common
Stock”) of the Company at a purchase price per share of $0.105 (the
“Purchase
Price”), at any time or from time to time beginning on the date hereof
(the “Issue
Date”), and prior to 5:00 P.M., New York City, New York, time, on
February 11, 2012, provided that in the
event the Company does not have a registration statement in effect covering a
resale of the shares of Common Stock issuable on exercise of this Warrant on
February 11, 2012, this Warrant will remain exercisable until such a
registration statement has been effective for a three-month period after such
date (such date, as adjusted, the “Expiration
Date”), all subject to the terms, conditions and adjustments set forth
below in this Warrant.

       

      This
Warrant (the “Warrant”,
such term to include any such warrants issued in substitution therefor) was one
of the warrants issued in connection with the Purchase Agreement dated as of
February 11, 2009 by and among the Company, Particle Drilling Technologies,
Inc., a Delaware corporation and a subsidiary of the Company, the Purchasers
named therein and LC Capital Master Fund, Ltd., as Agent (the “Purchase
Agreement”).  The Warrant evidences rights to purchase an
aggregate of up to [_____]%4 of the total issued and outstanding Common
Stock of the Company on the Issue Date, shares of Common Stock being subject to
adjustment as provided herein.  Certain capitalized terms used in this
Warrant are defined in Section 1;
references to an “Exhibit” are, unless otherwise specified, to one of the
Exhibits attached to this Warrant and references to a “Section” are, unless
otherwise specified, to one of the sections of this Warrant.

       

      1. Definitions.  For
the purposes of this Warrant, the following terms shall have the meanings
indicated:

       

       “Business
Day” shall mean any day other than a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
or executive order to close.

       

      “Charter
Documents” shall
have the meaning ascribed to such term in Section
8.

       

      

        

      

        
        3 The
aggregate number of shares underlying all warrants issued pursuant to the
Purchase Agreement shall be 7,130,200.

      

        
        4 The
initial aggregate percentage of equity interest that may be purchased by
exercising all warrants issued pursuant to the Purchase Agreement is
19.95%.

      


      
        
          
            B-2

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      “Closing
Price” shall mean, with respect to each share of Common Stock for any
day, (a) the last reported sale price or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, in either case as
reported on the principal national securities exchange on which the Common Stock
is listed or admitted for trading or (b) if the Common Stock is not listed or
admitted for trading on any national securities exchange, the last reported sale
price or, in case no such sale takes place on such day, the average of the
highest reported bid and the lowest reported asked quotation for the Common
Stock, in either case as reported on the NASDAQ or a similar service if NASDAQ
is no longer reporting such information.

       

      “Commission”
shall mean the Securities and Exchange Commission or any other federal agency at
the time administering the Securities Act.

       

      “Common
Stock” shall have the meaning ascribed to such term in the first
paragraph of this Warrant.

       

      “Company”
shall have the meaning ascribed to such term in the first paragraph of this
Warrant.

       

       “Equity
Securities” shall mean (i) all shares of Common Stock and of any other
class of capital stock of the Company, (ii) all warrants and options of the
Company, including, without limitation, this Warrant and the Warrant Shares, and
any securities issued or issuable upon the exercise of such options or warrants,
(iii) all other securities of the Company directly or indirectly convertible
into or exchangeable for shares of Common Stock and (iv) any securities issued
or issuable by the Company in respect of the forgoing upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar
event.

       

      “Election
to Purchase Shares” shall have the meaning ascribed to such term in Section 2(a).

       

      “Exchange
Act” shall have the meaning ascribed to it in Section 10(c).

       

      “Exempt
Securities” shall mean (i) shares of Common Stock issued upon the
exercise of the Warrants, (ii) shares of capital stock issued by the Company on
or prior to the date hereof (and shares of capital stock issued upon the direct
or indirect conversion or exercise of any securities issued by the Company on or
prior to the date hereof, in accordance with their respective terms), (iii)
shares of Common Stock issued pursuant to a public offering, (iv) shares of
Common Stock (including shares issuable upon the exercise or exchange of
warrants or options to acquire shares of Common Stock) issued solely to the
employees, directors or consultants of the Company or any of its subsidiaries
pursuant to a stock option or ownership plan or program or any stock issuance
arrangement in existence as of the Issue Date or adopted by the Board of
Directors of the Company and approved by a majority of the Company’s Common
Stock holders after the Issue Date, representing not more than 7% of the total
common equity of the Company determined on a fully-diluted basis as of the Issue
Date, and (v) shares of Company capital stock issued upon the direct or indirect
conversion or exercise of any of the forgoing securities, in accordance with
their terms.

       


      
        
          
            B-3

          

           


        

        
           


          
            

          

        

        
           


        

      


      “Exercise
Date” shall have the meaning ascribed to such term in Section 2(e).

       

      “Expiration
Date” shall have the meaning ascribed to such term in the first paragraph
of this Warrant.

       

      “Fair
Market Value” shall be determined in accordance with Section 3(e).

       

      “Holder” shall mean the registered
holder of this Warrant.

       

      [“LC”
shall mean LC Capital Master Fund, Ltd. or any of its affiliates.]5

       

      “NASDAQ”
shall mean the Automatic Quotation System of the National Association of
Securities Dealers, Inc.

       

      “Notes” shall mean the $1,200,000
Senior Secured PIK Notes Due 2010 issued and sold by the Company pursuant to the
Purchase Agreement to the Purchasers named therein.

       

       “Person”
shall mean any individual, firm, corporation, limited liability company,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision thereof)
or other entity of any kind, and shall include any successor (by merger or
otherwise) of such entity.

       

       “Purchase
Price” shall have the meaning ascribed to such term in the first
paragraph of this Warrant.

       

      “Purchaser”
shall have the meaning ascribed to such term in the first paragraph of this
Warrant.

       

       “Registrable
Securities” shall mean (a) any shares of Common Stock or other securities
issued or issuable upon exercise of this Warrant and any other warrants issued
pursuant to the terms of the Purchase Agreement and (b) any securities issued or
issuable with respect to any securities referred to in the foregoing subdivision
by way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise.  As to any particular Registrable Securities, once issued
such securities shall cease to be Registrable Securities when (a) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, (b) they shall be eligible
for sale to the public pursuant to Rule 144 (or any successor provision) under
the Securities Act without any restrictions on volume or manner of sale, (c)
they shall have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent disposition of them shall not require registration
or

      

        

      

        
        5 Insert
the bracketed language if this Warrant is issued to LC Capital Master Fund, Ltd.
or any of its affiliates.

      


      
        
          
            B-4

          

           


        

        
           


          
            

          

        

        
           


        

      


      qualification
of them under the Securities Act or any similar state law then in force, or (d)
they shall have ceased to be outstanding.

      “Registration
Expenses” shall mean all expenses incidental to the Company’s performance
of or compliance with Section 11,
including, without limitation, all registration, filing and NASD fees, all fees
and expenses of complying with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or “cold comfort”
letters required by or incident to such performance and compliance, the fees and
disbursements of any counsel and accountants retained by the holder or holders
of the Registrable Securities being registered, premiums and other costs of
policies of insurance against liabilities arising out of the public offering of
the Registrable Securities being registered and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions and transfer taxes, if any; provided, that, in
any case where Registration Expenses are not to be borne by the Company, such
expenses shall not include salaries of Company personnel or general overhead
expenses of the Company, auditing fees, premiums or other expenses relating to
liability insurance required by underwriters of the Company or other expenses
for the preparation of financial statements or other data normally prepared by
the Company in the ordinary course of its business or which the Company would
have incurred in any event.

       

      [“Release
Event” shall have the meaning ascribed to such term in Section 12 of this
Warrant.]6

       

      “Required
Holders” shall mean, as of any date of determination, Holders holding in
the aggregate more than 50% of all of the warrants issued pursuant to the
Purchase Agreement  and outstanding.

       

       “Sale of
the Company” shall have the meaning ascribed to such term in Section
3(i).

       

      [“Section 4350” shall have the
meaning ascribed to such term in Section 12 of this
Warrant.]7

       

      “Securities
Act” shall mean the Securities Act of 1933, or any similar federal
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time.

       

       “Purchase
Agreement” shall have the meaning ascribed to such term in the second
paragraph of this Warrant.

       

      “Transfer”
shall mean any sale, transfer, assignment, conveyance or other disposition,
including without limitation by merger, operation of law, bequest or pursuant to
any d

       

      

        

      

        
        6 Insert
the bracketed language if this Warrant is issued to LC Capital Master Fund, Ltd.
or any of its affiliates.

      

        
        7 Insert
the bracketed language if this Warrant is issued to LC Capital Master Fund, Ltd.
or any of its affiliates.

      


      
        
          
            B-5

          

           


        

        
           


          
            

          

        

        
           


        

      


      mestic
relations order, whether voluntarily or involuntarily, other than a sale,
transfer, assignment, conveyance or other disposition by or to the Company;
provided, that
a pledge or the creation of a lien on the Common Stock shall not constitute a
Transfer if the instrument creating such pledge or lien specifically references
this Warrant and the pledgee or holder of the lien specifically agrees to be
bound by the provisions hereof; provided further, that any
foreclosure (including the retention of the collateral in satisfaction of any
obligations) shall constitute a Transfer.

       

      [“Voting
Restriction” shall have the meaning ascribed to such term in Section 12
of this Warrant.]8

       

       “Warrant”
shall mean this Warrant and any subsequent Warrant issued pursuant to the terms
of this Warrant.

       

      [“Warrants”
shall mean, collectively, this Warrant and all other warrants issued pursuant to
the Purchase Agreement.]9

       

       “Warrant
Shares” shall mean the shares of Common Stock deliverable upon proper
exercise of this Warrant and/or other Warrants, as the case may be.

       

       “Warrant
Register” shall have the meaning ascribed to such term in Section 10(a).

       

      2. Exercise of
Warrant.

       

      (a) Exercise.  This
Warrant may be exercised, in whole or in part, at any time or from time to time
during the period beginning on the Issue Date and ending on the Expiration Date,
by surrendering to the Company at its principal office this Warrant, with the
form of Election to Purchase Shares (the “Election
to Purchase Shares”) attached hereto as Exhibit A duly
executed by the Holder and accompanied by payment of the aggregate Purchase
Price (rounded to the nearest whole cent) for the number of shares of Common
Stock specified in the Election to Purchase Shares.

       

      (b) Delivery of Shares; Payment
of Purchase Price.  As soon as practicable after each exercise
of this Warrant, in whole or in part, and in any event within five Business Days
thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued and delivered to the Holder a
certificate or certificates for the number of shares of Common Stock set forth
in the Election to Purchase Shares, in such name or names as

       

      

        

      

        
        8 Insert
the bracketed language if this Warrant is issued to LC Capital Master Fund, Ltd.
or any of its affiliates.

      

        
        9 Insert
the bracketed language if this Warrant is issued to LC Capital Master Fund, Ltd.
or any of its affiliates.

      


      
        
          
            B-6

          

           


        

        
           


          
            

          

        

        
           


        

      


      (c) may be
designated by such Holder (subject to Section 10
hereof), and, as set forth in Section 6, a
check for the amount of cash to be paid in lieu of issuance of fractional
shares, if any.  Payment of the Purchase Price may be
made:  (i) in United States currency by cash or delivery of a
certified check, bank draft or postal or express money order payable to the
order of the Company or by wire transfer to such account as specified by the
Company in writing to the Holder, (ii) by surrender of a number of shares of
Common Stock held by the Holder equal to the quotient obtained by dividing (A)
the aggregate Purchase Price payable with respect to the portion of this Warrant
then being exercised by (B) the Fair Market Value per share of Common Stock
on the Exercise Date, or (iii) by any combination of clauses (i) and
(ii).

       

      (d) Partial
Exercise.  If this Warrant is exercised for less than all of
the shares of Common Stock purchasable upon exercise of this Warrant, the
Company shall cancel this Warrant upon surrender hereof and shall execute and
deliver to the Holder a new Warrant of like tenor for the balance of the shares
of Common Stock purchasable hereunder.

       

      (e) Alternative Cashless
Exercise.  Notwithstanding any provision herein to the
contrary, in lieu of exercising this Warrant as set forth above, the Holder may
exercise this Warrant by electing to receive that number of shares of Common
Stock as determined below by surrendering to the Company at its principal office
this Warrant, with the applicable Election to Purchase Shares duly executed by
the Holder, in which event the Company shall issue to the Holder the number of
shares of Common Stock computed using the following formula:

       

      CS =
WCS x (MP –
PP)

              MP

      where:

       

      CS
equals the number of shares of Common Stock to be issued to the
Holder

       

      WCS
equals the number of Warrant Shares represented by this Warrant to be
exercised

       

      MP
equals the Common Stock Fair Market Value per share (on the date of such
calculation)

       

      PP
equals the Purchase Price

       

      Following
the surrender of this Warrant pursuant to this Section 2(d),
the Company shall promptly issue and deliver to the Holder a certificate or
certificates for that number of shares of Common Stock, as calculated above in
such name or names as may be designated by such Holder (subject to Section 10
hereof).

       


      
        
          
            B-7

          

           


        

        
           


          
            

          

        

        
           


        

      


      When Exercise
Effective.  The exercise of this Warrant shall be deemed to
have been effective immediately prior to the close of business on the Business
Day on which this Warrant is surrendered to and the Purchase Price is received
by the Company as provided in this Section 2 (the
“Exercise
Date”) and the Person in whose name any certificate for shares of Common
Stock shall be issuable upon such exercise, as provided in Section 2(b),
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.

