Document:

Exhibit 10.1

 

PURCHASE AND
SALE AGREEMENT

 

THIS PURCHASE AND SALE AGREEMENT (this “Agreement”)
is made and entered into as of the 16th day of August, 2004, by and
between Cano Energy Corporation, a
Texas Corporation (“Seller”), and
Cano
Petroleum, Inc., a Texas Corporation (“Buyer”).

 

Background

 

A.                                   Seller owns an overriding royalty interest
(the “ORRI”)
in and to the oil, gas and minerals produced and saved by virtue of the Oil,
Gas and Mineral Leases located in Lincoln County, Oklahoma covering 2,178 acres,
more or less, and known more particularly as the Davenport unit described in
Annex A attached hereto and incorporated herein by reference for all purposes.

 

B.                                     Seller is hereby selling to Buyer, and Buyer
is hereby purchasing from Seller, ten percent (10.0%) of eight-eighths (8/8ths)
of the ORRI (the “Purchased ORRI”).

 

C.                                     Buyer is currently managing Seller’s
accounting and records system (the “System”) and is correcting all material
defects of the System related to management and control of the System prior to
September 1, 2004 (“Material Defects”) before turning over
management and control of the System to Seller on or before September 16,
2004.

 

Terms and Conditions

 

In consideration of the mutual benefits to be
derived and the covenants, conditions and promises herein contained, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:

 

1.                                       Transaction.

 

1.1                                 Purchase and Sale. 
Subject to the terms and conditions of this Agreement, Seller hereby
sells, transfers and delivers to Buyer, and Buyer hereby purchases the
Purchased ORRI.

 

1.2                                 Consideration.  As consideration for the sale and transfer of the Purchased ORRI by
Seller, (1) Buyer is paying Seller in cash the sum of Six Hundred Sixty Seven
Thousand and No/100 Dollars ($667,000.00) (the “Purchase Price”) and (2)
Buyer is correcting Material Defects of the System.

 

2.                                       Covenants.

 

2.1                                 Payment Schedule. 
Upon execution of this Agreement, Buyer shall pay Seller in cash the sum
of Five Hundred Twenty-Five Thousand and No/100 Dollars ($525,000.00).  Buyer shall pay in cash the balance due
Seller of One Hundred Forty-Two Thousand and No/100 Dollars ($142,000.00) on or
before October 16, 2004.  The
Effective Time (as defined in Annex B) shall be increased by one day for every
day after October 16, 2004 that a balance remains due Seller on the
Purchase Price.

 

1

 

2.2                                 The System.  Before September 16,
2004, Buyer warrants that the System shall have no Material Defects.  The Effective Time shall be increased by one
day for every day the System retains Material Defects after September 15,
2004.  The adjustment of the Effective
Time due to Material Defects shall be in addition to adjustments to the
Effective Time due to delays in full payment of the Purchase Price.  The System shall be deemed free of Material
Defects when Seller’s accounting software, OGAS, reports an accurate balance
sheet, historical income statement and historical cash flow statement since
inception for an August 31, 2004 report date.

 

2.3                                 Overriding Royalty Assignment.  As
soon as reasonably practical following the receipt of the full Purchase Price
by Seller (the “Payment Date”), but no later than ten days from the Payment
Date, Seller shall assign the Purchased ORRI to Buyer.  The assignment of the Purchased ORRI shall
be in substantially the form attached hereto as Annex “B” and incorporated
herein by reference for all purposes.

 

2.4                                 Transaction Expenses. 
Except as expressly otherwise provided herein, each party to this
Agreement shall bear its respective expenses incurred in connection with the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of agents,
representatives, counsel and accountants. 
In the case of termination of this Agreement, the obligation of each
party to pay its own expenses shall be subject to any rights of such party arising
from a breach of this Agreement by another party.

 

2.5                                 Confidentiality. 
Each party hereto will maintain in strictest confidence, and not use to
the detriment of any party hereto, any written, oral or other information
obtained in confidence from any other party hereto regarding the transactions
contemplated by this Agreement; provided, however, this confidentiality
restriction shall not be applicable if (i) the information to be divulged is
already known to the divulging party as a result of being obtained from others
not bound by a duty of confidentiality; (ii) the information becomes publicly
available through no fault of the divulging party; (iii) the use of the
information is necessary or appropriate in making any filings or obtaining any
consent or approval required for the consummation of the transactions
contemplated hereby; or (iv) the furnishing or use of the information is
required by or necessary or appropriate in connection with legal proceedings.

 

3.                                       Miscellaneous.

 

3.1                                 Notices.  Except as otherwise set forth
herein, all notices given in connection with this Agreement shall be in writing
and shall be delivered either by personal delivery, by telecopy or similar
facsimile means, by certified or registered mail, return receipt requested, or
by express courier or delivery service, addressed to the parties hereto at the
following addresses:

 

Seller:

 

c/o
Peter Partain

309
West Seventh Street

Suite
1600

Fort
Worth, Texas 76102

Telecopy
No.: 817-698-0760

 

2

 

Buyer:

 

c/o
Jeff Johnson

309
West Seventh Street

Suite
1600

Fort
Worth, Texas 76102

Telecopy
No.: 817-698-0900

 

or at such other address and number as either
party shall have previously designated by written notice given to the other
party in the manner hereinabove set forth. 
Notices shall be deemed given when received, if sent by telecopy or
similar facsimile means (confirmation of such receipt by confirmed facsimile
transmission being deemed receipt of communications sent by telecopy or other
facsimile means); and when delivered and receipted for (or upon the date of
attempted delivery where delivery is refused), if hand-delivered, sent by
express courier or delivery service, or sent by certified or registered mail,
return receipt requested.

 

3.2                                 Further Assurances.  The parties hereto agree (i) to furnish upon
request to each other such further information; (ii) to execute and deliver to
each other such other documents; and (iii) to do such other acts and things,
all as the other party hereto may at any time reasonably request for the
purpose of carrying out the intent of this Agreement and the documents referred
to herein.

 

3.3                                 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative.  Neither
the failure nor any delay on the part of any party in exercising any right,
power or privilege under this Agreement or the documents referred to herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.  To the maximum extent permitted by
applicable law, (i) no claim or right arising out of this Agreement or the
documents referred to herein can be discharged by one party hereto, in whole or
in part, by a waiver or renunciation of the claim or right unless in writing
signed by the other party hereto; (ii) no waiver which may be given by a party
hereto shall be applicable except in the specific instance for which it is
given; and (iii) no notice to or demand on one party hereto shall be deemed to
be a waiver of any obligation of such party or of the right of the party giving
such notice or demand to take further action without notice or demand as provided
in this Agreement or the documents referred to herein.

 

3.4                                 Entire Agreement and Modification. 
This Agreement is intended by the parties to this Agreement as a final
expression of their agreement with respect to the subject matter hereof, and
are intended as a complete and exclusive statement of the terms and conditions
of that agreement.  This Agreement may
not be modified, rescinded, or terminated orally, and no modification,
rescission, termination or attempted waiver of any of the provisions hereof (including
this Section) shall be valid unless in writing and signed by the party against
whom the same is sought to be enforced.

 

3.5                                 Assignments, Successors and No Third-Party
Rights.  Neither this Agreement nor any of the rights
and obligations hereunder may be assigned by either party without the express
written consent of the other party hereto. 
This Agreement shall apply to and be binding in all respects upon, and
shall inure to the benefit of, the successors and permitted

 

3

 

assigns of the parties hereto.  Nothing expressed or referred to in this
Agreement is intended or shall be construed to give any person or entity other
than the parties to this Agreement any legal or equitable right, remedy or
claim under or with respect to this Agreement, or any provision hereof, it
being the intention of the parties hereto that this Agreement and all of its
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement, their successors and permitted assigns, and for the benefit
of no other person or entity.

