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  Exhibit 4.8    
    

  

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        The following provides management's discussion and analysis ("MD&A") of DragonWave Inc.'s unaudited interim consolidated results
of operations and financial condition for the three and six month periods ended August 31, 2009. This discussion should be read in conjunction with our unaudited consolidated interim financial
statements for the three and six month periods ended August 31, 2009. For additional information and details, readers are referred to the audited annual consolidated financial statements,
together with our Interim Financial Statements and MD&A for fiscal 2009 and our Annual Information Form (the "AIF") dated May 7, 2009, all of which are filed separately and are available
at www.sedar.com. 

        The
financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are reported in Canadian dollars. The information contained
herein is dated as of October 8, 2009 and is current to that date, unless otherwise stated. Our fiscal year commences March 1 of each year and ends on the last day of February of the
following year. 

        In
this document, "we", "us", "our", "Company" and "DragonWave" all refer to DragonWave Inc. collectively with its subsidiaries, DragonWave Corp. and
4472314 Canada Inc. The content of this MD&A has been approved by our Board of Directors, on the recommendation of its Audit Committee. 

 Forward-Looking Statements  

        This MD&A contains certain information that may constitute "forward-looking information" and "forward-looking statements" within the
meaning of applicable Canadian and United States securities laws. All forward looking information and forward-looking statements are necessarily based on a number of estimates and assumptions
that are inherently subject to significant business, economic and competitive uncertainties and contingencies. All statements other than statements which are reporting results as well as statements of
historical fact set forth herein, are forward-looking statements that may involve a number of known and unknown risks, uncertainties and other factors; many of which are beyond our ability to control
or predict. Forward-looking statements include, without limitation, statements regarding strategic plans, future production, sales and revenue estimates, cost estimates and anticipated financial
results, capital expenditures and objectives. These statements relate to analysis and other information that are based on forecasts of future results, estimates of amounts not yet determinable and
assumptions of management. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. 

        Forward-looking
statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "should",
"continue", "expect", "anticipate", "estimate", "believe", "intend", "plan" or "project" or the negative of these words or other variations on these words or comparable terminology. There can be no
assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. The following are some of the important
factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements: 

	•
	our dependence on the development and growth of the market for high-capacity wireless communications services; 
	•
	our reliance on a small
number of customers for a large percentage of revenue; 

1

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

	•
	intense competition from several competitors;  
	•
	competition from indirect competitors;  
	•
	our dependence on our ability to develop new products and enhance existing products;  
	•
	our history of losses;  
	•
	our ability to successfully manage growth;  
	•
	quarterly revenue and operating results which are difficult to predict and can fluctuate
substantially; 
	•
	the impact of the general economic downturn on our customers;  
	•
	disruption resulting from economic and geopolitical uncertainty;  
	•
	currency fluctuations;  
	•
	our exposure to credit risk for accounts receivable;  
	•
	pressure on our pricing models;  
	•
	the allocation of radio spectrum and regulatory approvals for our products;  
	•
	the ability of our customers to secure a license for applicable radio spectrum;  
	•
	changes in government regulation or industry standards that may limit the potential
market for our products; 
	•
	our dependence on establishing and maintaining relationships with channel partners;  
	•
	our
reliance on outsourced manufacturing;  
	•
	our reliance on suppliers of components;  
	•
	our ability to protect our own
intellectual property and potential harm to our business if we infringe the intellectual
property rights of others;  
	•
	risks associated with software licensed by us;  
	•
	a lengthy and variable sales cycle;

	•
	our dependence on ability to recruit and retain management and other qualified personnel;  
	•
	our exposure to risks resulting
from our international sales and operations, including the requirement to comply with
export control and economic sanctions laws;  
	•
	our ability to successfully effect acquisitions of products or businesses; and  
	•
	product defects, product liability claims, or health and safety risks relating to wireless products. 

        Although
we have attempted to identify important factors that could cause our actual results to differ materially from expectations, intentions, estimates or forecasts, there may be
other factors that could cause our results to differ from what we currently anticipate, estimate or intend. Recent unprecedented events in global financial and credit markets have resulted in high
market price volatility and contraction in credit markets. These on-going events could impact forward-looking statements contained in this short form prospectus and in the documents
incorporated herein by reference in an unpredictable and possibly detrimental manner. In light of these risks, uncertainties and assumptions, the forward-looking events described in this MD&A might
not occur or might not occur when stated. To develop a better understanding of the business risk factors that could cause our actual results to differ materially from expectations either expressed or
implied please refer to our AIF and to our preliminary short form base PREP prospectus dated September 24, 2009, a copy of each of which is available on SEDAR at
www.sedar.com. 

        Except
as required under applicable securities legislation, we undertake no obligation to publicly update or revise forward-looking statements, whether as a result of new information,
future events or otherwise. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they were made. 