       

      (f) Warrant Shares Fully Paid,
Nonassessable.  The Company shall take all actions necessary to
ensure that following exercise of this Warrant in accordance with the provisions
of this Section 2, the
Warrant Shares issued hereunder shall, without further action by the Holder, be
fully paid and nonassessable, free from all taxes (excluding any taxes on income
realized or recognized by the Holder), liens, charges and security interests
with respect to the issue thereof.  The Warrant Shares shall be issued
with restrictive legends.

       

      (g) Continued
Validity.  A Holder of shares of Common Stock issued upon the
exercise of this Warrant, in whole or in part, shall continue to be entitled to
all of the rights and subject to all of the obligations set forth in Section 10
hereof.

       

      (h) Company to Reaffirm
Obligations.  The Company will, at the time of each exercise of
this Warrant, upon the request of the Holder hereof, acknowledge in writing its
continuing obligation to afford to such Holder all rights (including, without
limitation, any rights to registration) to which such Holder shall continue to
be entitled after such exercise in accordance with the terms of this Warrant,
provided that
if the Holder of this Warrant shall fail to make any such request, such failure
shall not affect the continuing obligation of the Company to afford such rights
to such holder.

       

      3. Adjustment of Purchase Price
and Number of Shares.  The Purchase Price and the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
from time to time upon the occurrence of the events described in this Section 3.

       

      (a) Dividend, Subdivision or
Combination of Common Stock.  If the Company shall, at any time
or from time to time, (i) declare a dividend on the Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock into a
larger number of shares of Common Stock or (iii) combine the outstanding Common
Stock into a smaller number of shares of its Common Stock, then in each such
case, the number of shares of Common Stock issuable on such date and the
Purchase Price shall be proportionately adjusted so that the Holder of any
Warrant exercised after such date shall be entitled to receive, upon payment of
the same aggregate amount as would have been payable before such date, the
aggregate number of shares of Common Stock which, if such Warrant had been
exercised immediately prior to such date, such Holder would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision or
combination.  Any such adjustment shall become effective immediately
after the record date of such dividend or the effective date of such subdivision
or combination.  Such adjustment shall be made successively whenever
any event listed above shall occur.  If a dividend is declared and
such dividend is not paid, the number of shares of Common Stock issuable
pursuant to this Warrant on such date and the Purchase Price shall again be
adjusted to be such number and Purchase Price, as applicable, in effect
immediately prior to such record date

       


      
        
          
            B-8

          

           


        

        
           


          
            

          

        

        
           


        

      


      (b) (giving
effect to all adjustments that otherwise would be required to be made pursuant
to this Section 3 from
and after such record date).

       

      (c) Issuance of Rights to
Purchase Common Stock Below Fair Market Value.

       

      (i)           Except
to the extent any of the following constitute Exempt Securities, if the Company
shall, at any time or from time to time, fix a record date for the issuance of
rights, options or warrants to holders of Common Stock entitling them to
subscribe for or purchase Common Stock, or securities convertible into Common
Stock (including any adjustments thereof pursuant to such securities’
anti-dilution provisions), or issue any of the foregoing, at a price per share
of Common Stock or having a conversion price per share of Common Stock if a
security is convertible into Common Stock (determined in either such case by
dividing (x) the total consideration received or receivable by the Company in
consideration of the sale or issuance of such rights, options, warrants or
convertible or exchangeable securities, plus the total consideration payable to
the Company upon exercise or conversion or exchange thereof, by (y) the total
number of shares of Common Stock covered by such rights, options, warrants or
other securities convertible into Common Stock) which is lower than the Fair
Market Value per share of Common Stock on such record date, then, the Purchase
Price shall be reduced to the price determined by multiplying the Purchase Price
in effect immediately prior to such record date by a fraction, the numerator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date plus the number of additional shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock so to be
offered (or the aggregate initial conversion price of the convertible securities
so to be offered) would purchase at the Fair Market Value per share of Common
Stock and the denominator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible).  In case such
price for subscription or purchase may be paid in a consideration part or all of
which shall be in a form other than cash, the value of such consideration shall
be determined in good faith by the Board of Directors of the
Company.  Any such adjustment shall become effective immediately after
the record date for such rights or warrants.  Such adjustment shall be
made successively whenever such a record date is fixed.  If such
rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to the Purchase Price that otherwise would be in effect but for the
fact such record date was fixed (giving effect to all adjustments that otherwise
would be required to be made pursuant to this Section 3 from
and after such record date).

       

      (ii)           Notwithstanding
any provision in Section 3 to the
contrary and without limitation to any other provision contained in Section 3, in
the event that (A) the purchase price payable for any rights, options, warrants
or convertible securities referred to in Section 3(b)(i),
(B) the additional consideration, if any, payable upon the exercise of such
rights, options or warrants or the conversion of such convertible securities
referred to in Section 3(b)(i)
or (C) the rate at which any such convertible securities referred to in Section 3(b)(i)
are convertible into additional shares of Common Stock shall change, the
Purchase Price in effect at the time of such event shall forthwith be readjusted
to the Purchase Price that would have been in effect at such time had such
rights, options, warrants or convertible securities provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time in

       


      
        
          
            B-9

          

           


        

        
           


          
            

          

        

        
           


        

      


      tially
granted, issued or sold.  On the expiration of any such rights,
options or warrants not exercised or of any such right to convert under any such
convertible securities not exercised, the Purchase Price then in effect
hereunder shall forthwith be increased to the Purchase Price that would have
been in effect at the time of such expiration or termination had such rights,
options, warrants or convertible securities never been issued.  No
readjustment pursuant to this Section 3(b)(ii)
shall have the effect of increasing the Purchase Price by an amount in excess of
the adjustment originally made to the Purchase Price in respect of the grant,
issue or sale of the applicable rights, options, warrants or convertible
securities.

       

      (d) Certain
Distributions.  If the Company shall, at any time or from time
to time, fix a record date for the distribution to all holders of Common Stock
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of capital stock or
other securities, evidences of indebtedness, assets or other property (other
than regularly scheduled cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in capital stock
for which adjustment is made under Section 3(a)) or
subscription rights, options or warrants (excluding those referred to in Section 3(b)),
then, the
Purchase Price shall be reduced to the price determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction
(which shall in no event be less than zero), the numerator of which shall be the
Fair Market Value per share of Common Stock on such record date, less the fair
market value (as determined in good faith by the Board of Directors of the
Company) of the portion of the assets, evidences of indebtedness, other
property, subscription rights or warrants so to be distributed applicable to one
share of Common Stock and the denominator of which shall be such Fair Market
Value per share of Common Stock.  Any such adjustment shall become
effective immediately after the record date for such
distribution.  Such adjustments shall be made successively whenever
such a record date is fixed.  In the event that such distribution is
not so made, the Purchase Price shall be adjusted to the Purchase Price in
effect immediately prior to such record date (giving effect to all adjustments
that otherwise would be required to be made pursuant to this Section 3 from
and after such record date).

       

      (e) Issuance of Common Stock
Below Fair Market Value.

       

      (i)           If
the Company shall, at any time and from time to time, after the date hereof,
directly or indirectly, sell or issue shares of Common Stock (other than Exempt
Securities) (regardless of whether originally issued or from the Company’s
treasury) at a price per share of Common Stock which is lower than the Fair
Market Value per share of Common Stock, then, subject to
clause (ii) of this Section 3(d),
the Purchase Price shall be reduced to a price determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such sale or issuance plus the number of shares of Common
Stock which the aggregate consideration received (determined as provided below)
for such sale or issuance would purchase at the Fair Market Value per share of
Common Stock and the denominator of which shall be the total number of shares of
Common Stock outstanding immediately after such sale or
issuance.  Such adjustment shall be made successively whenever such
sale or issuance is made.  If the Company shall sell or issue shares
of Common Stock for a consideration consisting, in whole or in part, of property
other than cash or its equivalent, then in determining the “price
per

       


      
        
          
            B-10

          

           


        

        
           


          
            

          

        

        
           


        

      


      share of
Common Stock” and the “consideration” received or receivable by or payable to
the Company for purposes of the first sentence and the immediately preceding
sentence of this Section 3(d),
the fair value of such property shall be determined in good faith by the Board
of Directors of the Company.

       

      (ii)           No
adjustment shall be made to the Purchase Price pursuant to clause (i) of
this Section
3(d) in connection with the issuance of (A) shares issued in any of the
transactions described in Section 3(a),
(b) and (c) hereof, including
upon the exercise of any right, option, warrant or convertible or exchangeable
security and (B) shares issued upon exercise of this Warrant.

       

      (f) Determination of Fair Market
Value.  For the purpose of any computation under Section (b), (c)
or (d) of this
Section 3
or any other provision of this Warrant, the Fair Market Value per share of
Common Stock on any date shall be deemed to be the average of the daily Closing
Prices per share of Common Stock for the 10 consecutive trading days commencing
15 trading days before such date.  If on any such date the shares of
Common Stock are not listed or admitted for trading on any national securities
exchange or quoted by NASDAQ or a similar service, then the Fair Market Value
per share of Common Stock shall be determined by mutual agreement of the Board
of Directors of the Company and a majority of the Holders of the
Warrants.

       

      (g) Adjustments to Other
Shares.  In the event that at any time, as a result of an
adjustment made pursuant to Section 3(h),
the Holder shall become entitled to receive, upon exercise of this Warrant, any
shares of capital stock of the Company other than shares of Common Stock, the
number of such other shares so receivable upon exercise of this Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the shares of Common
Stock contained in Sections 3(a), (b),
(c), (d), (g) and (h), inclusive, and
the provisions of Sections 2, 6, 7
and 8 with
respect to the shares of Common Stock shall apply on like terms to any such
other shares.

       

      (h) Adjustment of Number of
Shares Issuable Upon Exercise.  Upon each adjustment of the
Purchase Price as a result of the calculations made in Section 3(a), (b),
(c) or (d), this Warrant
shall thereafter evidence the right to receive, at the adjusted Purchase Price,
that number of shares of Common Stock (calculated to the nearest one-hundredth)
obtained by dividing (x) the product of the aggregate number of shares of Common
Stock covered by this Warrant immediately prior to such adjustment and the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price by (y) the Purchase Price in effect immediately after such adjustment of
the Purchase Price.

       

      (i) Reorganization,
Reclassification, Merger and Sale of Assets.

       

      (i) Other
than in the cases referred to in Sections 3(a), (b),
(c) and (d), if there occurs
any capital reorganization or any reclassification of the Common Stock of the
Company, the consolidation or merger of the Company with or into another Person
or the sale or conveyance of all or substantially all of the properties or
assets of the Company to another Person, then, the Holder will thereafter be
entitled to receive, upon the exercise of this Warrant in

       


      
        
          
            B-11

          

           


        

        
           


          
            

          

        

        
           


        

      


      (ii) accordance
with the terms hereof, the same kind and amounts of securities (including shares
of stock) or other assets, or both, which were issuable or distributable to the
holders of outstanding Common Stock of the Company upon such reorganization,
reclassification, consolidation, merger, sale or conveyance, in respect of that
number of shares of Common Stock then deliverable upon the exercise of this
Warrant if this Warrant had been exercised immediately prior to such
reorganization, reclassification, consolidation, merger, sale or conveyance;
and, in any such case, appropriate adjustments (as determined in good faith by
the Board of Directors of the Company) shall be made to assure that the
provisions hereof (including provisions with respect to changes in, and other
adjustments of, the Purchase Price) shall thereafter be applicable, as nearly as
reasonably may be practicable, in relation to any securities or other assets
thereafter deliverable upon exercise of this Warrant.

       

      (iii) Notwithstanding
anything contained in this Warrant or in the Purchase Agreement to the contrary,
the Company will not effect any of the transactions described in clauses (i) of
this Section 3(h)
unless, prior to the consummation thereof, each Person (other than the Company)
which may be required to deliver any stock, securities, cash or property upon
the exercise of this Warrant as provided herein shall assume, by written
instrument delivered to, and reasonably satisfactory to, the Holder of this
Warrant, (a) the obligations of the Company under this Warrant (and if the
Company shall survive the consummation of such transaction, such assumption
shall be in addition to, and shall not release the Company from, any continuing
obligations of the Company under this Warrant) and (b) the obligation to deliver
to such Holder such shares of stock, securities, cash or property as, in
accordance with the foregoing provisions of this Section 3, such
Holder may be entitled to receive, and such Person shall have similarly
delivered to such Holder an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such Holder, stating that this Warrant shall
thereafter continue in full force and effect and the terms hereof (including,
without limitation, all of the provisions of this Section 3) shall
be applicable to the stock, securities, cash or property which such Person may
be required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.  Nothing in this Section 3 shall
be deemed to authorize the Company to enter into any transaction not otherwise
permitted by the Purchase Agreement.

       

      (j) Notice of Company
Sale.  The Company shall provide the Holders written notice of
any issuance by the Company of more than 20% of the issued and outstanding
Common Stock of the Company to another Person, the consolidation or merger of
the Company with or into another Person or the sale or conveyance of all or
substantially all of the properties or assets of the Company to another Person
(a “Sale of
the Company”) as promptly as practicable upon the consummation of such
sale, and in any event within two Business Days after such
consummation.

       

      (k) Purchase Price Below Par
Value.  Notwithstanding anything contained herein, in the event
that and only to the extent that the Purchase Price as adjusted hereunder is
less than the par value per share of the Common Stock issuable pursuant to the
exercise of this Warrant, such adjusted Purchase Price shall be used only for
the purposes of adjusting the number of shares issuable upon exercise of this
Warrant.  In no event shall the Purchase Price paid upon the exercise
of this Warrant be less than the par value per share of the Common Stock
issuable pursuant to the exercise of this Warrant.