 

3.6                                 Severability.  In
the event any court of competent jurisdiction shall hold any provision of this
Agreement invalid or unenforceable, such holding shall not invalidate or render
unenforceable any other provisions hereof. 
Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable.

 

3.7                                 Section Headings, Construction. 
The headings of articles and sections contained in this Agreement are
provided for convenience only.  They
form no part of this Agreement and shall not affect its construction or
interpretation.  All references to
articles and sections in this Agreement refer to the corresponding articles and
sections of this Agreement.  All words
used herein shall be construed to be of such gender or number as the
circumstances require.  Unless otherwise
specifically noted, the words “herein,” “hereof,” “hereby,” “hereinabove,”
“hereinbelow,” “hereunder,” and words of similar import, refer to this
Agreement as a whole and not to any particular section, subsection, paragraph,
clause or other subdivision hereof.

 

3.8                                 Consent or Permission Not to be Unreasonably
Withheld.  Except as otherwise expressly stated herein,
whenever the consent or permission of a party hereto is required hereunder,
such consent or permission shall not be unreasonably withheld or delayed.

 

3.9                                 Time of Essence. 
With regard to all time periods set forth or referred to in this
Agreement, time is of the essence.

 

3.10                           Governing Law. 
This Agreement shall be governed by, and construed under, the laws of
the State of Texas without regard to conflicts of laws, all rights and remedies
being governed by such laws.

 

3.11                           Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original copy of this
Agreement, and all of which, when taken together, shall be deemed to constitute
but one and the same agreement.

 

4

 

Signatures

 

To evidence the binding effect of the
covenants and agreements described above, Seller (by its duly authorized
general partner) and Buyer (by its duly authorized officer) have each caused
this Agreement to be executed as of the date first written above.

 

	
   

  	
  Seller:

  
	
   

  	
   

  
	
   

  	
  CANO ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Peter Partain

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  
	
   

  	
  Buyer:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Jeff Johnson

  
	
   

  	
   

  	
  President

  
					

 

5

 

Annex “A”

To

Purchase and Sale Agreement

 

The Oil, Gas
and Mineral Leases

 

Wells and Interests

 

	
  Well Name:

  	
   

  	
  Legal
  Description:

  	
   

  	
  Interest
  Owned:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
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8

 

Annex “B”

To

Purchase and Sale Agreement

 

Assignment of Overriding Royalty Interest

 

9

 

ASSIGNMENT OF OVERRIDING ROYALTY

 

THIS ASSIGNMENT OF OVERRIDING
ROYALTY (this “Assignment”),  effective as of October 1, 2004, at
12:00 a.m., Central Daylight Time (the “Effective
Time”), is from Cano Energy
Corporation, a Texas Corporation (“Assignor”),
to Cano Petroleum, Inc., a Texas
Corporation (“Assignee”).

 

Assignment and Conveyance

 

For
and in consideration of $10.00 and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Assignor does hereby
bargain, sell, transfer, assign and convey to Assignee, a ten percent (10.0%)
overriding royalty interest with respect to the oil, gas and other minerals
produced and saved by virtue of the Oil, Gas and Mineral Leases described in
Annex “A” attached hereto and incorporated herein by reference for all purposes
(the “Leases”), free and clear of
all costs and expenses except applicable taxes.

 

TO HAVE AND TO HOLD the overriding royalty interest
herein conveyed, together with all rights, privileges and appurtenances in any
way belonging or pertaining thereto, unto Assignee, its successors and assigns,
forever.  This Assignment is also made
without warranty or recourse whatsoever, but with full transfer, substitution
and subrogation, but with all the rights and actions of warranty that Assignor
may have.

 

Signature

 

To
evidence the binding effect of the foregoing, Assignor has caused this
Assignment to be executed by its duly authorized officer this
     day of October 2004, but effective as of the
Effective Time.

 

 

	
   

  	
  CANO ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Peter Partain

  	
   

  
	
   

  	
   

  	
  President

  	
   

  
					

 

10

 

	
  STATE OF OKLAHOMA

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF LINCOLN

  	
  §

  

 

This instrument was acknowledged before me on this
                
day of October 2004, by Peter Partain, President of Cano Energy Corporation, a Texas
corporation, on behalf of said company.

 

[NOTARY SEAL]

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public in
  and for the State of Texas

  
	
   

  
	
  My commission
  expires:

  	
   

  	
   

  
					

 

11<PAGE>

                                                                     Exhibit 4.3

================================================================================

                                TOWER GROUP, INC.

                                       AND

                     FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

                            ------------------------

                                WARRANT AGREEMENT

                         DATED AS OF ____________, 2004

                            ------------------------

================================================================================

<PAGE>

                                WARRANT AGREEMENT

         This Warrant Agreement (this "Agreement") is made as of ____________,
2004 between TOWER GROUP, INC., a Delaware corporation (the "Company"), and
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. ("FBR").

                                    RECITALS

         A. The Company and American Re-Insurance Company propose to sell,
pursuant to an Underwriting Agreement dated ___________, 2004 between the
Company, the Selling Stockholders and the Underwriters, as such terms are
defined therein (the "Underwriting Agreement"), up to __________ shares (the
"Initial Shares") of common stock, par value $.01 per share, of the Company (the
"Common Stock") to the Underwriters, for which FBR is acting as lead
representative, and the Company and certain Selling Stockholders propose to sell
up to _________ shares (the "Option Shares") of Common Stock, to cover
over-allotments, if any (the "Offering").

         B. The Company deems it advisable, in consideration for the services
rendered to the Company by FBR as lead underwriter in connection with the
Offering, to issue to FBR warrants (the "Warrants") entitling the holders
thereof to purchase an aggregate of _______ shares of Common Stock, representing
an amount equal to 1.4% of the Initial Shares being offered to the public. The
shares of Common Stock issued or issuable upon exercise of the Warrants are
referred to as the "Warrant Shares".

         C. The Company desires to enter into this Agreement to set forth the
terms and conditions of the Warrants and the rights of the holders thereof.

         NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein contained, the parties hereto agree as follows:

                                    ARTICLE I

      ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF WARRANT CERTIFICATES

         SECTION 1.01. Form of Warrant Certificates. The Warrants shall be
evidenced by certificates (the "Warrant Certificates") substantially in the form
of Exhibit A and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with any law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any securities exchange, or to conform to usage, or as
consistently herewith may be determined by the officers executing such Warrant
Certificates as evidenced by their execution of the Warrant Certificates. Each
Warrant Certificate shall evidence the right, subject to the provisions of this
Agreement and of the Warrant Certificate, to purchase the number of shares of
Common Stock stated therein, adjusted as provided for in Article III hereof,
upon payment of the Exercise Price (as defined in Section 2.01 hereof).

<PAGE>

         SECTION 1.02. Execution of Warrant Certificates. Each Warrant
Certificate, whenever issued, shall (i) be dated as of the date of signature
thereof by the Company either upon initial issuance or upon exchange,
substitution or transfer and (ii) be signed manually by, or bear the facsimile
signature of, the Chairman of the Board or the President or a Treasurer or a
Vice President of the Company. In the event any officer of the Company whose
manual or facsimile signature has been placed upon any Warrant Certificate shall
have ceased to be such before such Warrant Certificate is issued, such Warrant
Certificate may be issued with the same effect as if such officer had not ceased
to be such at the date of issuance. Any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, whether or not any such person was such an officer at the
date of the execution of this Agreement.

         SECTION 1.03. Issuance, Delivery and Registration of Warrant
Certificates. The Company shall issue and deliver, at the closing of the sale of
the Initial Shares to the Underwriters as provided in the Underwriting
Agreement, to FBR or its designees, a Warrant Certificate representing the
Warrants, in substantially the form of Exhibit A. Additionally, the Company
shall sign and deliver Warrant Certificates upon exchange, transfer or
substitution for one or more previously signed Warrant Certificates as
hereinafter provided. The Company shall maintain books for the registration of
transfers and exchanges of Warrant Certificates (the "Warrant Register").