       


      
        
          
            B-12

          

           


        

        
           


          
            

          

        

        
           


        

      


      (l) De Minimis
Adjustments.  Unless stated otherwise herein, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 0.1% in the Purchase Price; provided, however, that any
adjustments not required to be made by virtue of this sentence shall be carried
forward and taken into account in any subsequent adjustment.  All
calculations under this Section 3 shall
be made to the nearest one hundredth (1/100) of a cent or the nearest one tenth
(1/10) of a share of Common Stock (or other securities issued or issuable upon
exercise of this Warrant), as the case may be.

       

      (m) Computations.  The
computations of all amounts under this Section 3 shall
be made assuming all other antidilution or similar adjustments to be made to the
terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 3 have
previously been made so as to maintain the relative economic interest of this
Warrants vis à vis all other securities issued by the Company.

       

      4. Other Dilutive
Events.  In case any event shall occur as to which the
provisions of Section 3 are
not strictly applicable but the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principles of such sections’, then, in each such case, upon
the request of the Required Holders, the Company shall appoint a firm of
independent certified public accountants of recognized national standing (which
may be the regular auditors of the Company or such other independent certified
public accountants selected by the Company), which shall give their opinion upon
the adjustment, if any, on a basis consistent with the essential intent and
principles established in Section 3,
necessary to preserve, without dilution, the purchase rights represented by this
Warrant.  Upon receipt of such opinion, the Company will promptly mail
a copy thereof to such Holder and shall make the adjustments described
therein.

       

      5. Statement of
Adjustments.  Whenever the Purchase Price and the number of
shares of Common Stock issuable, or the securities or other property
deliverable, upon the exercise of this Warrant shall be adjusted pursuant to the
provisions hereof, the Company shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Company, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
Purchase Price and number of shares of Common Stock issuable, or the securities
or other property deliverable, upon the exercise of this Warrant, that shall be
in effect after such adjustment.  The Company shall also cause a copy
of such statement to be sent by first class certified mail, return receipt
requested and postage prepaid, to the Holder at such Holder’s address appearing
on the Company’s records as promptly as practicable and in any event within 20
days of the occurrence of such event.

       

      6. Fractional
Shares.  Notwithstanding an adjustment pursuant to Section 3(g) in
the number of shares of Common Stock covered by this Warrant or any other
provision of this Warrant, the Company shall not be required to issue fractions
of shares upon exercise of this Warrant and to distribute certificates which
evidence fractional shares.  In lieu of fractional shares, the Company
shall notify the Holder in writing of the amount to be paid in lieu of the
fraction of a share of the Common Stock and concurrently pay to the Holder, at
the time of exercise of this Warrant as herein provided, an amount in cash equal
to such fraction multiplied by the Fair Market Value of a share of Common Stock
on the Exercise Date rounded to the nearest whole cent.

       


      
        
          
            B-13

          

           


        

        
           


          
            

          

        

        
           


        

      


      7. Notice of Proposed
Actions.  In case the Company shall propose at any time or from
time to time (a) to declare or pay any dividend payable in stock of any class to
the holders of Common Stock or to make any other distribution to the holders of
Common Stock (other than a regularly scheduled cash dividend), (b) to offer to
the holders of Common Stock rights or warrants to subscribe for or to purchase
any additional shares of Common Stock or shares of stock of any class or any
other securities, rights or options, other than Exempt Securities, (c) to effect
any reclassification of its Common Stock, (d) to effect any consolidation,
merger or sale, transfer or other disposition of all or substantially all of the
property, assets or business of the Company which would, if consummated, adjust
the Purchase Price or the securities issuable upon exercise of this Warrants or
(e) to effect the liquidation, dissolution or winding up of the Company, then,
in each such case, the Company shall give to the Holder, in accordance with
Section 17, a
written notice of such proposed action, which shall specify (i) the record date
for the purposes of such stock dividend, distribution of rights or warrants, or
if a record is not to be taken, the date as of which the holders of shares of
Common Stock of record to be entitled to such dividend, distribution of rights
or warrants is to be determined, or (ii) the date on which such
reclassification, consolidation, merger, sale, transfer, disposition,
liquidation, dissolution or winding up is expected to become effective, and such
notice shall be so given as promptly as possible but in any event at least 10
Business Days prior to the applicable record, determination or effective date
specified in such notice.

       

      8. No Dilution or
Impairment.  The Company will not, by amendment of its articles
of incorporation, bylaws or such other constitutive documents (collectively, the
“Charter
Documents”) or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
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 the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
dilution or other impairment.  Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any shares of
stock receivable on the exercise of this Warrant above the amount payable
therefor on such exercise, (b) will at all times reserve and keep available the
maximum number of its authorized shares of Common Stock, free from all
preemptive rights therein, which will be sufficient to permit the full exercise
of this Warrant and (c) will take all such action as may be necessary or
appropriate in order that all shares of Common Stock as may be issued pursuant
to the exercise of this Warrant will, upon issuance, be duly and validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issuance thereof.

       

      9. Replacement of
Warrants.  On receipt by the Company of an affidavit of an
authorized representative of the Holder stating the circumstances of the loss,
theft, destruction or mutilation of this Warrant, the Company at its expense
will promptly execute and deliver, in lieu thereof, a new Warrant of like tenor
which shall be exercisable for a like number of shares of Common
Stock.  If required by the Company, in the case of any such loss,
theft or destruction of any Warrant held by a Person other than the Purchaser or
any institutional investor, such holder must provide an indemnity bond or other
indemnity sufficient in the judgment of the Company to protect the Company from
any loss which it may suffer if a lost, stolen or destroyed Warrant is replaced,
or in the case of any such mutilation, such holder must surrender such Warrant
for  cancellation.

       


      
        
          
            B-14

          

           


        

        
           


          
            

          

        

        
           


        

      


      10. Restrictions on Transfer;
Registration of Transfers.

       

      (a) Restrictions on
Transfer.    Subject to any applicable laws, this
Warrant and all rights hereunder shall be transferrable to any transferee
designated by Holder upon delivery of this Warrant together with a Form of
Assignment attached hereto as Exhibit B at the principal office of the
Company.

       

      (b) Registration.  The
Company shall maintain a register (the “Warrant
Register”) in its principal office for the purpose of registering the
Warrants and any Transfer thereof, which register shall reflect and identify, at
all times, the ownership of any interest in the Warrants.  Upon the
issuance of this Warrant, the Company shall record the name of the initial
purchaser of this Warrant in the Warrant Register as the first
Holder.  The Company shall from time to time, register in the Warrant
Register a Transfer of this Warrant, upon surrender thereof together with a
properly executed Form of Assignment attached hereto as Exhibit B at the
principal office of the Company, subject to the compliance of such Transfer with
the Transfer restrictions set forth in this Section 10.  Upon
any such registration of Transfer, the Company shall, at its expense, execute
and deliver one or more new Warrants of like tenor which shall be exercisable
for a like aggregate number of shares of Common Stock, registered in the name of
the Holder or a transferee or transferees and the surrendered Warrant shall be
cancelled by the Company.  This Warrant, if properly assigned, may be
exercised by a new Holder without a new Warrant first having been
issued.

       

      (c) Legend.  This
Warrant and the Warrant Shares will include a restrictive legend in
substantially the form as set forth on the cover of this
Warrant.  Upon termination of such restrictions on Transfer, the
Holder shall be entitled to receive from the Company, without expense (other
than applicable transfer taxes, if any) a new Warrant or certificates evidencing
shares of Common Stock issued upon the exercise of this Warrant of like tenor
without such legend.

       

      11. Registration under the
Securities Act.

       

      (a) Filing of Registration
Statement. The Company shall file with the Commission within sixty (60)
days after the Issue Date and use its commercially reasonable efforts to cause
to become effective a resale shelf Registration Statement for an offering on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of all
of the Registrable Securities held by each Holder that has provided the Company
all information requested pursuant to Section 11(g)(iv)
within 15 business days of such request ( a “Resale
Registration Statement”).

       

      (b) Notice of Registration
Status.  Not more than fifty (50) days and not less than
forty-five (45) days after the Issue Date, the Company shall deliver to the
Holder a notice in writing confirming whether or not the Resale Registration
Statement has been declared effective by the Commission and, if not, the steps
taken by the Company in connection with the filing and progression of the Resale
Registration Statement, the status of the filing, the extent of comments and
responses in connection with such registration and the Company’s estimate of the
date by which the Resale Registration Statement will be declared
effective.

       


      
        
          
            B-15

          

           


        

        
           


          
            

          

        

        
           


        

      


      (c) Effectiveness. The
Company shall keep such Resale Registration Statement continuously effective
under the Securities Act until (i) there are no longer any Registrable
Securities saleable thereunder or (ii) such date that is one year after the
Expiration Date, whichever is earlier.  To the extent permitted by
applicable law and interpretations of the staff of the Commission, the Resale
Registration Statement may be terminated with respect to the Registrable
Securities on the date that there are no longer any Registrable Securities
saleable thereunder.

       

      (d) Expenses. The Company
shall pay all Registration Expenses in connection with any registration of
Registrable Securities pursuant to this Section 11.

       

      (e) Registration of Other
Securities.  No registration statement filed in accordance with
this Section 11
may include any securities of the Company other than Registrable
Securities.

       

      (f) Selection of
Underwriters.  If a registration pursuant to this Section 11
involves an underwritten offering, the underwriter or underwriters thereof shall
be selected by the holders of at least a majority (by number of shares) of the
Registrable Securities.

       

      (g) Additional Provisions
Concerning Registration.  The following provisions of this
Section 11(g)
are applicable to any registration statement filed pursuant to this Section 11:

       

      (i)           The
Company shall furnish to each seller of Registrable Securities covered by such
registration statement such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus contained in
such registration statement (including each preliminary prospectus and any
summary prospectus) and such other documents as such seller may reasonably
request.

      (ii)           The
Company shall use its reasonable best efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities laws or blue sky laws of such
jurisdictions as any seller thereof shall reasonably request, to keep such
registrations and qualifications in effect for so long as such registration
statement remains in effect, and take any other action which may be reasonably
necessary or advisable to enable such seller to consummate the disposition in
such jurisdiction of the securities owned by such seller, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not but
for the requirements of this clause (ii) be obligated to be so qualified or to
consent to general service of process in any such jurisdiction.

      (iii)           The
Company shall use its reasonable best efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof to consummate the disposition of such
Registrable Securities.

      (iv)           In
connection with any registration statement in which a holder of Registrable
Securities is participating, each such seller shall furnish to the Company such
written information and affidavits as the Company reasonably requests for use in
conne


      
        
          
            B-16

          

           


        

        
           


          
            

          

        

        
           


        

      


      tion with
any such registration statement or prospectus to the extent necessary to permit
the disposition of the Registrable Securities so to be registered.

      (v)           In
the event of any registration of any securities of the Company under the
Securities Act, the Company shall indemnify and hold harmless, to the fullest
extent permitted by applicable law, the holder of any Registrable Securities
covered by such registration statement, its directors, officers, employees,
advisors, agents, representatives, partners and members and each other Person
who participates as an underwriter (within the meaning of the Securities Act) in
the offering or sale of such securities and each other Person, if any, who
controls such holder or any such underwriter (within the meaning of the
Securities Act) from and against any and all losses, claims, damages and
liabilities (or actions or proceedings) arising out of or based upon any untrue
statement or alleged untrue statement of material fact contained in any
registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein or any amendment or supplement thereto, or any
omission or alleged omissions to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Company shall reimburse such holder and each such director, officer,
employee, advisor, agent, representative, partner, member, underwriter and
control person for any legal or any other expenses (including fees and expenses
of counsel, which counsel may, if the holder or holders of Registrable
Securities request, be separate from counsel for the Company) reasonably
incurred by them in connection with investigating, preparing or defending any
such loss, claim, liability, action or proceeding; provided, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability (or action or proceeding respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with an instrument duly executed
by such holder specifically stating that it is for use in the preparation
thereof; provided, further, that the
Company shall not be liable to any Person who participates as an underwriter, in
the offering or sale of Registrable Securities or to any other Person, if any,
who controls such underwriter (within the meaning of the Securities Act), in any
such case to the extent that any such loss, claim, damage, liability (or action
or proceeding in respect thereof) or expense arises out of such Person’s failure
to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus.  Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such holder or any such director, officer, employee,
advisor, agent, representative, partner, member, underwriter and control person
and shall survive the transfers of such securities by such holder.

      (vi)           Neither
the giving of any notice by any holder of Registrable Securities nor the making
of any request for prospectuses imposes any upon any holder making such request
any obligation to sell any Registrable Securities or exercise this
Warrant.


      
        
          
            B-17

          

           


        

        
           


          
            

          

        

        
           


        

      


      (vii)           The
registration rights in this Section 11 may
be assigned by any holder in connection with a permitted Transfer of this
Warrant.

      (viii)                      The
Company’s agreements with respect to this Warrant or the Registrable Securities
in this Section 11 shall
not be affected by the exercise and surrender of this Warrant.

      (h) Registration of Common
Stock; Listing Rights.  If any shares of Common Stock required
to be reserved for purposes of exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
(other than the Securities Act) before such shares may be issued upon exercise,
the Company will, at its expense and as expeditiously as possible, use its best
efforts to cause such shares to be duly registered or approved, as the case may
be.  At any such time as Common Stock is listed on any national
securities exchange, the Company will, at its expense, obtain promptly and
maintain the approval for listing on each such exchange, upon official notice of
issuance, the shares of Common Stock issuable upon exercise of the then
outstanding Warrants and maintain the listing of such shares after their
issuance; and the Company will also list on such national securities exchange,
will register under the Exchange Act and will maintain such listing of, any
other securities that at any time are issuable upon exercise of this Warrant, if
and at the time that any securities of the same class shall be listed on such
national securities exchange by the Company.

       

      (i) Registration Rights of Other
Securities. The Company shall not grant registration rights to any
securities of the Company other than the Registrable Securities without the
prior written consent of the Required Holders.

       

      [12.           Warrants held by
LC.    Provided that a Release Event (as defined
below) shall not have occurred, the parties hereto agree that, if LC owns, or
would own upon exercise of this Warrant and all other Warrants held by LC, more
than 20% of the voting Common Stock of the Company and LC votes its Warrant
Shares in any corporate matter of the Company, LC will vote such Warrant Shares
in the same proportion as all other Common Stock voted with respect to such
matter excluding any other Common Stock voted by LC (the foregoing, the “Voting
Restriction”).

      A “Release Event” shall
have occurred if (i) the NASDAQ shall have confirmed in writing to the Company
that the purchase of the Warrants by LC or any transferee with full voting
rights for the underlying Warrant Shares does not require a shareholder vote
pursuant to Section 4350 of the NASDAQ Stock Market Rules (such Section and any
other section substituted therefor, “Section 4350”); (ii)
the requisite shareholders of the Company have approved the issuance of the
Warrants and/or the Warrant Shares deliverable upon proper exercise of such
Warrants to LC or any transferee pursuant to Section 4350; (iii) the Company is
no longer subject to Section 4350; or (iv) the Company is no longer required to
obtain a shareholder vote approving the issuance of the Warrants to LC or any
transferee with full voting rights for the underlying Warrant
Shares.

      The Company agrees to use it best
efforts promptly after the issuance of the Warrants to LC pursuant to the
Purchase Agreement to obtain a confirmation from the NASDAQ that the issuance of
the Warrants to LC with full voting rights for the underlying Warrant Shares as
provided in the Company’s articles of incorporation and without the Voting
Restriction would not be a “change of control” under Section 4350.  If
the NASDAQ will not provide such confirmation or such written confirmation is
not obtained within three months of the Issue Date, the


      
        
          
            B-18

          

           


        

        
           


          
            

          

        

        
           


        

      


      Company
will use its best efforts to obtain the consent of its shareholders under
Section 4350 for the issuance of the Warrants to LC with full voting rights for
the underlying Warrant Shares as provided in the Company’s articles of
incorporation and without the Voting Restrictions.

      Provided that a Release Event shall not
have occurred, LC agrees that it will not transfer any Warrants or Warrant
Shares to any Person who would as a result of such transfer own upon exercise of
the Warrants more than 20% of the voting Common Stock of the Company unless such
Person shall agree to be bound by the voting and transfer restrictions set forth
in this Section 12].10

      [12][13].                      Ownership of
Warrant.  The Company may deem and treat the Person in whose
name this Warrant is registered as the Holder and owner hereof (notwithstanding
any notations of ownership or writing hereon made by anyone other than the
Company) for all purposes and shall not be affected by any notice to the
contrary, until presentation of this Warrant for registration of
Transfer.

       

      [13][14].                      No Rights or Liability as a
Stockholder.  Prior to the exercise of this Warrant, the Holder
hereof shall not be entitled to any voting rights or other rights (including the
right to receive dividends) as a stockholder of the Company.  No
provisions hereof, in the absence of affirmative action by the Holder hereof to
purchase Common Stock, and no enumeration herein of the rights or privileges of
the Holder shall give rise to any liability of such Holder as a stockholder of
the Company.

       

      [14][15].                      Charges, Taxes and
Expenses.  Issuance of certificates for shares of Common Stock
upon the exercise of this Warrant shall be made without charge to the Holder
hereof for any issue or transfer tax, or other incidental expense, in respect of
the issuance or delivery of such certificates or the securities represented
thereby, all of which taxes and expenses shall be paid by the Company; provided, that the
Company shall not be required to pay any tax that may be payable in respect of
any Transfer of this Warrant or any Warrant Shares or any Transfer involved in
the issuance and delivery of the Warrant Shares in a name other than that in
which the Warrant to which such issuance relates was registered, and, if any
such tax would otherwise be payable by the Company, no such issuance or delivery
shall be made unless and until the Person requesting such issuance has paid to
the Company the amount of any such tax, or it is established to the reasonable
satisfaction of the Company that such tax has been paid.

       

      [15][16].                      Amendment or
Waiver.  This Warrant and any term hereof or thereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the Holder of this Warrant.

       

      [16][17].                      Notices.  Any
notice or other communication (or delivery) required or permitted hereunder
shall be made in writing and shall be by telecopier (with receipt confirmed and
followed by first class mail), courier service or personal delivery to the
Company at its pri

       

      

        

      

        
        10 Insert
the bracketed language as Section 12 if this Warrant is issued to LC Capital
Master Fund, Ltd. or any of its affiliates.

      


      
        
          
            B-19

          

           


        

        
           


          
            

          

        

        
           


        

      


      cipal
office at 5611 Baird Court, Houston, Texas 77041, Attention: Chief Executive
Officer and to the Holder at its address as it appears in the Warrant
Register.  All such notices and communications (and deliveries) shall
be deemed to have been duly given when delivered by hand, if personally
delivered; when delivered by courier, if delivered by commercial overnight
courier service; and when receipt is acknowledged, if telecopied.

       

      [17][18].                      Certain
Remedies.  The Holder shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Warrant and to enforce
specifically the terms and provisions of this Warrant in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which such Holder may be entitled at law or in
equity.

       

      [18][19].                      Governing
Law.  This Warrant shall be governed by, construed in
accordance with, and enforced under, the laws of the State of New York
applicable to agreements or instruments entered into and performed entirely
within such State.  The parties hereto irrevocably consent to the
jurisdiction of the state and federal courts sitting in the City of New York in
connection with any action, suit or proceeding arising out of or relating to
this Warrant Agreement.

       

      [19][20].                      Headings.  The
headings in this Warrant are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

       

      


      [Remainder
of page intentionally left blank]


      
        
          
            B-20

          

           


        

        
           


          
            

          

        

        
           


        

      


      IN WITNESS WHEREOF, the parties hereto
have caused this Warrant to be signed by their duly authorized
officer.

      


      PARTICLE
DRILLING TECHNOLOGIES, INC.

      


      By                                                                           

            Name:

            Title:

      


      [PURCHASER]

      


      By                                                                           

            Name:

            Title:

      


      


      


      



      
        
          
            B-21

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      Exhibit A
to

      Common Stock Purchase
Warrant

      


      [FORM
OF]

      ELECTION
TO PURCHASE SHARES

      The
undersigned hereby irrevocably elects to exercise this Warrant to purchase
__________ shares of  Common Stock, par value $0.001 per share (“Common Stock”), of
Particle Drilling Technologies, Inc. (the “Company”) and hereby
[makes payment of $__________ therefor] [or] [makes payment therefore by
surrendering pursuant to Section 2(b)(ii) ____________ shares of Common
Stock of the Company] [or] [makes payment therefor by cancellation pursuant to
Section 2(d) of a portion of this Warrant with respect to __________ shares
of Common Stock].  The undersigned hereby requests that certificates
for such shares be issued and delivered as follows:

      ISSUE
TO:                                                                                                                                          

      (NAME)

       

      


      (ADDRESS,
INCLUDING ZIP CODE)

       

      


      (SOCIAL
SECURITY OR OTHER IDENTIFYING NUMBER)

      


      DELIVER
TO:                                                                                                                                          

      (NAME)

       

      


      (ADDRESS,
INCLUDING ZIP CODE)

      


      If the
number of shares of Common Stock purchased hereby is less than the number of
shares of Common Stock covered by this Warrant, the undersigned requests that a
new Warrant representing the number of shares of Common Stock not purchased be
issued and delivered as follows:

      


      ISSUE
TO:                                                                                                                                          

      (NAME)

       

      


      (ADDRESS,
INCLUDING ZIP CODE)

       

      


      (SOCIAL
SECURITY OR OTHER IDENTIFYING NUMBER)

      


      DELIVER
TO:                                                                                                                                         

      (NAME)

       

      


      (ADDRESS,
INCLUDING ZIP CODE)


      
        
          
            B-22

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      Dated:_____________________________                                                                                                                                         [NAME
OF HOLDER11]

      


      


      By                                                                

          Name:                                                                

          Title:                                                                

      


      

        

      

        
        11    Name
of Holder must conform in all respects to name of Holder as specified on the
face of the Warrant.

      


      
        
          
            B-23

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      Exhibit B
to

      Common Stock Purchase
Warrant

      


      [FORM
OF] ASSIGNMENT

      [To
be executed only upon transfer of Warrant]

      FOR
VALUED RECEIVED, the undersigned registered holder of the within Warrant hereby
sells, assigns, and transfers unto ________________ the right represented by
such Warrant to purchase __________ shares of  Common Stock, par value
$0.001 per share (“Common Stock”) of
Particle Drilling Technologies, Inc. (the “Company”) to which
such Warrant relates, and appoints ____________ Attorney to make such transfer
on the books of the Company maintained for such purpose, with full power of
substitution in the premises.

      


      Dated:____________________________                                                                                     [NAME
OF HOLDER12]

      By:                                                                

            Name:

            Title:

      


      ____________________________________

                 (Street
Address)

      ____________________________________

      


       

      

        

      

        
        12    Name
of Holder must conform in all respects to name of Holder as specified on the
face of the Warrant.

      


      
        
          
            B-24

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      EXHIBIT
C-1

       

      Form of
Opinion of Vinson & Elkins LLP

       

      


       

      1. Particle
Drilling Technologies, Inc. (Delaware) (the “Delaware Sub”) is
validly existing as a corporation in good standing under the laws of the State
of Delaware.  The Delaware Sub has corporate power and corporate
authority to own and use its properties and assets and to carry on its business
as currently conducted, to enter into the Transaction Documents to which it is
party, to perform its obligations thereunder and to consummate the transactions
contemplated by such Transaction Documents.

       

      2. The
execution and delivery by the Delaware Sub of the Transaction Documents to which
it is party and the performance by the Delaware Sub of its obligations
thereunder have been duly authorized by all necessary corporate action on the
part of the Delaware Sub.

       

      3. Assuming
the due authorization, execution and delivery of each of the Transaction
Documents by the other parties thereto, each of the Transaction Documents to
which the Company and the Delaware Sub is party is a valid and binding agreement
of the Company and the Delaware Sub, as the case may be, enforceable against the
Company or the Delaware Sub, as applicable in accordance with its terms, except
to the extent that enforcement thereof may be limited by the effect of
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other
laws relating to or affecting creditors’ rights generally and equitable
principles of general applicability (whether enforcement is considered in a
proceeding in equity or at law), and except to the extent that enforcement
thereof may be limited by the effect of the potential unenforceability under law
or court decision of provisions providing for the indemnification and
contribution of a party with respect to a liability where such indemnification
and contribution is contrary to public policy.

       

      4. The
execution and delivery by the Company and the Delaware Sub of the Transaction
Documents to which they are party do not, and the performance by the Company and
the Delaware Sub of their respective obligations thereunder will not (i) result
in any violation of the provisions of the Certificate of Incorporation or Bylaws
of the Delaware Sub, (ii) breach or result in a default under any agreement or
instrument listed on Schedule A to such opinion (the “Applicable
Contracts”), (iii) result in a violation by the Company or the Delaware
Sub of any statute of the United States or the State of New York normally
applicable to the type of transactions contemplated by the Transaction
Documents, or any rule or regulation that has been issued pursuant to any such
statute, or (iv) result in any violation of any order, writ, judgment or decree
known to such counsel to which the Company or the Delaware Sub is subject,
except that no opinion need be expressed pursuant to this paragraph (2) in
relation to federal or state securities or anti-fraud statutes, rules or
regulations.

       

      5. Assuming
the accuracy of the representations and warranties of the Company set forth in
Section 7 of this Agreement and of the Purchasers set forth in Section 8 of this
Agreement and the compliance with the agreements of the Company and the
Purchasers contained in this Agreement, the offer, issuance and sale of the
Notes and the Warrants to the Purchasers pursuant to this Agreement does not
require registration under the Securities Act.

       


      
        
          
            


            C-1-

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      6. The
execution and delivery by the Company and the Delaware Sub of the Transaction
Documents to which they are party do not, and the performance by the Company and
the Delaware Sub of their respective obligations thereunder will not, require
that the Company or the Delaware Sub, as the case may be, obtain the approval
of, or make any filing with, any governmental authority under any law of the
State of New York or the United States, or any rule or regulation thereunder,
other than (i) those which have already been obtained or made, (ii)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Warrants and the
Warrant Shares under applicable blue sky laws (but excluding jurisdictions
outside of the United States), (iii) other filings required under federal and
state securities laws as contemplated by this Agreement by this Agreement or
(iv) the filing of the Delaware Financing Statement in the filing offices set
forth in paragraph 9 hereof.

       

      7. Neither
the Company nor the Delaware Sub is, and after giving effect to the Transaction
will be, an “investment company” as defined under the Investment Company Act of
1940, as amended.

       

      8. The
provisions of the Security Agreement are effective to create in favor of the
Agent to secure the Secured Obligations, a valid security interest in all of the
Company’s and the Delaware Sub’s right, title and interest in and to that
portion of the Collateral (as defined therein) to the extent that such
Collateral is property in which a security interest may be created under Article
9 of the NY UCC (the “Article 9
Collateral”).