         SECTION 1.04. Transfer and Exchange of Warrant Certificates. The
Company, from time to time, shall register the transfer of any outstanding
Warrant Certificates in the Warrant Register upon surrender at the principal
office of the Company of Warrant Certificates accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Company, duly
executed by the Warrantholder (as defined in Section 5.11 hereof) or the
Warrantholder's attorney duly authorized in writing, and evidence, satisfactory
to the Company, of compliance with the provisions of Section 5.04 and the other
terms and conditions of transfer specified herein. Upon any such registration of
transfer, a new Warrant Certificate shall be signed by the Company and issued to
the transferee and the surrendered Warrant Certificate shall be canceled by the
Company. Warrant Certificates may be exchanged at the option of the holder
thereof, upon surrender, properly endorsed, at the principal office of the
Company, with written instructions, for other Warrant Certificates signed by the
Company entitling the registered holder thereof, subject to the provisions
thereof and of this Agreement, to purchase in the aggregate a like number of
shares of Common Stock as represented by the Warrant Certificate so surrendered.
The Company may require the payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any such exchange or
transfer.

                                       2
<PAGE>

                                   ARTICLE II

      SHARES OF COMMON STOCK ISSUABLE, EXERCISE PRICE, EXPIRATION DATE AND
                              EXERCISE OF WARRANTS

         SECTION 2.01. Warrant Shares Issuable; Exercise Price; Expiration Date.
Each Warrant Certificate shall entitle the registered holder thereof, subject to
the provisions thereof and of this Agreement, to purchase from the Company at
any time, or from time to time, from the first anniversary of the date of the
prospectus contained in the registration statement on Form S-1 filed by the
Company with the U.S. Securities and Exchange Commission in connection with the
Offering to the close of business on the fifth anniversary of such date (or, if
such date is not a Business Day (as defined below), the immediately preceding
Business Day) (the "Exercise Period") the number of shares of Common Stock
stated therein, adjusted as provided in Article III, upon payment of $____ per
share (which price is equal to the Offering price), adjusted as provided in
Article III. Such price, as in effect from time to time as provided in Article
III, is referred to as the "Exercise Price." Each Warrant not exercised during
the Exercise Period set forth above shall become void, and all rights thereunder
and all rights in respect thereof under this Agreement shall cease at the end of
such period. For purposes of this Agreement, the term "Business Day" means any
day of the week other than a Saturday, Sunday or a day which in The City of New
York or in the city in which the principal office of the Company is located
shall be a legal holiday or a day on which banking institutions are authorized
or required by law to close.

         SECTION 2.02. Exercise of Warrants. (a) Warrants may be exercised by
surrendering the Warrant Certificate evidencing such Warrants at the principal
office of the Company or at the office of the Company's transfer agent, with the
Election to Exercise form attached as Attachment 1 to the Warrant Certificate
duly completed and signed, and by paying in full to the Company (i) in cash,
(ii) by certified or official bank check payable to the Company's order, (iii)
by wire transfer, (iv) through the surrender of shares of Common Stock valued at
the Current Market Value (as defined below) of the Common Stock on the date of
exercise, (v) provided that the Current Market Value (as defined below) on the
date of exercise exceeds the Exercise Price, by a Cashless Exercise (as defined
below) or (vi) by any combination of the foregoing, the Exercise Price for each
Warrant Share as to which Warrants are then being exercised and any applicable
taxes, other than taxes that the Company is required to pay hereunder. A
Warrantholder may exercise such Warrantholder's Warrant for the full number of
Warrant Shares issuable upon exercise thereof or any lesser number of whole
Warrant Shares.

For purposes of this Agreement, a "Cashless Exercise" shall mean an exercise of
a Warrant in accordance with the immediately following two sentences. To effect
a Cashless Exercise, the holder may exercise a Warrant or Warrants without
payment of the Exercise Price in cash by surrendering such Warrant or Warrants
(represented by one or more Warrant Certificates) and, in exchange therefor,
receiving such number of Warrant Shares equal to the product of (1) that number
of Warrant Shares which would be issuable in the event of an exercise with
payment in cash of the Exercise Price and (2) the Cashless Exercise Ratio. The
"Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the
excess of the Current Market Value per share of Common Stock on the date of
exercise over the Exercise Price per share of Common Stock as of the date of
exercise and the denominator of which is the Current Market Value per share of
Common Stock on the date of exercise. Upon surrender of a Warrant Certificate
representing more than one Warrant in connection with a holder's option to elect
a Cashless Exercise, such holder must specify the number of Warrants for which
such Warrant Certificate is to be exercised (assuming payment with no Cashless
Exercise). All provisions of this Agreement shall be applicable with respect to
a Cashless Exercise of a Warrant Certificate for less than the full number of
Warrants represented thereby.

                                       3
<PAGE>

For purposes of this Agreement, "Current Market Value" shall mean (i) if the
security is not registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the value of the security, determined in good faith by the
board of directors of the Company and set forth in a certificate thereof, or
(ii) (a) if the security is registered under the Exchange Act, the average of
the volume weighted average sales prices of the securities for the 20
consecutive trading days immediately preceding such date, or (b) if the security
has been registered under the Exchange Act for less than 20 consecutive trading
days before such date, then the average of the closing sales prices for all of
the trading days before such date for which closing sales prices are available.
The closing sales price for each such trading day shall be: (A) in the case of a
security listed or admitted to trading on any U.S. national securities exchange
or quotation system, the closing sales price, regular way, on such day, or if no
sale takes place on such day, the average of the closing bid and asked prices on
such day on the principal U.S. national securities exchange or quotation system
on which the security is listed or admitted to trading, (B) in the case of a
security not then listed or admitted to trading on any U.S. national securities
exchange or quotation system, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation source designated by the Company,
(C) in the case of a security not then listed or admitted to trading on any U.S.
national securities exchange or quotation system and as to which no such
reported sale price or bid and asked prices are available, the Current Market
Value shall be determined as if the securities were not registered under the
Exchange Act.

         (b) As soon as practicable after the exercise of any Warrants and
payment by the Warrantholder of the full Exercise Price (including any election
of a Cashless Exercise) for the Warrant Shares as to which such Warrants are
then being exercised, the Company will requisition from the registrar and
transfer agent of the shares of Common Stock and deliver to or upon the order of
such Warrantholder a certificate or certificates for the number of full Warrant
Shares to which such Warrantholder is entitled (taking into account any Cashless
Exercise), registered in the name of such Warrantholder or, subject to
compliance with the terms and conditions hereof with respect to transfers, as
such Warrantholder shall direct. Fractional Warrant Shares that otherwise would
be issuable in respect of such exercise shall be paid in cash as provided in
Section 2.03 hereof, and the number of Warrant Shares issuable to such
Warrantholder shall be rounded down to the next nearest whole number. If such
Warrant Certificate shall not have been exercised in full, the Company will
issue to such Warrantholder a new Warrant Certificate exercisable for the number
of shares of Common Stock as to which such Warrant shall not have been exercised
(taking into account any Cashless Exercise). The Company will cancel all
Warrants so surrendered.

                                       4
<PAGE>

         (c) Each person in whose name any such certificate for Warrant Shares
is issued shall for all purposes be deemed to have become the holder of record
of such Warrant Shares on the date on which the Warrant Certificate was
surrendered to the Company and payment of the Exercise Price and any applicable
taxes was made to the Company, irrespective of the date of delivery of such
certificate for Warrant Shares.

         (d) All Warrant Shares when issued will be duly authorized, validly
issued, fully paid and non-assessable. The Company will pay all documentary
stamp taxes attributable to the initial issuance of Warrant Shares. The Company
will not be required, however, to pay any tax imposed in connection with any
transfer involved in the issue of the Warrant Shares in a name other than that
of the Warrantholder. In such case, the Company will not be required to issue
any certificate for Warrant Shares until the person or persons requesting the
same shall have paid to the Company the amount of any such tax or shall have
established to the Company's satisfaction that the tax has been paid or that no
tax is due.