       

      9. To the
extent that the filing of a financing statement can be effective to perfect a
security interest in the Article 9 Collateral under the Delaware UCC, the
security interest in favor of the Agent in that portion of the Article 9
Collateral described in the Delaware Financing Statement will be perfected upon
the filing of the Delaware Financing Statement in the office of the Secretary of
State of the State of Delaware.  For purposes of our opinion set forth
in this paragraph 7 as to the Delaware UCC, we have based such opinion solely on
our review of the generally available compilations of Article 9 of the Delaware
UCC as in effect on the date hereof and we have not reviewed any other laws of
the State of Delaware or retained or relied on any opinion or advice of Delaware
counsel.

       

      10. With
respect to that portion of the Article 9 Collateral consisting of the Securities
Accounts (as defined in the Security Agreement), the provisions of the
Securities Account Control Agreement are effective to perfect the security
interest of the Agent therein by “control” (within the meaning of Section 8-106
of the NY UCC).

       

      11. With
respect to that portion of the Article 9 Collateral consisting of the Deposit
Accounts (as defined in the Security Agreement), the provisions of the Deposit
Account Control Agreement are effective to perfect the security interest of the
Agent therein by “control” (within the meaning of Section 9-104 of the NY
UCC).

       


      
        
          
            


            C-1-

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      EXHIBIT
C-2

       

      Form of
Opinion of Woodburn and Wedge

       

      


       

      1. The
Company is validly existing as a corporation in good standing under the laws of
the State of Nevada.  The Company has corporate power and corporate
authority to own and use its properties and assets and to carry on its business
as currently conducted, to enter into the Transaction Documents, to perform its
obligations thereunder and to consummate the transactions contemplated by each
of the Transaction Documents.

       

      2. The
execution and delivery of the Transaction Documents by the Company and the
performance by the Company of its obligations thereunder have been duly
authorized by all necessary corporate action on the part of the
Company.

       

      3. To the
extent that Nevada law governs such issues, each of the Transaction Documents
has been duly and validly executed and delivered by the Company.

       

      4. Neither
the issuance, sale or delivery of the Warrants nor the issuance or delivery of
the Warrant Shares is subject to any preemptive right of the stockholders of the
Company arising under Nevada law or the Articles of Incorporation of the
Company.

       

      5. The
Company has duly authorized and reserved for issuance 7,130,200 shares of Common
Stock of the Company for issuance upon exercise of the Warrants.

       

      6. When
issued by the Company in accordance with the terms of this Agreement and the
Warrants, the Warrant Shares will be validly issued, fully paid and
non-assessable.

       

      7. The
execution, delivery and performance of the Transaction Documents, the
consummation of the transactions contemplated therein and the performance by the
Company of its obligations thereunder do not and will not result in any
violation of the provisions of the Articles of Incorporation or Bylaws of the
Company or any statute, rule or regulation of the State of Nevada.

       

      8. No filing
with, or authorization, approval, consent, license, order, registration,
qualification or decree of, any Nevada court or Nevada governmental authority or
agency, is necessary or required in connection with the due authorization,
execution and delivery by the Company of the Transaction Documents, the
performance by the Company of its obligations thereunder or the consummation by
the Company of the transactions contemplated thereby, except (i) such as those
which have already been obtained or made, (ii) qualification (or taking such
action as may be necessary to secure an exemption from qualification, if
available) of the offer and sale of the Warrants and the Warrant Shares under
applicable blue sky laws (but excluding jurisdictions outside of the United
States), (iii) the filing of the Financing Statements in the filing offices set
forth in paragraph 10 hereof or (iv) other filings required under federal and
state securities laws as contemplated by this Agreement, as to which we offer no
opinion.

       


      
        
          
            


            C-2-

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      9. The
authorized stock of the Company consists of 100,000,000 shares of Common Stock
and 10,000,000 shares of preferred stock, par value $0.01 per share, of which
100,000 shares have been designated as Series A Junior Participating Preferred
Stock.

       

      10. To the
extent that the filing of a financing statement can be effective to perfect a
security interest in the Article 9 Collateral under the Nevada UCC, the security
interest in favor of the Agent in that portion of the Article 9 Collateral
described in the Financing Statement  will be perfected upon the
filing of the Financing Statements in the office of the Secretary of State of
the State of Nevada.

       


      
        
          
            


            C-2-

            


          

           


        

        
           


          
            

          

        

        
           


        

      


      EXHIBIT
D

       

      Form of
Compliance Certificate

       

      


       

      This COMPLIANCE CERTIFICATE (this “Certificate”) is delivered
pursuant to Section 5.05(a) of that certain Purchase Agreement dated as of
February 11, 2009 by and among Particle Drilling Technologies, Inc. a Nevada
Corporation (the “Company”), Particle Drilling
Technologies, Inc., a Delaware corporation and a subsidiary of the Company (the
“Delaware Sub”), the
Purchasers named therein and LC Capital Master fund, Ltd., a Cayman Islands
exempted company, as agent and collateral agent (as amended, supplemented,
modified and restated and in effect from time to time, the “Purchase
Agreement”).  Capitalized terms used but not defined herein
shall have the respective meanings given them in the Purchase
Agreement.

       

      THE UNDERSIGNED HEREBY CERTIFIES
THAT:

       

      (1) He is the
duly elected [Chief Executive Officer/Chief Financial Officer] of the
Company;

       

      (2) He has
reviewed the terms of the Purchase Agreement and the terms of the other
Transaction Documents, and has made, or has caused to be made under his
supervision, a review in reasonable detail of the transactions and condition of
Company and its Subsidiaries during the period from the date of the execution of
the Purchase Agreement to the date of this Certificate (the “Applicable
Period”);

       

      (3) The
examination described in paragraph (2) above did not disclose, and he has no
knowledge of, the existence of any condition or event which constituted an Event
of Default at any time during the Applicable Period or constitutes an Event of
Default or as of the date of this Certificate;

       

      (4) Based on
the examination described in paragraph (2) above, the Company was and is in
compliance with each of the covenants set forth in Section 9 and Section 10 of
the Purchase Agreement at all times during the Applicable Period and as of the
date of this Certificate;

       

      (5) Attached
hereto as Annex A is a true, correct, and complete copy of the Articles of
Incorporation of the Company (the “Company
Charter”).  Since [_____], 20[__], there have been no
amendments to the Company Charter. Since such date, no proceeding has been
commenced for the merger, consolidation, dissolution or liquidation of the
Company or the sale of all or substantially all of its assets and there has not
been commenced or threatened any action or proceeding threatening the Company’s
existence or which would result in the forfeiture of the Company
Charter;

       


      
        
          
            


            D-1

          

           


        

        
           


          
            

          

        

        
           


        

      


      (6) Attached
hereto as Annex B is a true, correct, and complete copy of the By-laws of the
Company as in effect at the date hereof and at all times
since  [_____], 20[__];

       

      (7) Attached
hereto as Annex C is a true, correct, and complete copy of the Certificate of
Incorporation of the Delaware Sub (the “Delaware Sub
Charter”).  Since [_____], 20[__], there have been no
amendments to the Delaware Sub Charter. Since such date, no proceeding has been
commenced for the merger, consolidation, dissolution or liquidation of the
Company or the sale of all or substantially all of its assets and there has not
been commenced or threatened any action or proceeding threatening the Company’s
existence or which would result in the forfeiture of the Delaware Sub
Charter;

       

      (8) Attached
hereto as Annex D is a true, correct, and complete copy of the By-laws of the
Delaware Sub as in effect at the date hereof and at all times
since  April 2, 2004;

       

      (9) Attached
hereto as Annex E is a true, correct and complete copy of resolutions duly
adopted by the Board of Directors of the Company and the Board of Directors of
the Delaware Sub (collectively, the “Boards”) at meetings duly
called and held on February 10, 2009, at which a quorum was present and acting
throughout.  Such actions have not been amended, modified or
rescinded, remain in full force and effect in the form adopted and are the only
resolutions adopted by the Boards or by any committee thereof or corporate
actions taken relating to the Securities and the issuance and sale of the
Securities pursuant to the Purchase Agreement; and

       

      (10) Each
person who, as an officer of the Company or the Delaware Sub, as the case may
be, signed any document delivered in connection with the Purchase Agreement and
the closings related thereto was duly elected or appointed, qualified, and
acting as such officer at the respective times of the signing and delivery
thereof and the signature of each such person appearing on each such document is
the genuine signature of such officer.

       

      


       

      [SIGNATURE
PAGE TO FOLLOW]

       


      
        
          
             

            D-2

          

           


        

        
           


          
            

          

        

        
           


        

      


      PARTICLE
DRILLING TECHNOLOGIES, INC.

      


      By:
__________________________

      Title:
________________________

      



      
        
          
            


            D-3

          

           


        

        
           


          
            

          

        

        
           


        

      


      EXHIBIT
E

       

      Form of
Security Agreement

       

      


       

      This
Security Agreement (this “Agreement”) is dated
as of [_____], 2009, among Particle Drilling Technologies, Inc, a Nevada
corporation (the “Parent”), Particle
Drilling Technologies, Inc, a Delaware corporation (the “Delaware Sub,” and
together with the Parent, the “Company”) and LC
Capital Master Fund, Ltd., a Cayman Islands exempted company, as the Collateral
Agent for the Purchasers referred to below (in such capacity, together with its
successors in such capacity, the “Agent”).

      


      A.           The
Parent and the Delaware Sub have entered into certain Purchase Agreement (the
“Purchase
Agreement”) with the Purchasers named therein (the “Purchasers”) and the
Agent dated as of February 11, 2009, pursuant to which the Purchasers will
purchase certain promissory notes (the “Notes”) from the
Parent.

       

      C.           It
is a condition precedent to the Purchasers’ performance of their obligations
under the Purchase Agreement that the parties hereto shall have executed and
delivered this Agreement prior to the date of the First Draw Down, pursuant to
which the Notes shall be secured by, among other things, a first priority Lien,
on substantially all the property of the Company (including, without limitation,
real and other property acquired subsequent to the date of the First Draw
Down).

      


      D.           Accordingly,
to induce the Purchasers to enter into and perform the Purchase Agreement and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Parent, the Delaware Sub and the Agent agree as
follows:

      


      Section
1.  Definitions.

      


      (a)           Terms
defined in the Purchase Agreement are used herein as defined therein and the
principles of interpretation referred to therein shall apply hereto mutatis
mutandis.

      


      (b)           The
terms “Account”, “Chattel Paper”,
“Deposit
Account”, “Document”, “Electronic Chattel
Paper”, “Equipment”, “Fixture”, “General Intangible”,
“Goods”, “Instrument”, “Inventory”, “Investment Property”,
“Letter-of-Credit
Right”, “Payment Intangible”,
“Proceeds”,
“Promissory
Note”, “Securities Account”,
“Security
Entitlement”, “Software” and “Tangible Chattel
Paper” have the respective meanings ascribed thereto in Article 9 of
the UCC, and the term “Financial Assets” has
the meaning ascribed thereto in Article 8 of the UCC.

      


      (c)           As
used herein:

      


      “Agent” has the
meaning set forth in the first paragraph of this Agreement.

      


      “Agreement” has the
meaning set forth in the first paragraph of this Agreement.


      
        
          
            E-1

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      


      “Company” has the
meaning set forth in the first paragraph of this Agreement.

      


      “Collateral” has the
meaning set forth in Section 3.

      


      “Collateral Account”
has the meaning set forth in Section 4(a).

      


      “Copyright Collateral”
means all Copyrights of the Company, whether now owned or hereafter acquired,
including each Copyright identified in Annex 3.

      


      “Copyrights” means all
copyrights, copyright registrations and applications for copyright
registrations, including, without limitation, all renewals and extensions
thereof, the right to recover for all past, present and future infringements
thereof, and all other rights of any kind whatsoever accruing thereunder or
pertaining thereto.

      


      “Delaware Sub” has the
meaning set forth in the first paragraph of this Agreement.

      


      “Initial Pledged
Shares” means the Shares of each Subsidiary beneficially owned by the
Company on the date hereof and identified in Annex 7.

      


      “Intellectual
Property” means, collectively, all Copyright Collateral, all Patent
Collateral and all Trademark Collateral, together with (a) all inventions,
processes, production methods, proprietary information, know-how and trade
secrets; (b) all licenses or user or other agreements granted to the
Company with respect to any of the foregoing, in each case whether now or
hereafter owned or used, including, without limitation, the licenses or other
agreements with respect to the Copyright Collateral, the Patent Collateral or
the Trademark Collateral listed in Annex 6; (c) all trade secrets and
confidential information, including confidential customer lists, identification
of suppliers, data, plans, blueprints, specifications, designs, drawings,
recorded knowledge, surveys, engineering reports, test reports, manuals,
materials standards, processing standards, performance standards, catalogs,
computer and automatic machinery software and programs, field repair data, sales
data and other information relating to sales or service of products now or
hereafter manufactured, accounting information; (d) all field repair data,
sales data and other information relating to sales or service of products now or
hereafter manufactured; (e) all accounting information and all media in
which or on which any information or knowledge or data or records may be
recorded or stored and all computer programs used for the compilation or
printout of such information, knowledge, records or data; (f) all licenses,
consents, permits, variances, certifications and approvals of governmental
agencies now or hereafter held by the Company; and (g) all causes of
action, claims and warranties now or hereafter owned or acquired by the Company
in respect of any of the items listed above.

      


      “Notes” has the
meaning set forth in paragraph A of this Agreement.