         SECTION 2.03. No Fractional Shares to Be Issued. If more than one
Warrant Certificate shall be surrendered for exercise at one time by the same
holder, the number of full Warrant Shares which shall be issuable upon exercise
thereof shall be computed on the basis of the aggregate number of Warrants so
surrendered (and giving effect to the election of any Cashless Exercise). The
Warrantholders, by their acceptance of the Warrant Certificates, expressly waive
their right to receive any fraction of a Warrant Share or a share certificate
representing a fraction of a Warrant Share. In lieu thereof, the Company will
purchase such fractional interest for an amount in cash equal to the Current
Market Value of such fractional interest.

         SECTION 2.04. Cancellation of Warrants. The Company shall cancel any
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, exchange or substitution, and no Warrant
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall destroy canceled
Warrant Certificates. If the Company shall acquire any of the Warrants, such
acquisition shall not operate as a redemption or termination of the right
represented by such Warrants unless and until the Warrant Certificates
evidencing such Warrants are surrendered to the Company for cancellation.

                                   ARTICLE III

            ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.;
            RESERVATION OF SHARES OF COMMON STOCK; PAYMENT OF TAXES

         SECTION 3.01. Adjustment of Exercise Price and Number of Warrant
Shares. The Exercise Price shall be subject to adjustment from time to time as
provided in this Article III. After each adjustment of the Exercise Price, each
Warrantholder shall at any time thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.

                                       5
<PAGE>

         SECTION 3.02. Stock Dividends. If the Company shall declare a dividend
or any other distribution upon any capital stock which is payable in shares of
Common Stock or securities convertible into shares of Common Stock at a
conversion price less than the Current Market Value of a share of Common Stock
on the date such dividend or distribution is declared, the Exercise Price shall
be reduced by multiplying the Exercise Price in effect immediately prior to such
dividend or other distribution by the quotient obtained by dividing (i) the
number of shares of Common Stock outstanding immediately prior to such
declaration by (ii) the sum of the total number of shares of Common Stock
outstanding immediately after such declaration (including any shares of Common
Stock payable in connection with such declaration) and the number of shares of
Common Stock (if any) issuable upon conversion of any such convertible
securities. All shares of Common Stock and all convertible securities issuable
in payment of any dividend or other distribution upon the capital stock of the
Company shall be deemed to have been issued or sold without consideration.

         SECTION 3.03. Stock Splits and Reverse Stock Splits. If the Company
shall subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price shall be proportionately reduced and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
increased. If the Company shall combine the outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be proportionately
increased and the number of Warrant Shares issuable upon exercise of each
Warrant shall be proportionately decreased.

         SECTION 3.04. Reorganizations and Asset Sales. If any capital
reorganization or reclassification of the Company, or any consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of the assets of the Company shall be effected in such a way
that the holders of the shares of Common Stock shall be entitled to receive
securities, assets or other property with respect to or in exchange for shares
of Common Stock, adequate provision shall be made, prior to and as a condition
of such reorganization, reclassification, consolidation, merger or sale, whereby
each Warrantholder shall have the right to receive, upon the terms and
conditions specified herein and in addition to or in lieu of (as applicable) the
Warrant Shares otherwise receivable upon the exercise of such Warrants, such
securities or assets or other property as would have been issued or payable with
respect to or in exchange for the number of Warrant Shares otherwise receivable
after the happening of such reorganization, reclassification, consolidation,
merger or sale had such Warrantholder exercised such Warrant immediately prior
to such action. In any such case appropriate provision shall be made with
respect to the rights and interests of such Warrantholder so that the provisions
of this Agreement shall be applicable with respect to any securities, assets or
other property thereafter deliverable upon exercise of the Warrants. The Company
shall not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the survivor or successor
corporation resulting from such consolidation or merger or the purchaser of such
assets shall assume by written instrument delivered to each holder of Warrants
the obligation to deliver to such holder such securities, assets or other
property as such holder may be entitled to receive, subject to payment of the
Exercise Price.

                                       6
<PAGE>

         SECTION 3.05. Covenant to Reserve Shares for Issuance on Exercise. (a)
The Company will cause an appropriate number of shares of Common Stock to be
duly and validly authorized and reserved and will keep available out of its
authorized shares of Common Stock, solely for the purpose of issue upon exercise
of Warrants as herein provided, the full number of shares of Common Stock, if
any, then issuable if all outstanding Warrants then exercisable were to be
exercised. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient for such purpose, the Company will take such
action as, in the opinion of its counsel, may be necessary to increase its
authorized but unissued Common Stock to such number of shares as shall be
sufficient for such purpose. Prior to the issuance of any Warrant Shares, the
Company shall secure the listing of such Warrant Shares upon any securities
exchange upon which shares of Common Stock are then listed, if any.

         (b) The Company hereby authorizes and directs its current and future
transfer agents for the shares of Common Stock at all times to reserve such
number of authorized shares as shall be requisite for such purpose. The Company
will supply such transfer agents with duly executed stock certificates for such
purposes. Promptly after the date of expiration of the Warrants, no shares shall
be reserved in respect of such Warrants.

         SECTION 3.06. Statements on Warrants. The form of Warrant Certificate
need not be changed because of any adjustment made pursuant to this Article III,
and Warrant Certificates issued after such adjustment may state the same
Exercise Price and the same number of shares of Common Stock as are stated in
the Warrant Certificates initially issued pursuant to this Agreement. The
Company, however, may at any time in its sole discretion (which shall be
conclusive) make any change in the form of Warrant Certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
Certificates thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be in the
form as so changed.

         SECTION 3.07. Notice of Change in Securities Issuable, etc. Whenever
the securities issuable or deliverable in exchange for Warrants are changed
pursuant to this Article III, the Company shall, within ten (10) days after the
occurrence of the event resulting in such change, deliver or send to each
Warrantholder a notice, executed by its Chief Financial Officer, setting forth
in reasonable detail the facts requiring the change and specifying the effective
date of such change and the number or amount of, and describing the shares of
Common Stock or other securities issuable or deliverable in exchange for, each
Warrant as so changed. Failure to publish such notice, or any defect in such
notice, shall not affect the legality or validity of any such change provided
that the Warrantholders are not materially prejudiced thereby.

                                       7
<PAGE>

         SECTION 3.08. References to Common Stock. Unless the context otherwise
indicates, all references to Common Stock in this Agreement and in the Warrant
Certificates, in the event of a change under this Article III, shall be deemed
to refer also to any other securities or other property issuable or deliverable
in exchange for Warrants pursuant to such change.

         SECTION 3.09. De Minimis Changes in the Exercise Price Not Required.
Notwithstanding anything to the contrary in this Article III, no adjustment in
the Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least five cents ($0.05) in such price; provided,
however, that any adjustments which, by reason of this Section 3.09, are not
required to be made, shall be carried forward and taken into account in any
subsequent adjustment required to be made hereunder. All calculations under this
Article III shall be made to the nearest cent or to the nearest one-hundredth of
a share, as the case may be. Notwithstanding anything in this Article III to the
contrary, so long as the changes in the Exercise Price described below would not
adversely affect the rights or interests of the holders of Warrants, the Company
shall be entitled to make such changes in the Exercise Price, in addition to
those required by this Article III, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Sock, hereafter made by the Company shall not result in any Federal income tax
liability pursuant to the provisions of Section 305(c) of the Internal Revenue
Code and the regulations thereunder to the holders of Common Stock or other
securities of the Company that are convertible, exercisable or exchangeable into
shares of Common Stock.