      
        
          
            E-2

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      “Parent” has the
meaning set forth in the first paragraph of this Agreement.

      


      
        	
                 
      

              	
                “Patent
      Collateral” means all Patents of the Company, whether now owned or
      hereafter acquired by the Company, including without limitation each
      Patent identified in Annex 4.

              


      

      


      
        	
                 
      

              	
                “Patents” means
      all patents and patent applications, including, without limitation, the
      inventions and improvements described and claimed therein together with
      the reissues, divisions, continuations, renewals, extensions and
      continuations-in-part thereof, all income, royalties, damages and payments
      now or hereafter due and/or payable under and with respect thereto,
      including, without limitation, damages and payments for past or future
      infringements thereof, the right to sue for past, present and future
      infringements thereof, and all rights corresponding thereto throughout the
      world.

              


      

      


      “Person” means an
individual, corporation, limited liability company, partnership, unincorporated
association, joint venture, trust, governmental agency or other
entity.

      


      “Pledged Shares”
means, collectively, (i) the Initial Pledged Shares and (ii) all other
Shares of any Person now or hereafter owned by the Company, together in each
case with (a) all certificates representing the same, (b) all shares,
securities, moneys or other property representing a dividend on or a
distribution or return of capital on or in respect of the Pledged Shares, or
resulting from a split-up, revision, reclassification or other like change of
the Pledged Shares or otherwise received in exchange therefor, and any warrants,
rights or options issued to the holders of, or otherwise in respect of, the
Pledged Shares, and (c) without prejudice to any provision of any of the
Transaction Documents prohibiting any merger or consolidation by the
Subsidiaries, all Shares of any successor entity of any such merger or
consolidation.

      


      “Purchase Agreement”
has the meaning set forth in paragraph A of this Agreement.

      


      “Purchasers” has the
meaning set forth in paragraph A of this Agreement.

      


      
        	
                 
      

              	
                “Required Secured
      Parties” means, as of any date of determination, Holders holding in
      the aggregate more than 50% of the Notes
  outstanding.

              


      

      


      
        	
                 
      

              	
                “Secured
      Obligations” means the principal of and interest on the Notes and
      all fees, indemnification payments or other amounts whatsoever payable,
      whether now outstanding or hereafter from time to time incurred, assumed
      or arising, under the Transaction
Documents.

              


      

      


      
        	
                 
      

              	
                “Secured
      Parties” means the Agent and the Holders of
  Notes.

              


      


      
        
          
            E-3

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                “Shares” means
      shares of capital stock of a corporation, limited liability company
      interests, partnership interests and other ownership or equity interests
      of any class in any Person.

              


      

      


      “Subsidiary” and
“Subsidiaries”
have the meanings set forth in Section 2.

      


      
        	
                 
      

              	
                “Trademark
      Collateral” means all Trademarks of the Company whether now owned
      or hereafter acquired by the Company, including without limitation each
      Trademark identified in Annex 5.  Notwithstanding the foregoing,
      the Trademark Collateral does not and shall not include any Trademark that
      would be rendered invalid, abandoned, void or unenforceable by reason of
      its being included as part of the Trademark
  Collateral.

              


      

      


      
        	
                 
      

              	
                “Trademarks”
      means all trade names, trademarks and service marks, logos, trademark and
      service mark registrations, and applications for trademark and service
      mark registrations, including, without limitation, all renewals of
      trademark and service mark registrations, all rights corresponding thereto
      throughout the world, the right to recover for all past, present and
      future infringements thereof, all other rights of any kind whatsoever
      accruing thereunder or pertaining thereto, together, in each case, with
      the product lines and goodwill of the business connected with the use of,
      and symbolized by, each such trade name, trademark and service
      mark.

              


      

      


      
        	
                 
      

              	
                “UCC” means the
      Uniform Commercial Code as in effect from time to time in the State of New
      York.

              


      

      


      Section 2.  Representations and
Warranties.  The Company represents and warrants to the Secured
Parties that:

      


      (a)           Title and
Priority.  The Company is the sole beneficial owner of the
Collateral and no security interest exists in the Collateral except for Liens
expressly permitted by the terms of the Transaction Documents; and the security
interests created pursuant hereto constitute valid, perfected security interests
in the Collateral, subject to no equal or prior Lien except as so
permitted.

      


      (b)           Names,
Etc.  The full and correct legal name, type of organization,
jurisdiction of organization, organizational ID number (if applicable) and
mailing address of the Company as of the date hereof are correctly set forth in
Annex 1; and Annex 1 correctly specifies the place of business of the
Company or, if the Company has more than one place of business, the location of
the chief executive office of the Company, and each location where Goods of the
Company are located (other than Goods in transit).

      


      (c)           Changes in
Circumstances.  The Company has not (i) within the period
of four months prior to the date hereof, changed its location (as defined in
Section 9-307 of the UCC), or (ii) except as specified in
Annex 1, heretofore changed its name, or (iii) except as specified in
Annex 2, heretofore become a “new debtor” (as defined in


      
        
          
            E-4

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      Section 9-102(a)(56)
of the UCC) with respect to a currently effective security agreement previously
entered into by any other Person.

      


      (d)           Intellectual
Property.  Annexes 3, 4, and 5, respectively, set forth a
complete and correct list of all Copyrights, Patents and Trademarks owned by the
Company on the date hereof; except pursuant to license agreements and other user
agreements entered into by the Company in the ordinary course of business, the
Company owns and possesses the right to use, and has not licensed any other
Person to use, any Copyright, Patent or Trademark listed in Annexes 3, 4,
and 5.  To the best knowledge of the Company after due inquiry, all
registrations listed in Annexes 3, 4, and 5, are valid and in full force
and effect; and except as set forth in Annex 6, to the best knowledge of the
Company after due inquiry, the Company owns and possesses the right to use all
Copyrights, Patents and Trademarks set forth on Annexes 3, 4, and 5; and Annex 6
sets forth a complete and correct list of all material license agreements and
other user agreements regarding Intellectual Property on the date
hereof.

      


      
        	
                 
      

              	
                To
      the Company’s best knowledge after due inquiry, (i) except as set
      forth in Annex 6, there is no violation by others of any right of the
      Company with respect to any Copyright, Patent or Trademark listed in
      Annexes 3, 4, and 5, respectively, and (ii) the Company is not
      infringing in any respect upon any Copyright, Patent or Trademark of any
      other Person; and no proceedings have been instituted or are pending
      against the Company or, to the Company’s knowledge, threatened, and no
      claim against the Company has been received by the Company, alleging any
      such violation, except as may be set forth in Annex
  6.

              


      

      


      
        	
                 
      

              	
                To
      the best knowledge of the Company after due inquiry, the Company does not
      own any Trademarks registered in the United States of America to which the
      last sentence of the definition of Trademark Collateral
      applies.

              


      

      


      (e)            Pledged
Shares.  The Initial Pledged Shares constitute 100% of the
issued and outstanding Shares of each of the Company’s subsidiaries (each, a
“Subsidiary”
and collectively, the “Subsidiaries”)
beneficially owned by the Company on the date hereof, whether or not registered
in the name of the Company. Annex 7 correctly identifies, as at the date
hereof, the respective Subsidiaries that issued the Initial Pledged Shares and
(in the case of any Subsidiary that is a corporation) the respective class and
par value of such Shares and the respective number of such Shares (and
registered owner thereof) represented by each such certificate.

      


      The Initial Pledged Shares are, and all
other Pledged Shares in which the Company shall hereafter grant a security
interest pursuant to Section 3 will be, (i) duly authorized, validly
existing, fully paid and non-assessable (in the case of any Shares issued by a
corporation) and (ii) duly issued and outstanding (in the case of any
equity interest in any other entity), and none of such Pledged Shares are or
will be subject to any contractual restriction, or any restriction under the
charter, by-laws, partnership agreement or other organizational instrument of
the respective Subsidiary thereof, upon the transfer of such Pledged Shares
(except


      
        
          
            E-5

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      for any
such restriction contained herein or in the Transaction Documents, or under such
organizational instruments).

      


      Section 3.  Collateral.  As
collateral security for the prompt payment in full when due (whether at stated
maturity, by acceleration or otherwise) of the Secured Obligations, whether now
existing or hereafter from time to time incurred or arising, the Company hereby
grants to the Agent for the benefit of the Secured Parties a security interest
in all of the Company’s right, title and interest in, to and under the following
property, assets and revenues, whether now owned or hereafter acquired and
whether now existing or hereafter coming into existence (all of the property,
assets and revenues described in this Section 3 being collectively referred
to herein as the “Collateral”):

      


      
        	
                (i)  

              	
                all
      Accounts:

              


      

       

      
        	
                (ii)  

              	
                all
      Chattel Paper (whether Tangible Chattel Paper or Electronic Chattel
      Paper);

              


      

       

      
        	
                (iii)  

              	
                all
      Deposit Accounts;

              


      

       

      
        	
                (iv)  

              	
                all
      Documents;

              


      

       

      
        	
                (v)  

              	
                all
      Equipment;

              


      

       

      
        	
                (vi)  

              	
                all
      Fixtures;

              


      

       

      
        	
                (vii)  

              	
                all
      General Intangibles, including without limitation all intellectual
      Property and all Software;

              


      

       

      
        	
                (viii)  

              	
                all
      Instruments, including without limitation all Promissory
      Notes;

              


      

       

      
        	
                (ix)  

              	
                all
      Intellectual Property;

              


      

       

      
        	
                (x)  

              	
                all
      Inventory;

              


      

       

      
        	
                (xi)  

              	
                all
      Investment Property not covered by other clauses of this Section 3,
      including without limitation all Securities and all Securities Accounts
      and all Security Entitlements with respect thereto and Financial Assets
      carried therein;

              


      

       

      
        	
                (xii)  

              	
                all
      Letter-of-Credit Rights;

              


      

       

      
        	
                (xiii)  

              	
                all
      Payment Intangibles, whatsoever not covered by the other clauses of this
      Section 3;

              


      

       

      
        	
                (xiv)  

              	
                all
      commercial tort claims, as defined in Section 9-102(a)(13) of the
      UCC;

              


      

       


      
        
          
            E-6

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      
        	
                (xv)  

              	
                all
      other tangible and intangible personal property whatsoever of the
      Company;

              


      

       

      
        	
                (xvi)  

              	
                all
      Proceeds, products, offspring, accessions, rents, profits, income,
      benefits, substitutions and replacements of and to any of the Collateral
      and, to the extent related to any Collateral, all books, correspondence,
      credit files, records, invoices and other papers (including without
      limitation all tapes, cards, computer runs and other papers and documents
      in the possession or under the control of the Company or any computer
      bureau or service company from time to time acting for the Company);
      and

              


      

       

      
        	
                (xvii)  

              	
                all
      Pledged Shares.

              


      

       

      Section 4.  Cash Proceeds of
Collateral.

      


      (a)  Collateral
Account.  The Company will, if so instructed by the Agent (at
the request of the Required Secured Parties), establish at a banking institution
selected by the Agent (at the direction of the Required Secured Parties) a cash
collateral account (the “Collateral Account”),
which

      


      (i)  to the extent of all
Investment Property or Financial Assets shall be a Securities Account in respect
of which the Agent, for the benefit of the Secured Parties, shall be the
“entitlement holder” as defined in Section 8-102(a)(7) of the UCC,
and

      


      (ii)  to the extent of any
cash, shall be a Deposit Account in respect of which the Agent, for the benefit
of the Secured Parties, shall be the “customer” within the meaning of
Section 9-104(a)(3) of the UCC, and

      


      into
which there shall be deposited from time to time the cash proceeds of any of the
Collateral (including proceeds of insurance thereon) required to be delivered to
the Agent pursuant hereto and into which the Company may from time to time
deposit any additional amounts that any of them wishes to pledge to the Agent
for the benefit of the Secured Parties as additional collateral security
hereunder or that they are required to pledge as additional collateral security
hereunder.  The balance from time to time in the Collateral Account
shall constitute part of the Collateral hereunder and shall not constitute
payment of the Secured Obligations until applied as hereinafter
provided.  The Agent shall remit the collected balance standing to the
credit of the Collateral Account to or upon the order of the Company as the
Company shall from time to time instruct, provided that at any
time after the occurrence and during the continuance of an Event of Default, the
Agent may, at the direction of the Required Secured Parties, apply or cause to
be applied (subject to collection) the balance from time to time standing to the
credit of the Collateral Account to the payment of the Secured Obligations in
the manner specified in Section 5.09.  The balance from time to
time in the Collateral Account shall be subject to withdrawal only as provided
herein.


      
        
          
            E-7

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      (b)  Proceeds of
Accounts.  If so requested by the Agent (acting at the
direction of the Required Secured Parties) at any time after the occurrence and
during the continuance of an Event of Default, the Company shall instruct all
account debtors in respect of Accounts, Chattel Paper and General Intangibles
and all obligors on Instruments to make all payments in respect thereof either
directly to the Agent or any bank in the United States of America specified by
the Agent under arrangements, in form and substance satisfactory to the Agent,
pursuant to which the Company shall have irrevocably instructed such other bank
(and such other bank shall have agreed) to remit all proceeds of such payments
directly to the Collateral Account.  All payments made to the Agent as
provided in the preceding sentence, shall be immediately deposited in the
Collateral Account.  In addition to the foregoing, the Company agrees
that, at any time after the occurrence and during the continuance of an Event of
Default, if the proceeds of any Collateral hereunder shall be received by it,
the Company shall, upon the request of the Agent (acting at the direction of the
Required Secured Parties), as promptly as possible deposit such proceeds into
the Collateral Account.  Until so deposited, all such proceeds shall
be held in trust by the Company for and as the property of the Secured Parties
and shall not be commingled with any other funds or property of the
Company.