                                   ARTICLE IV

           OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS

         SECTION 4.01. No Rights as Stockholders. Nothing contained in this
Agreement or in any Warrant Certificate shall be construed as conferring on any
Warrantholder any rights whatsoever as a stockholder of the Company, including
the right to vote at, or to receive notice of, any meeting of stockholders of
the Company; nor shall the consent of any such holder be required with respect
to any action or proceeding of the Company; nor shall any such holder, by reason
of the ownership or possession of a Warrant or the Warrant Certificate
representing the same, either at, before or after exercising such Warrant, have
any right to receive any cash dividends, stock dividends, allotments or rights,
or other distributions (except as provided herein), paid, allotted or
distributed or distributable to the stockholders of the Company prior to the
date of the exercise of such Warrant, nor shall such holder have any right not
expressly conferred by this Agreement or such holder's Warrant or Warrant
Certificate.

                                       8
<PAGE>

         SECTION 4.02. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate is lost, stolen, mutilated or destroyed, the Company in its
discretion may issue, in exchange and substitution for and upon cancellation of
the mutilated Warrant Certificate, or in lieu of and substitution for the
Warrant Certificate lost, stolen or destroyed, upon receipt of a proper
affidavit or other evidence satisfactory to the Company (and surrender of any
mutilated Warrant Certificate) and a bond of indemnity issued at the sole cost
and expense of the Warrantholder, in form and amount and with corporate surety
satisfactory to the Company, in each instance protecting the Company, a new
Warrant Certificate of like tenor and exercisable for an equivalent number of
shares of Common Stock as the Warrant Certificate so lost, stolen, mutilated or
destroyed. Any such new Warrant Certificate shall constitute an original
contractual obligation of the Company, whether or not the allegedly lost,
stolen, mutilated or destroyed Warrant Certificate at any time shall be
enforceable by anyone. An applicant for such a substitute Warrant Certificate
also shall comply with such other reasonable regulations and pay such other
reasonable charges as the Company may prescribe. All Warrant Certificates shall
be held and owned upon the express condition that the foregoing provisions are
exclusive with respect to the replacement of lost, stolen, mutilated or
destroyed Warrant Certificates, and shall preclude any and all other rights or
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without their surrender. For sake of clarity, the Company, FBR and
the Warrantholders acknowledge that the foregoing is not intended to limit the
Company from asserting any rights or remedies in respect of matters other than
the requirements to be satisfied for the replacement of lost, stolen, mutilated
or destroyed Warrant Certificates.

         SECTION 4.03.  Liquidation, Merger, etc.; Notice to Warrantholders.
If:

         (a) the Company shall authorize the issuance to all holders of Common
Stock of rights or warrants to subscribe for or purchase capital stock of the
Company or of any other subscription rights or warrants; or

         (b) the Company shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or cash distributions payable out of current earnings, retained
earnings or earned surplus or dividends payable in Common Stock); or

         (c) there shall be proposed any consolidation or merger to which the
Company is to be a party and for which approval of the holders of Common Stock
is required, or the conveyance or transfer of the properties and assets of the
Company substantially as an entirety, or such other merger or transaction
described in Section 3.04 hereof; or

         (d) there shall be proposed a reorganization, voluntary or involuntary
dissolution, liquidation or winding up of the Company; then the Company shall
cause to be given to each Warrantholder, by first-class mail, postage prepaid, a
written notice stating (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such rights, warrants or
distribution are to be determined or (ii) the date on which any consolidation,
merger, conveyance, transfer, reorganization, reclassification, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange the shares for securities or other property, if any,
deliverable upon the consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation or winding up. Such
notice shall be filed and mailed in the case of a notice pursuant to (i) above
at least ten calendar days before the record date specified and in the case of a
notice pursuant to clause (ii) above at least 20 calendar days before the
earlier of the dates specified. From the time notice is required to be given
pursuant to this Section 4.03, the holders of Warrants shall be entitled to
exercise such Warrants regardless of the provisions of Section 2.01.

                                       9
<PAGE>

                                    ARTICLE V

                                  MISCELLANEOUS

         SECTION 5.01. Registration of Warrant Shares. (a) Upon the receipt by
the Company at any time during the Exercise Period of the written request of
registered holders of Warrants and of Warrant Shares representing an aggregate
of 25% or more of the Warrant Shares, the Company shall file with the U.S.
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), such registration statements and
amendments thereto and such other filings as may be required to permit the
public offering and sale of such Warrant Shares in compliance with the
Securities Act. The Company shall be required to register Warrant Shares no more
than once pursuant to this Section 5.01(a). If the offering pursuant to any
registration statement described in this Section 5.01(a) is made through
underwriters and the managing underwriter of such offering shall advise the
Company in writing that, in its opinion, the distribution of the number of
Warrant Shares requested to be included in the registration concurrently with
any securities being registered by the Company or other holders of the Company's
securities with the right to request inclusion in such offering would materially
and adversely affect the distribution of such securities by the Company,
including with respect to the price at which the shares can be sold, then
priority for including shares of Common Stock in the offering, up to the number
advised by the managing underwriter, shall be allocated first, to each person
who has requested inclusion of Warrant Shares pursuant to the "demand"
registration right set forth in this Section 5.01(a), pro rata in proportion to
the respective number of Warrant Shares to be included by them, and second, to
the extent of any remaining capacity as advised by the managing underwriter, to
the Company and to each other person who has requested inclusion of shares of
Common Stock (including Warrant Shares) pursuant to a "piggyback" registration
right, pro rata in proportion to the respective number of shares of Common Stock
to be included by them. Such "demand" registration right shall not have a
duration of more than five years from the date of effectiveness or the
commencement of sales of the Offering. Warrantholders shall have no more than
one such "demand" registration right, whether at the Company's expense or
otherwise.

         (b) The Company will permit, subject to the last sentence of this
Section 5.01(b), any Warrant Shares to be included, at the request of the
holders of such Warrant Shares, in any registration of shares of Common Stock of
the Company (other than shares of Common Stock for a stock option or stock
purchase plan or shares registered on Form S-4 in connection with an arms-length
merger transaction) under a registration statement filed by the Company under
the Securities Act at any time during the Exercise Period. The Company shall
provide written notice to the record holders of all Warrants and Warrant Shares
at least 15 days prior to the filing of any such registration statement sent by
registered mail to the address of record of each such holder. If the offering
pursuant to any registration statement described in this Section 5.01(b) is made
through underwriters and the managing underwriter of such offering shall advise
the Company in writing that, in its opinion, the distribution of the number of
Warrant Shares requested to be included in the registration concurrently with
the securities being registered by the Company would materially and adversely
affect the distribution of such securities by the Company, including with
respect to the price at which the shares can be sold, then priority for
including shares of Common Stock in the offering, up to the number advised by
the managing underwriter, shall be allocated first, to the Company and each
other person who has requested inclusion of shares of Common Stock pursuant to a
"demand" registration right, pro rata in proportion to the respective number of
shares of Common Stock to be included by them, and second, to the extent of any
remaining capacity as advised by the managing underwriter, to each other person
who has requested inclusion of shares of Common Stock (including Warrant Shares)
pursuant to a "piggyback" registration right, pro rata in proportion to the
respective number of shares of Common Stock to be included by them. Such
"piggyback" registration right shall not have a duration of more than seven
years from the date of effectiveness or the commencement of sales of the
Offering.

                                       10

<PAGE>

         (c) In any registration of Common Stock initiated by the Company or by
any person having "demand" registration rights in which Warrantholders request
inclusion of Warrant Shares pursuant to Section 5.01(b), if at any time after
giving notice of its intention to register securities and prior to the effective
date of the applicable registration statement the Company or such other person
shall determine for any reason not to register or to delay registration of it
securities, the Company may, at its election, give written notice of such
determination to each Warrantholder that has requested inclusion of Warrant
Shares in the registration statement and (x) in the case of a determination not
to register, shall be relieved of its obligation to register any Warrant Shares
in connection with such registration and (y) in the case of a determination to
delay registering, shall be permitted to delay registering any Warrant Shares
for the same period as the delay in registering such other securities.