      


      (c)  Investment of Balance in
Collateral Account.  The cash balance standing to the credit of
the Collateral Account shall be invested from time to time in such Permitted
Investments as the Company (or, after the occurrence and during the continuance
of a Default, the Agent at the direction of the Required Secured Parties) shall
determine, which shall be held in the name and be under the control of the Agent
for the benefit of the Secured Parties (and credited to the Collateral Account),
provided that
at any time after the occurrence and during the continuance of an Event of
Default, the Agent (at the direction of the Required Secured Parties) may at any
time and from time to time elect to liquidate any such investments and to apply
or cause to be applied the proceeds thereof to the payment of the Secured
Obligations in the manner specified in Section 5.09.

      


      Section 5.  Further Assurances;
Remedies.  In furtherance of the grant of the pledge and
security interest pursuant to Section 3, the Company hereby agrees with the
Secured Parties and the Agent as follows:

      


      5.01  Delivery and Other
Perfection.  The Company shall:

      


      
        	
                 
      

              	
                (a)  if
      so instructed by the Agent (acting at the request of the Required Secured
      Parties), promptly deliver to the Agent any and all Instruments, Documents
      and Tangible Chattel Paper constituting part of the Collateral in which
      the Company purports to grant a security interest hereunder, endorsed
      and/or accompanied by such instruments of assignment and transfer in such
      form and substance as the Agent may request; provided, that
      so long as no Event of Default shall have occurred and be continuing, the
      Company may retain for collection in the ordinary course any Instruments,
      Documents or Tangible Chattel Paper received by the Company in the
      ordinary course of its business and the Agent shall, promptly upon request
      of the Company, make appropriate arrangements for making any of the
      foregoing pledged by the Company available to the Company
    for

              


      


      
        
          
            E-8

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                purposes
      of presentation, collection or renewal (any such arrangement to be
      effected, to the extent deemed appropriate by the Agent, against trust
      receipt or like document);

              


      

      


      
        	
                 
      

              	
                (b)  promptly
      give, execute, deliver, file, record, authorize or obtain all such
      financing statements, notices, instruments, documents, agreements or
      consents or other papers as may be necessary or desirable in the judgment
      of the Required Secured Parties to create, preserve, perfect or validate
      the security interest granted pursuant hereto or to enable the Agent and
      the Secured Parties to exercise and enforce their rights, directly or
      through the Agent, hereunder with respect to such pledge and security
      interest, provided that
      notices to account debtors in respect of any Accounts, Chattel Paper or
      General Intangibles and to obligors on Instruments shall be subject to the
      provisions of clause (d)
below;

              


      

      


      (c)  promptly
execute and deliver such security agreements relating to Collateral consisting
of the Intellectual Property as the Agent (at the request of the Required
Secured Parties) may reasonably request;

      


      
        	
                 
      

              	
                (d)  upon
      the occurrence and during the continuance of any Event of Default, upon
      request of the Agent (acting at the direction of the Required Secured
      Parties), promptly notify (and the Company hereby authorizes the Agent so
      to notify) each account debtor in respect of any Accounts, Chattel Paper
      or General Intangibles and each obligor on Instruments of the Company that
      such Collateral has been assigned to the Agent hereunder, and that any
      payments due or to become due in respect thereof are to be made either
      directly to the Agent or any bank in the United States of America
      specified by the Agent under arrangements, in form and substance
      satisfactory to the Agent;

              


      

      


      
        	
                 
      

              	
                (e)  without
      limiting the obligations of the Company under Section 5.04(c), if so
      requested by the Agent (acting at the direction of the Required Secured
      Parties), upon the acquisition after the date hereof by the Company of any
      Equipment valued in excess of $5,000 covered by a certificate of title or
      ownership, cause the Agent to be listed as the lienholder on such
      certificate of title for the benefit of the Secured Parties and take such
      other steps as may be required under the law applicable to perfection of a
      security interest in such property to perfect such security interest, and
      within 10 days of the acquisition thereof deliver evidence of the same to
      the Agent;

              


      

      


      
        	
                 
      

              	
                (f)  keep
      full and accurate books and records relating to the Collateral, and stamp
      or otherwise mark such books and records in such manner as the Agent may
      reasonably require in order to reflect the security interests granted by
      this Agreement; and

              


      

      


      
        	
                 
      

              	
                (g)  permit
      representatives of the Agent and/or the other Secured Parties, upon
      reasonable notice, at any time during normal business hours to inspect and
      make abstracts from its books and records pertaining to the Collateral,
      and permit representatives of the Agent to be present at the Company’s
      place of business to receive copies of all communications and remittances
      relating to the Collateral, and forward copies of
  any

              


      


      
        
          
            E-9

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                notices
      or communications received by the Company with respect to the Collateral,
      all in such manner as the Agent or the other Secured Parties may
      require.

              


      

      


      5.02  Other Financing Statements
and Liens.  Without the prior written consent of the Agent,
acting at the direction of the Required Secured Parties, the Company shall not
(a) file or authorize the filing of any financing statement or like instrument
with respect to any of the Collateral in which the Agent is not named as the
sole secured party, or (b) cause or permit any Person other than the Agent to
have  “control” (as defined in Section 9-104, 9-105, 9-106 or
9-107 of the UCC) of any Deposit Account, Electronic Chattel Paper, Investment
Property, Letter-of-Credit Right constituting part of the
Collateral.

      


      5.03  Preservation of
Rights.  The Agent shall not be required to take steps
necessary to preserve any rights against prior parties to any of the
Collateral.

      


      5.04  Special Provisions Relating
to Intellectual Property.

      


      (a)  For the purpose of
enabling the Agent to exercise rights and remedies under Section 5.05 at
such time as the Agent shall be lawfully entitled to exercise such rights and
remedies, and for no other purpose, the Company hereby grants to the Agent for
the benefit of the Secured Parties, to the extent assignable, an irrevocable,
non-exclusive license (exercisable without payment of royalty or other
compensation to the Company) to use, assign, license or sublicense any of the
Intellectual Property now owned or hereafter acquired by the Company, wherever
the same may be located, including in such license reasonable access to all
media in which any of the licensed items may be recorded or stored and to all
computer programs used for the compilation or printout thereof.

      


      (b)  Notwithstanding anything
contained herein to the contrary, so long as no Event of Default shall have
occurred and be continuing, the Company will be permitted to exploit, use,
enjoy, protect, license, sublicense, assign, sell, dispose of or take other
actions with respect to the Intellectual Property in the ordinary course of the
business of the Company.  In furtherance of the foregoing, unless an
Event of Default shall have occurred and be continuing the Agent shall from time
to time, upon the request of the Company, execute and deliver any instruments,
certificates or other documents, in the form so requested, that the Company
shall have certified are appropriate (in its judgment) to allow it to take any
action permitted above (including relinquishment of the license provided
pursuant to clause (a) immediately above as to any specific Intellectual
Property).  Further, upon the payment in full of all of the Secured
Obligations and cancellation or termination of any commitment to purchase the
Notes under the Transaction Documents or earlier expiration of this Agreement or
release of the Collateral, the Agent shall grant back to the Company the license
granted pursuant to clause (a) immediately above.  The exercise
of rights and remedies under Section 5.05 by the Agent shall not terminate
the rights of the holders of any licenses or sublicenses theretofore granted by
the Company in accordance with the first sentence of this
clause (b).

      


      (c)  The Company will furnish
to the Agent from time to time (but, unless a Default shall have occurred and be
continuing, no more frequently than quarterly) statements and


      
        
          
            E-10

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      schedules
further identifying and describing the Copyright Collateral, the Patent
Collateral and the Trademark Collateral, respectively, and such other reports in
connection with the Copyright Collateral, the Patent Collateral and the
Trademark Collateral as the Agent may reasonably request, all in reasonable
detail; and promptly upon request of the Agent, following receipt by the Secured
Parties and the Agent of any statements, schedules or reports pursuant to this
clause (b), modify this Agreement by amending Annexes 2, 3
and/or 4, as the case may be, to include any Copyright, Patent or Trademark
that becomes part of the Collateral under this Agreement.

      5.05  Events of Default,
Etc.  If an Event of Default shall have occurred and be
continuing:

      


      
        	
                 
      

              	
                (a)  the
      Company shall, at the request of the Agent (acting at the direction of the
      Required Secured Parties), assemble the Collateral owned by it at such
      place or places, reasonably convenient to the Secured Parties, the Agent
      and the Company, designated in the Agent’s
  request;

              


      

      


      
        	
                 
      

              	
                (b)  the
      Agent (at the direction of the Required Secured Parties) may make any
      reasonable compromise or settlement deemed desirable with respect to any
      of the Collateral and may extend the time of payment, arrange for payment
      in installments, or otherwise modify the terms of, any of the
      Collateral;

              


      

      


      
        	
                 
      

              	
                (c)  the
      Agent shall have all of the rights and remedies with respect to the
      Collateral of a secured party under the Uniform Commercial Code (whether
      or not said Code is in effect in the jurisdiction where the rights and
      remedies are asserted) and such additional rights and remedies to which a
      secured party is entitled under the laws in effect in any jurisdiction
      where any rights and remedies hereunder may be asserted, including,
      without limitation, the right, to the fullest extent permitted by
      applicable law, to exercise all voting, consensual and other powers of
      ownership pertaining to the Collateral as if the Agent, on behalf of the
      Secured Parties, were the sole and absolute owner thereof (and the Company
      agrees to take all such action as may be appropriate to give effect to
      such right);

              


      

      


      
        	
                 
      

              	
                (d)  the
      Agent (at the direction of the Required Secured Parties) may, in its name
      or in the name of the Company or otherwise, demand, sue for, collect or
      receive any money or property at any time payable or receivable on account
      of or in exchange for any of the Collateral, but shall be under no
      obligation to do so; and

              


      

      


      
        	
                 
      

              	
                (e)  the
      Agent (at the direction of the Required Secured Parties) may, upon ten
      days’ prior written notice to the Company of the time and place, with
      respect to the Collateral or any part thereof that shall then be or shall
      thereafter come into the possession, custody or control of the Agent or
      its agents, sell, lease, assign or otherwise dispose of all or any part of
      such Collateral, at such place or places as the Agent (at the direction of
      the Required Secured Parties) deems best, and for cash or for credit or
      for future delivery (without thereby assuming any credit risk), at public
      or private sale, without demand of performance or notice of intention to
      effect any such disposition or of the time or place thereof (except such
      notice as is required above or by applicable statute and cannot be
      waived), and any Secured Parties, the Agent or anyone else may be
      the

              


      


      
        
          
            E-11

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                purchaser,
      lessee, assignee or recipient of any or all of the Collateral so disposed
      of at any public sale (or, to the extent permitted by law, at any private
      sale) and thereafter hold the same absolutely, free from any claim or
      right of whatsoever kind, including any right or equity of redemption
      (statutory or otherwise), of the Company, any such demand, notice and
      right or equity being hereby expressly waived and released.  In
      the event of any sale, assignment, or other disposition of any of the
      Trademark Collateral, the goodwill connected with and symbolized by the
      Trademark Collateral subject to such disposition shall be included, and
      the Company shall supply to the Agent or its designees, for inclusion in
      such sale, assignment or other disposition, all Intellectual Property
      relating to such Trademark Collateral.  The Agent (at the
      direction of the Required Secured Parties) may, without notice or
      publication, adjourn any public or private sale or cause the same to be
      adjourned from time to time by announcement at the time and place fixed
      for the sale, and such sale may be made at any time or place to which the
      sale may be so adjourned.

              


      

      


      The
Proceeds of each collection, sale or other disposition under this
Section 5.05, including by virtue of the exercise of the license granted to
the Agent for the benefit of the Secured Parties in Section 5.04(b), shall
be applied in the manner specified in Section 5.09.

      


      The Company recognizes that, by reason
of certain prohibitions contained in the Securities Act of 1933, as amended, and
applicable state securities laws, the Agent may be compelled, with respect to
any sale of all or any part of the Collateral, to limit purchasers to those who
will agree, among other things, to acquire the Collateral for their own account,
for investment and not with a view to the distribution or resale
thereof.  The Company acknowledges that any such private sales may be
at prices and on terms less favorable to the Agent than those obtainable through
a public sale without such restrictions, and, notwithstanding such
circumstances, agree that any such private sale shall be deemed to have been
made in a commercially reasonable manner and that the Agent shall have no
obligation to engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the respective Issuer or
issuer thereof to register it for public sale.

      


      5.06  Deficiency.  If
the proceeds of sale, collection or other realization of or upon the Collateral
pursuant to Section 5.05 are insufficient to cover the costs and expenses
of such realization and the payment in full of the Secured Obligations, the
Company shall remain liable for any deficiency.

      


      5.07  Locations;
Names.  Without at least 30 days’ prior written notice to the
Agent, the Company shall not change its location (as defined in
Section 9-307 of the UCC) or change its name from the name shown as its
current legal name on Annex 1.

      


      5.08  Private
Sale.  None of the Secured Parties or the Agent shall incur any
liability as a result of the sale of the Collateral, or any part thereof, at any
private sale pursuant to Section 5.05 conducted in a commercially
reasonable manner.  The Company hereby waives any claims against any
Secured Party or the Agent arising by reason of the fact that the price at which
the Collateral may have been sold at such a private sale was less than the price
that might have been obtained at a public sale or was less than the aggregate
amount of the Secured Obligations,


      
        
          
            E-12

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      even if
the Agent accepts the first offer received and does not offer the Collateral to
more than one offeree.