         (d) If (i) at any time when a prospectus relating to Warrant Shares is
required to be delivered under the Securities Act, the Company discovers that,
or any event occurs as a result of which, the prospectus (including any
supplement thereto) included in any registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
(ii) the Commission issues any stop order suspending the effectiveness of any
registration statement or proceedings are initiated or threatened for that
purpose, then the Company shall promptly deliver a written notice to such effect
to each Warrantholder whose Warrant Shares are included in such registration
statement, and each such Warrantholder shall immediately upon receipt of such
notice discontinue its disposition of Warrant Shares pursuant to such
registration statement until its receipt of the copies of the supplemented or
amended prospectus contemplated by the immediately following sentence and, if so
directed by the Company, shall deliver to the Company or destroy (with such
destruction certified in writing to the Company) at the Company's expense all
copies, other than permanent file copies, then in such Warrantholder's
possession of the prospectus or prospectus supplement relating to such Warrant
Shares current at the time of receipt of such notice. As promptly as practicable
following the event or discovery referred to in clause (i) of the immediately
preceding sentence, the Company shall prepare and furnish to the Warrantholders
whose Warrant Shares are included in such registration statement a reasonable
number of copies of an amendment or supplement of such prospectus so that, as
thereafter delivered to purchasers of such Warrant Shares, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.

                                       11
<PAGE>

         (e) Notwithstanding anything to the contrary in this Article V, if the
filing or maintenance of any registration statement would require the Company to
make a disclosure that would, in the reasonable judgment of the Company's Board
of Directors, have a material adverse effect on the business, operations,
properties, prospects or financial condition of the Company or on pending or
imminent transactions, the Company shall have the right, exercisable for a
period not to exceed in the aggregate 45 consecutive calendar days in any period
of twelve consecutive months (the "Blackout Period") upon written notice to the
Warrantholders, to delay the filing of any registration statement or of any
amendment thereto, to suspend its obligation to maintain the effectiveness of
any registration statement and to suspend the use of any prospectus or
prospectus supplement in connection with any registration statement. Each
Warrantholder agrees that upon receipt of any such notice from the Company, it
shall immediately cease all efforts to dispose of Warrant Shares pursuant to
such registration statement until such time as the Company shall notify it of
the end of such restrictions or, if earlier, the expiration of the Blackout
Period.

         (f) Each such holder shall pay the underwriting discount attributable
to such holder's Warrant Shares, any transfer tax payable with respect thereto
and the fees and expenses of such holder's counsel. All other expenses of
registration under Section 5.01(a), or Section 5.01(b) shall be borne by the
Company.

         (g) The Company will agree to indemnify the holders of Warrant Shares
that are included in a registration statement or amendments to existing
registration statements pursuant to this Section 5.01 substantially to the same
extent as the Company has agreed to indemnify the Underwriters in the
Underwriting Agreement and such holders will agree to indemnify the Company and
any underwriter with respect to information furnished by them in writing to the
Company for inclusion therein substantially to the same extent as the
Underwriters have indemnified the Company in the Underwriting Agreement.

         (h) If the offering pursuant to any registration statement provided for
herein is made through underwriters, the Company will enter into an underwriting
agreement in customary form and indemnify, in customary form, such underwriters
and each person who controls any such underwriter within the meaning of the
Securities Act. Such underwriting agreement shall contain provisions for the
indemnification of the Company in customary form, provided that the aggregate
amount that may be recovered from any such underwriter pursuant to such
provisions shall not exceed the underwriting discounts and commissions
applicable to the Warrant Shares purchased by any such underwriter under such
underwriting agreement.

                                       12
<PAGE>

         SECTION 5.02. Enforcement of Warrant Rights. All rights of action are
vested in the respective Warrantholders. Any holder of any Warrant, in its own
behalf and for its own benefit, may enforce, and may institute and maintain any
suit, action or proceeding against the Company suitable to enforce, or otherwise
in respect of, its right to exercise its Warrant for the purchase of the number
of Warrant Shares issuable or deliverable in exchange therefor, in the manner
provided in the Warrant and in this Agreement.

         SECTION 5.03. Negotiability and Ownership. The Warrants issued
hereunder (and the Warrant Shares issuable upon exercise of the Warrants) shall
not, for a period of 180 days following the closing of the Offering, be sold,
transferred, assigned, pledged or hypothecated by the holders thereof except (a)
to persons who are officers or partners of FBR and members of the selling group
and/or their officers and partners, provided that any Warrants (and the Warrant
Shares issuable upon exercise of the Warrants) transferred pursuant to this
clause (a) shall remain subject to the restrictions set forth in this Section
5.03 with respect to any further transfers thereof, or (b) by operation of law,
including in the case of an individual, pursuant to such individual's last will
and testament or the laws of descent and distribution and, in any case, only in
compliance with the Securities Act. Any attempt to sell, transfer, assign or
hypothecate or dispose of the Warrant Shares or the Warrants in contravention of
this Section shall be null and void.

         SECTION 5.04. Warrant Legend. (a) Each Warrant shall contain a legend
in substantially the following form:

"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED
_________, 2004, BETWEEN TOWER GROUP, INC. AND FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC. ANY ATTEMPT TO TRANSFER THIS WARRANT OR ANY SHARE OF COMMON STOCK ISSUED
UPON EXERCISE OF THIS WARRANT TO ANY UNAUTHORIZED TRANSFEREE SHALL BE NULL AND
VOID AND NO TRANSFER IN VIOLATION OF SAID AGREEMENT SHALL BE EFFECTIVE. THIS
WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A CURRENT REGISTRATION STATEMENT OR
POSTEFFECTIVE AMENDMENT THERETO IS IN EFFECT FOR SUCH SHARES UNDER THE ACT OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT SHALL HAVE BEEN FURNISHED TO THE
ISSUER."

                                       13
<PAGE>

         (b) Each certificate representing Warrant Shares, unless registered
pursuant to Section 5.01, shall contain a legend substantially in the following
form:

"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A CURRENT REGISTRATION STATEMENT OR
POSTEFFECTIVE AMENDMENT THERETO IS IN EFFECT FOR SUCH SHARES UNDER THE ACT OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT SHALL HAVE BEEN FURNISHED TO THE
ISSUER. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN THE WARRANT AGREEMENT, DATED _____________, 2004, BETWEEN TOWER
GROUP, INC. AND FRIEDMAN, BILLINGS, RAMSEY & CO., INC. ANY ATTEMPT TO TRANSFER
THE SHARES REPRESENTED BY THIS CERTIFICATE TO ANY UNAUTHORIZED TRANSFEREE SHALL
BE NULL AND VOID AND NO TRANSFER IN VIOLATION OF SAID AGREEMENT SHALL BE
EFFECTIVE."

         SECTION 5.05. Supplements and Amendments. (a) Notwithstanding the
provisions of Section 5.05(b) below, FBR, without the consent or concurrence of
the registered holders of the Warrants, may enter into one or more supplemental
agreements or amendments with the Company for the purpose of evidencing the
rights of Warrantholders upon consolidation, merger, sale, transfer or
reclassification pursuant to Section 3.04, making any changes or corrections in
this Agreement that are required to cure any ambiguity, to correct or supplement
any provision contained herein that may be defective or inconsistent with any
other provision herein or any clerical omission or mistake or manifest error
herein contained, or making such other provisions in regard to matters or
questions arising under this Agreement as shall not materially adversely affect
the interests of the holders of the Warrants or be inconsistent with this
Agreement or any supplemental agreement or amendment.