      


      5.09  Application of
Proceeds.  Except as otherwise expressly provided herein, the
Proceeds of any collection, sale or other realization of all or any part of the
Collateral pursuant hereto, and any other cash at the time held by the Agent for
the benefit of the Secured Parties under Section 4 or this Section 5,
shall be applied by the Agent:

      


      
        	
                 
      

              	
                First, to the
      payment of the costs and expenses of such collection, sale or other
      realization, including out-of-pocket costs and expenses of the Secured
      Parties and the Agent and the fees and expenses of its agents and counsel,
      and all expenses incurred and advances made by the Secured Parties and the
      Agent in connection therewith;

              


      

      


      
        	
                 
      

              	
                Second, to the
      payment of any amount payable to the Agent under the Purchase
      Agreement;

              


      

      


      
        	
                 
      

              	
                Third, to the
      payment in full of the Secured Obligations, in each case equally and
      ratably in accordance with the respective amounts thereof then due and
      owing or as the Secured Parties may otherwise specify;
  and

              


      

      


      
        	
                 
      

              	
                Finally, to the
      payment to the Company, or its successors or assigns, or as a court of
      competent jurisdiction may direct, of any surplus then
      remaining.

              


      

      


      5.10  Attorney-in-Fact.  Without
limiting any rights or powers granted by this Agreement to the Agent or the
Secured Parties while no Event of Default has occurred and is continuing, upon
the occurrence and during the continuance of any Event of Default the Agent is
hereby appointed the attorney-in-fact of the Company for the purpose of carrying
out the provisions of this Section 5 and taking any action and executing
any instruments that the Agent may deem necessary or advisable to accomplish the
purposes hereof, which appointment as attorney-in-fact is irrevocable and
coupled with an interest.  Without limiting the generality of the
foregoing, so long as the Agent shall be entitled under this Section 5 to
make collections in respect of the Collateral, the Agent shall have the right
and power to receive, endorse and collect all checks made payable to the order
of the Company representing any dividend, payment or other distribution in
respect of the Collateral or any part thereof and to give full discharge for the
same.

      


      5.11  Perfection.  Prior
to or concurrently with the execution and delivery of this Agreement, the
Company shall (i) file such financing statements and other documents in
such offices as the Agent (at the request of the Required Secured Parties) may
request to perfect the security interests granted by Section 3 of this
Agreement, (ii) cause the Agent, for the benefit of the Secured Parties, to
be listed as the lienholder on all certificates of title or ownership relating
to any Equipment valued in excess of $5,000 owned by the Company to the extent
the title thereto is governed by a certificate of title or ownership and to the
extent so requested by the Agent (at the request of the Required Secured
Parties), and (iii) execute and deliver such security agreements relating
to Collateral consisting of Intellectual Property as the Agent (at the
request


      
        
          
            E-13

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      of the
Required Secured Parties) may reasonably request.  Without limiting
the foregoing, the Company consents that UCC financing statements may be filed
describing the Collateral as “all assets” or “all personal property” of the
Company (provided that no such
description shall be deemed to modify the description of Collateral set forth in
Section 3).

      


      5.12  Termination.  Subject
to Section 6.12, when all Secured Obligations shall have been paid in full, this
Agreement shall terminate, and the Agent shall forthwith cause to be assigned,
transferred and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral and money received in
respect thereof, to or on the order of the Company and to be released and
canceled all licenses and rights referred to in
Section 5.04.  The Agent, at the expenses of the Company, shall
also execute and deliver to the Company upon such termination such Uniform
Commercial Code termination statements and such other documentation as shall be
reasonably requested by the Company to effect the termination and release of the
liens on the Collateral.

      


      Section 6.  Miscellaneous.

      


      6.01  Notices.  All
notices, requests, consents and demands hereunder shall be in writing and shall
be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

      


      (a)  if to the Company,
to:                                                                Particle
Drilling Technologies, Inc.

      5611 Baird Court

      Houston,
Texas  77041

      Attention:
Chief Executive Officer

      Facsimile:
713 224 6361

      


      with a
copy to:

      


      Vinson
& Elkins LLP

      1001
Fannin Street, Ste. 2500

      Houston,
Texas  77002

      Attention:  W.
Matthew Strock

      Facsimile:  713.615.5650;

      


      (b) if to
the Agent,
to:                                                                LC
Capital Master Fund, Ltd.

      680 5th
Avenue, 12th
Floor

      New York,
NY 10019

      Attention:  Steve
Lampe

      Facsimile:
212.581.8999.

      


      


      Any party
hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto.  All
notices and other


      
        
          
            E-14

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      communications
given to any party hereto in accordance with the provisions of this Agreement
shall be deemed to have been given on the date of receipt.

      


      6.02  No
Waiver.  No failure on the part of any Secured Party or the
Agent to exercise, and no course of dealing with respect to, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise by any Secured Party or the
Agent of any right, power or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or
remedy.  The remedies herein are cumulative and are not exclusive of
any remedies provided by law.

      


      6.03  Amendments,
Etc.  The terms of this Agreement may be waived, altered or
amended only by an instrument in writing duly executed by the Company and the
Agent (acting with the consent of the Required Secured Parties).

      


      6.04  Expenses.  The
Company agrees to reimburse the Secured Parties and the Agent for all costs and
expenses incurred (including, without limitation, the fees and expenses of legal
counsel) in connection with (i) any Event of Default and any enforcement or
collection proceeding resulting therefrom, including, without limitation, all
manner of participation in or other involvement with (w) performance by the
Secured Parties or the Agent of any obligations of the Company in respect of the
Collateral that the Company has failed or refused to perform,
(x) bankruptcy, insolvency, receivership, foreclosure, winding up or
liquidation proceedings, or any actual or attempted sale, or any exchange,
enforcement, collection, compromise or settlement in respect of any of the
Collateral, and for the care of the Collateral and defending or asserting rights
and claims of the Secured Parties or the Agent in respect thereof, by litigation
or otherwise, including expenses of insurance, (y) judicial or regulatory
proceedings and (z) workout, restructuring or other negotiations or
proceedings (whether or not the workout, restructuring or transaction
contemplated thereby is consummated) and (ii) the enforcement of this
Section 6.04, and all such costs and expenses shall be Secured Obligations
entitled to the benefits of the collateral security provided pursuant to
Section 3.

      


      6.05  Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of the Company and the Agent
(provided,
however, that the Company shall not assign or transfer its rights or obligations
hereunder without the prior written consent of the Required Secured
Parties).

      


      6.06  Counterparts.  This
Agreement may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument and any of the parties
hereto may execute this Agreement by signing any such counterpart.

      


      6.07  Governing Law; Jurisdiction;
Etc.

      


      (a)  Governing
Law.  This Agreement shall be construed in accordance with and
governed by the law of the State of New York.


      
        
          
            E-15

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      (b)  Submission to
Jurisdiction.  The Company hereby irrevocably and
unconditionally submits, for itself and its property, to nonexclusive
jurisdiction of the Supreme Court of the State of New York sitting in New York
County and of the United States District Court for the Southern District of New
York and any appellate court from any thereof, in any action or proceeding
arising out of or relating to this Agreement, or for recognition or enforcement
of any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in the State of New York or, to the
extent permitted by Government Rules, in such Federal court.  Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by Government Rules.  Nothing
in this Agreement shall affect any right that the Secured Parties or the Agent
may otherwise have to bring any action or proceeding relating to this Agreement
against the Company or its properties in the courts of any
jurisdiction.

      


      (c)  Waiver of
Venue.  The Company hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
referred to in paragraph (b) of this Section.  Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by Government
Rules, the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.

      


      (d)  Service of
Process.  Each party to this Agreement irrevocably consents to
service of process in the manner provided in Section 14.06(a) of the Purchase
Agreement.  Nothing in this Agreement will affect the right of any
party to this Agreement to serve process in any other manner permitted by
Government Rules.

      


      6.08  WAIVER OF JURY
TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE GOVERNMENT RULES, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT,
TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS NOTE BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

      


      6.09  Captions.  The
captions and section headings appearing herein are included solely for
convenience of reference and are not intended to affect the interpretation of
any provision of this Agreement.


      
        
          
            E-16

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      6.10  Severability.  If
any provision hereof is invalid and unenforceable in any jurisdiction, then, to
the fullest extent permitted by law, (a) the other provisions hereof shall
remain in full force and effect in such jurisdiction and shall be liberally
construed in favor of the Secured Parties in order to carry out the intentions
of the parties hereto as nearly as may be possible and (b) the invalidity
or unenforceability of any provision hereof in any jurisdiction shall not affect
the validity or enforceability of such provision in any other
jurisdiction.

      


      6.11  Reinstatement.  The
obligations of the Company under this Agreement and the security interest in,
and the Lien on the Collateral created hereunder, to the extent permitted by
applicable Government Rule, shall be automatically reinstated if and to the
extent that for any reason any payment by or on behalf of the Company in respect
of the Secured Obligations is rescinded or must be otherwise restored by any
holder of any of the Secured Obligations, whether as a result of any proceedings
in bankruptcy or reorganization or otherwise.  The Company agrees that
it will indemnify the Secured Parties and the Agent on demand for all reasonable
and reasonably documented costs and expenses (including reasonable and
reasonably documented fees of counsel) incurred by the Secured Parties or the
Agent, as applicable, in connection with such rescission or restoration,
including any such costs and expenses incurred in defending against any claim
alleging that such payment constituted a preference, fraudulent transfer or
similar payment under any bankruptcy, insolvency or similar law.

       

      6.12  Entire
Agreement.  This Agreement and the other Transaction Documents
constitute the entire contract among the parties relating to the subject matter
hereof and supersede any and all previous agreements and understandings, oral or
written, relating to the subject matter hereof.

      


      


      [SIGNATURE
PAGES FOLLOW]


      
        
          
            E-17

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      


      IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be duly executed and delivered as of the day and
year first above written.

      


      
        	
                 
      

              	
                PARTICLE
      DRILLING TECHNOLOGIES, INC.

              


      

            as
Parent

      


      By:                      ___________________________

      Name:

      Title:             Authorized
Signatory

      


      


      


      
        	
                 
      

              	
                PARTICLE
      DRILLING TECHNOLOGIES, INC.

              


      

            as
Delaware Sub

      


      By:                      ___________________________

            Name:

      Title:             Authorized
Signatory


      
        
          
            E-18

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


      LC
CAPITAL MASTER FUND, LTD.

      as Collateral Agent

      


      


      By:  ______________________________________

      Name:

      Title:

       

      


       


      
        
          
            E-19

            


            


          

           


        

        
           


          
            

          

        

        
           


        

      


       ANNEX
1

      


      


      FILING
DETAILS

      


      


      
        	
                 

                Current
      Legal Name (no trade names)

              	
                 

                Type
      of Organization (corporation, limited liability company, etc.)

              	
                 

                 

                 

                Jurisdiction

                 of
      Organization

              	
                 

                 

                 

                Organizational
      ID Number

                (if applicable)

              	
                 

                 

                 

                Current
      Mailing Address

              	
                Place
      of Business or Location of Chief Executive Officer

              	
                 

                 

                 

                Location

                of

                Goods

              	
                 

                 

                Former

                Legal

                Name(s)

                (if any)

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      


      

      



      
        
          
            


            


            Annex 1 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


       ANNEX
2

      


      


      “NEW
DEBTOR” EVENTS

      


      Description of
Event                                                                                                Date of
Event

      



      
        
          
            


            


            Annex 2 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


      


       ANNEX
3

      


      


      


      


      LIST
OF COPYRIGHTS, COPYRIGHT REGISTRATIONS AND

      APPLICATIONS FOR COPYRIGHT
REGISTRATIONS

      


      


      


      


      Title                          Date
Filed                                   Registration
No.                                               Effective
Date

      


      



      
        
          
            


            


            Annex 3 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


       ANNEX
4

      


      


      


      


      LIST OF PATENTS AND PATENT
APPLICATIONS

      


      


      


      File                      Patent                          Country                          Registration
No.                                             Date

      



      
        
          
            


            


            Annex 4 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


       ANNEX
5

      


      


      


      


      LIST
OF TRADE NAMES, TRADEMARKS, SERVICES MARKS,

      TRADEMARK
AND SERVICE MARK REGISTRATIONS AND

      APPLICATIONS
FOR TRADEMARK AND SERVICE MARK REGISTRATIONS

      


      


      U.S.
Trademarks

      


      


      Application (A)

      Registration
(R)                                               Registration

      Mark                              or Series No.
(S)                                              or Filing
Date

      



      
        
          
            


            


            Annex 5 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


      


      


      Foreign
Trademarks

      


      


      


      Application
(A)                                                                        Registration
or

      Mark                    Registration
(R)                                            Country                            Filing Date
(F)

      


      


      



      
        
          
            


            


            Annex 5 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


      ANNEX
6

      


      


      


      LIST
OF CONTRACTS, LICENSES AND OTHER AGREEMENTS

      



      
        
          
            


            Annex 6 to Security
Agreement 

          

           


        

        
           


          
            

          

        

        
           


        

      


       ANNEX
7

      


      


      


      


      INITIAL PLEDGED SHARES

      


      
        	
                Issuer

              	
                Holder

              	
                Percentage Held

              	
                Certificate Number

              	
                Type of Entity

              	
                Jurisdiction
      of Organization

              
	 
      	 
      	 
      	 
      	 
      	 
      


      

      


      


      


      


      


      


      


       


      
        
          
            Annex 7 to Security
Agreement