         (b) With the consent of the registered holders of the Warrants
representing in the aggregate at least a majority in number of the Warrant
Shares then issuable upon exercise of the Warrants then outstanding and
unexercised, the Company and FBR at any time and from time to time by
supplemental agreement or amendment may add any provisions to or change in any
manner or eliminate any of the provisions of this Agreement or of any
supplemental agreement or modify in any manner the rights and obligations of the
Warrantholders and of the Company; provided, however, that no such supplemental
agreement or amendment, without the consent of the registered holder of each
outstanding Warrant affected thereby, shall:

             (1) alter the provisions of this Agreement so as to affect
adversely the terms upon which the Warrants are exercisable or may be redeemed;
or

             (2) reduce the number of Warrants outstanding the consent of
whose holders is required for any such supplemental agreement or amendment.

         (c) Notwithstanding any other provision of this Agreement, this
Agreement may not be amended, modified or supplemented at any time without the
written consent of the Company and FBR.

                                       14
<PAGE>

         SECTION 5.06. Covenant as to No Investment Company Status. During the
Exercise Period, the Company shall use commercially reasonable efforts to
maintain its status as an entity that is not an "investment company" or an
entity "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940.

         SECTION 5.07. Successors and Assigns. All the covenants and provisions
of this Agreement by or for the benefit of the Company or FBR shall bind and
inure to the benefit of their respective successors and assigns hereunder.

         SECTION 5.08. Notices. Any notice or demand authorized by this
Agreement to be given or made by FBR or the holder of any Warrant to or on the
Company shall be sufficiently given or made if sent by mail first-class, postage
prepaid, facsimile or delivered by personal delivery, in either such case
addressed, faxed or delivered, as the case may be (until another address is
filed in writing by the Company with FBR) as follows:

           Tower Group, Inc.
           120 Broadway, 14th Floor
           New York, New York  10271
           Attn:  Michael H. Lee
           Facsimile:  [(212) 271-5492]

         Any notice or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on FBR shall be
sufficiently given or made if sent by mail first-class, postage prepaid,
facsimile or delivered by personal delivery, in either such case addressed,
faxed or delivered, as the case may be (until another address is filed in
writing by FBR with the Company), as follows:

           Friedman, Billings, Ramsey & Co., Inc.
           1001 Nineteenth Street North
           Arlington, Virginia 22209
           Attention:     Kurt Harrington
           Facsimile:  [____________]

           with a copy to:

           Friedman, Billings, Ramsey & Co., Inc.
           1001 Nineteenth Street North
           Arlington, Virginia 22209
           Attention:     General Counsel
           Facsimile:  [____________]

         Any notice or demand authorized by this Agreement to be given or made
to the holder of any Warrants shall be sufficiently given or made if sent by
first-class mail, postage prepaid, facsimile or delivered by personal delivery,
in either such case addressed, faxed or delivered, as the case may be, to the
last address of such holder as it shall appear on the Warrant Register.

                                       15
<PAGE>

         SECTION 5.09. Applicable Law. This Agreement and each Warrant
Certificate shall be deemed a contract made under the laws of the State of New
York and for all purposes shall be construed in accordance with the laws of the
State of New York without giving effect to the principles of conflicts of law
thereof.

         SECTION 5.10. Benefits of this Agreement. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
entity other than the parties hereto and the holders of the Warrants any right,
remedy or claim under or by reason of this Agreement or of any covenant,
condition, stipulation, promise or agreement hereof, and all covenants,
conditions, stipulations, promises and agreements in this Agreement contained
shall be for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of the Warrants.

         SECTION 5.11. Registered Warrantholders. Prior to due presentment for
registration of transfer, the Company may deem and treat the person in whose
name any Warrants are registered in the Warrant Register as the absolute owner
thereof for all purposes whatever (notwithstanding any notation of ownership or
other writing thereon made by anyone other than the Company) and the Company
shall not be affected by any notice to the contrary or be bound to recognize any
equitable or other claim to or interest in any Warrants on the part of any other
person and shall not be liable for any registration of transfer of Warrants that
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer or with
such knowledge of such facts that its participation therein amounts to bad
faith. The terms "Warrantholder" and "holder of any Warrants" and all other
similar terms used herein shall mean such person in whose name Warrants are
registered in the Warrant Register.

         SECTION 5.12. Inspection of Agreement. A copy of this Agreement shall
be available at all reasonable times for inspection by any Warrantholder at the
principal office of the Company. The Company may require any such Warrantholder
to submit its Warrant Certificate for inspection by it before allowing such
Warrantholder to inspect a copy of this Agreement.

         SECTION 5.13. Headings. The Article and Section headings herein are for
convenience only and are not a part of this Agreement and shall not affect the
interpretation thereof.

         SECTION 5.14. Counterparts. The Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original.

                                       16
<PAGE>

         IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the day and year first above written.

                                        TOWER GROUP, INC.

                                        By: ____________________________________
                                        Name:    Michael H. Lee
                                        Title:  President

                                        FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

                                        By: ____________________________________
                                        Name:
                                        Title:

                                       17
<PAGE>

                                                                       EXHIBIT A

                                    EXHIBIT A
                          [FORM OF WARRANT CERTIFICATE]

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED
_________, 2004, BETWEEN TOWER GROUP, INC. AND FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC. ANY ATTEMPT TO TRANSFER THIS WARRANT OR ANY SHARE OF COMMON STOCK ISSUED
UPON EXERCISE OF THIS WARRANT TO ANY UNAUTHORIZED TRANSFEREE SHALL BE NULL AND
VOID AND NO TRANSFER IN VIOLATION OF SAID AGREEMENT SHALL BE EFFECTIVE. THIS
WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A CURRENT REGISTRATION STATEMENT OR
POSTEFFECTIVE AMENDMENT THERETO IS IN EFFECT FOR SUCH SHARES UNDER THE ACT OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT SHALL HAVE BEEN FURNISHED TO THE
ISSUER.

No. __________                                            _______ Warrant Shares

                                     WARRANT
                      TO PURCHASE SHARES OF COMMON STOCK OF
                                TOWER GROUP, INC.

         Tower Group, Inc., a Delaware corporation (the "Company"), for value
received, hereby certifies that
_______________________________________________, or registered assign(s), is
the owner of a Warrant, which represents the right, subject to the terms and
conditions hereof and of the Warrant Agreement hereafter referred to, to
purchase from the Company at any time, or from time to time, from [________],
2005 up to the close of business on [_________], 2009 (or, if such date is not a
Business Day (as defined below), the immediately preceding Business Day) (the
"Exercise Period") the number of shares of common stock, par value $0.01 per
share, of the Company (the "Common Stock") set forth above (each share of Common
Stock issuable upon exercise of a Warrant is referred to as a "Warrant Share").
Subject to the terms and conditions of the Warrant Agreement, the exercise price
per Warrant represented by this Warrant Certificate shall be $[________] per
share, adjusted as provided in Article III of the Warrant Agreement, payable in
full as to each Warrant exercised at the time of purchase. The term
"Underwriting Agreement" as used herein refers to the Underwriting Agreement
dated _____________, 2004 between the Company and its Underwriters (as such term
is defined in the Underwriting Agreement). The term "Exercise Price" as used
herein refers to the foregoing price per share in effect at any time.

                                      A-1
<PAGE>

         This Warrant may be exercised in whole or in part at any time or from
time to time during the Exercise Period. The portion of this Warrant not
exercised during the Exercise Period shall become void, and all rights hereunder
and all rights in respect hereof and under the Warrant Agreement shall cease at
the end of the Exercise Period. Each such purchase of Warrant Shares shall be
made, and shall be deemed effective for the purpose of determining the date of
exercise, only upon surrender hereof to the Company at the principal office of
the Company, with the form of Election to Exercise attached hereto as Attachment
1 duly filled in and signed, and upon payment in full to the Company of the
Exercise Price (i) in cash, (ii) by certified or official bank check payable to
the Company's order, (iii) by wire transfer, (iv) through the surrender of
shares of Common Stock valued at the Current Market Value (as defined below) of
the Common Stock on the date of exercise, (v) provided that the Current Market
Value (as defined below) on the date of exercise exceeds the Exercise Price, by
a Cashless Exercise (as defined below) or (vi) by any combination of the
foregoing, and any applicable taxes, other than taxes the Company is required to
pay under the Warrant Agreement, subject to the conditions set forth herein and
in the Warrant Agreement. A Warrantholder may exercise this Warrant for the full
number of Warrant Shares issuable upon exercise hereof or any lesser number of
whole Warrant Shares.

         For purposes of this Warrant Certificate, a "Cashless Exercise" shall
mean an exercise of a Warrant in accordance with the immediately following two
sentences. To effect a Cashless Exercise, the holder may exercise a Warrant or
Warrants without payment of the Exercise Price in cash by surrendering such
Warrant or Warrants (represented by one or more Warrant Certificates) and, in
exchange therefor, receiving such number of shares of Common Stock equal to the
product of (1) that number of shares of Common Stock for which such Warrant or
Warrants are exercisable and which would be issuable in the event of an exercise
with payment in cash of the Exercise Price and (2) the Cashless Exercise Ratio.
The "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is
the excess of the Current Market Value per share of Common Stock on the date of
exercise over the Exercise Price per share of Common Stock as of the date of
exercise and the denominator of which is the Current Market Value per share of
Common Stock on the date of exercise. Upon surrender of a Warrant Certificate
representing more than one Warrant in connection with a holder's option to elect
a Cashless Exercise, such holder must specify the number of Warrants for which
such Warrant Certificate is to be exercised (assuming payment with no Cashless
Exercise). All provisions of the Warrant Agreement shall be applicable with
respect to a Cashless Exercise of a Warrant Certificate for less than the full
number of Warrants represented thereby.

                                      A-2
<PAGE>

         For purposes of this Warrant Certificate, "Current Market Value" shall
mean (i) if the security is not registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the value of the security, determined in
good faith by the board of directors of the Company and set forth in a
certificate thereof, or (ii) (a) if the security is registered under the
Exchange Act, the average of the volume weighted average sales prices of the
securities for the 20 consecutive trading days immediately preceding such date,
or (b) if the security has been registered under the Exchange Act for less than
20 consecutive trading days before such date, then the average of the closing
sales prices for all of the trading days before such date for which closing
sales prices are available. The closing sales price for each such trading day
shall be: (A) in the case of a security listed or admitted to trading on any
U.S. national securities exchange or quotation system, the closing sales price,
regular way, on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day on the principal U.S. national
securities exchange or quotation system on which the security is listed or
admitted to trading, (B) in the case of a security not then listed or admitted
to trading on any U.S. national securities exchange or quotation system, the
last reported sale price on such day, or if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reputable quotation source designated by the Company, (C) in the case of a
security not then listed or admitted to trading on any U.S. national securities
exchange or quotation system and as to which no such reported sale price or bid
and asked prices are available, the Current Market Value shall be determined as
if the securities were not registered under the Exchange Act.

         The Company shall not be required upon the exercise of the Warrant
represented hereby to issue fractions of Warrant Shares or to distribute share
certificates that evidence fractional Warrant Shares. Every holder of this
Warrant Certificate expressly waives its right to receive any fraction of a
Warrant Share or a share certificate representing a fraction of a Warrant Share.
Fractional Warrant Shares that otherwise would be issuable in respect of such
exercise shall be paid in cash as provided in the Warrant Agreement, and the
number of Warrant Shares issuable to such Warrantholder shall be rounded down to
the next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Company will issue to such Warrantholder a new Warrant
Certificate exercisable for the number of shares of Common Stock as to which
such Warrant shall not have been exercised.

         This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates at the principal office of the
Company for new Warrant Certificates representing the same aggregate number of
Warrant Shares as were evidenced by the Warrant Certificate or Warrant
Certificates exchanged, upon surrender of this Warrant Certificate and any other
Warrant Certificates being exchanged and upon compliance with and subject to the
conditions set forth herein and in the Warrant Agreement.

         This Warrant Certificate is transferable (subject to restrictions set
forth in the Warrant Agreement) at the principal office of the Company by the
registered holder hereof in person or by its attorney duly authorized in
writing, upon (i) surrender of this Warrant Certificate together with a duly
executed assignment substantially in the form attached hereto as Attachment 2
and (ii) compliance with and subject to the conditions set forth herein and in
the Warrant Agreement. Upon any such transfer, a new Warrant Certificate or new
Warrant Certificates of different denominations, representing in the aggregate a
like number of Warrant Shares, will be issued to the transferee. Every holder of
Warrants, by accepting this Warrant Certificate, consents and agrees with the
Company and with every subsequent holder of this Warrant Certificate that until
due presentation for the registration of transfer of this Warrant Certificate on
the Warrant Register maintained by the Company, the Company may deem and treat
the person in whose name this Warrant Certificate is registered as the absolute
and lawful owner for all purposes whatsoever and the Company shall not be
affected by any notice to the contrary.

                                      A-3
<PAGE>

         This Warrant Certificate is issued under and in accordance with the
Warrant Agreement dated as of _______, 2004 (the "Warrant Agreement"), between
the Company and Friedman, Billings, Ramsey & Co., Inc. and is subject to the
terms and provisions of the Warrant Agreement, which terms and provisions are
hereby incorporated by reference herein and made a part hereof. Copies of the
Warrant Agreement and of the Underwriting Agreement are available for inspection
by the registered holder at the principal office of the Company.

         Nothing contained in the Warrant Agreement or in this Warrant
Certificate shall be construed as conferring on the holder of any Warrants or
his transferee any rights whatsoever as a stockholder of the Company.

         The Warrant Agreement and each Warrant Certificate, including this
Warrant Certificate, shall be deemed a contract made under the laws of the State
of New York and for all purposes shall be construed in accordance with the laws
of the State of New York without giving effect to the principles of conflicts of
law thereof.

                                      A-4
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.

Dated:_________________, 2004
                                              TOWER INSURANCE GROUP, INC

                           `                  By: ___________________________

                                      A-5
<PAGE>

                                                                    ATTACHMENT 1

                              ELECTION TO EXERCISE
                    (To be executed upon exercise of Warrant)

TO TOWER GROUP, INC.:

         The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant Certificate for, and to purchase
thereunder, ___________ shares of Common Stock, as provided for therein, and
tenders herewith payment of the purchase price in full in the form of:

         (i) cash or a certified or official bank check payable to the Company's
order (or combination thereof) in the amount of $________________;

         (ii) a wire transfer in the amount of $________________, confirmation
number ____________;

         (iii) surrender of ________shares of Common Stock having a Current
Market Value of in the amount of $________________; and/or

         (iv) surrender for cancellation of the Warrant, or portion thereof,
representing ________shares of Common Stock pursuant to a Cashless Exercise (as
defined in the Warrant Agreement).

         Please issue a certificate or certificates for such shares of Common
Stock in the name of:

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF REGISTERED HOLDER        Name ___________________________
OF WARRANT OR ASSIGNEE, AS APPLICABLE:
_____________________________                  Address ________________________

                                                       ________________________

                                               Signature _______________________

                                               Note: The above signature should
                                               correspond exactly with the name
                                               on the face of the attached
                                               Warrant Certificate or with the
                                               name of assignee appearing in
                                               the assignment form below.
         Dated:  ____________________, _______

<PAGE>

                                                                    ATTACHMENT 2

                                   ASSIGNMENT
          (To be executed only upon assignment of Warrant Certificate)

         For value received, __________________________ hereby sells, assigns
and transfer unto ___________________________ the attached Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _______________________ attorney, to transfer said
Warrant Certificate on the books of the within-named Company, with full power of
substitution in the premises.

Dated:  _____________________, _______

                                        ---------------------------------------
                                        NOTE:   The above signature should
                                                correspond exactly with the name
                                                on the face of the attached
                                                Warrant Certificate

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