2

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 SELECTED FINANCIAL INFORMATION:  

															
	 
	 	Three Months Ended 	 	Six Months Ended 	 
	 
	 	August 31,

2009
 	 	August 31,

2008
 	 	August 31,

2009
 	 	August 31,

2008
 	 
	 REVENUE
	 	 	 35,509	 	 	 10,572	 	 	 51,459	 	 	 21,297	 
	 	 Cost of sales
	 	 	 20,584	 	 	 6,945	 	 	 31,024	 	 	 13,289	 
	 	 	 	 	 	 	 	 	 	 
	 Gross profit
	 	 	 14,925	 	 	 3,627	 	 	 20,435	 	 	 8,008	 
	 EXPENSES
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Research and development
	 	 	 3,544	 	 	 2,594	 	 	 6,568	 	 	 5,725	 
	 	 Selling and marketing
	 	 	 3,567	 	 	 2,783	 	 	 6,106	 	 	 5,407	 
	 	 General and administrative
	 	 	 1,819	 	 	 1,133	 	 	 3,050	 	 	 2,263	 
	 	 Investment tax credits
	 	 	 (60	)	 	 (50	)	 	 (120	)	 	 (100	)
	 	 Restructuring Charges
	 	 	 —	 	 	 —	 	 	 —	 	 	 —	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 8,870	 	 	 6,460	 	 	 15,604	 	 	 13,295	 
	 	 	 	 	 	 	 	 	 	 
	 Income (Loss) from Operations
	 	 	 6,054	 	 	 (2,833	)	 	 4,830	 	 	 (5,287	)
	 	 Interest income (expense), net
	 	 	

(5	
)	 	

170	 	 	

22	 	 	

415	 
	 	 Gain on sale of property and equipment
	 	 	 35	 	 	 —	 	 	 35	 	 	 —	 
	 	 Foreign exchange gain (loss)
	 	 	 70	 	 	 997	 	 	 (1,616	)	 	 1,265	 
	 	 	 	 	 	 	 	 	 	 
	 Net Income (Loss)
	 	 	 6,154	 	 	 (1,666	)	 	 3,271	 	 	 (3,607	)
	 	 Income taxes
	 	 	

(209	
)	 	

(11	
)	 	

(209	
)	 	

(11	
)
	 	 Future Income tax recovery
	 	 	 346	 	 	 —	 	 	 346	 	 	 —	 
	 	 	 	 	 	 	 	 	 	 
	 Net and Comprehensive Income (Loss)
	 	 	 6,291	 	 	 (1,677	)	 	 3,408	 	 	 (3,618	)
	 	 	 	 	 	 	 	 	 	 
	 Basic income (loss) per share
	 	 	

0.22	 	 	

(0.06	
)	 	

0.12	 	 	

(0.13	
)
	 Diluted income (loss) per share
	 	 	 0.21	 	 	 (0.06	)	 	 0.12	 	 	 (0.13	)
	 Basic weighted average shares outstanding
	 	 	

28,620,162	 	 	

28,555,335	 	 	

28,594,700	 	 	

28,517,929	 
	 Diluted weighted average shares outstanding
	 	 	 29,675,696	 	 	 28,555,335	 	 	 29,281,050	 	 	 28,517,929	 

								
	 
	 	As at

August 31,

2009
 	 	As at

February 28,

2009
 	 
	 Consolidated Balance Sheet Data:
	 	 	 	 	 	 	 
	 Cash and cash equivalents
	 	 	 21,349	 	 	 8,504	 
	 Short Term Investments
	 	 	 —	 	 	 14,994	 
	 Total Assets
	 	 	 69,816	 	 	 51,828	 
	 Line of credit
	 	 	 587	 	 	 641	 
	 Total liabilities
	 	 	 22,523	 	 	 8,533	 
	 Total shareholder's equity
	 	 	 47,293	 	 	 43,295	 

3

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION  

        The following table sets out selected financial information for each of our most recent eight fiscal quarters. In the opinion of
management, this information has been prepared on the same basis as DragonWave's audited consolidated financial statements, and all necessary adjustments have been included in the amounts stated below
to present fairly the unaudited quarterly results when read in conjunction with DragonWave's consolidated financial statements and related notes thereto. 

																											
	 
	 	FY 08 	 	FY 09 	 	FY10 	 
	 
	 	Nov 30

2007
 	 	Feb 29

2008
 	 	May 31

2008
 	 	Aug 31

2008
 	 	Nov 28

2008
 	 	Feb 28

2009
 	 	May 31

2009
 	 	Aug 31

2009
 	 
	Revenue	 	 	11,548	 	 	10,342	 	 	10,725	 	 	10,572	 	 	10,704	 	 	11,333	 	 	15,950	 	 	 35,509	 
	Gross Profit	 	 	4,532	 	 	4,256	 	 	4,381	 	 	3,627	 	 	3,704	 	 	2,939	 	 	5,510	 	 	 14,925	 
	 	Gross Profit %	 	 	39%	 	 	41%	 	 	41%	 	 	34%	 	 	35%	 	 	26%	 	 	35%	 	 	 42%	 
	
 Operating Expenses	
 	
 	
5,850	
 	
 	
6,475	
 	
 	
6,835	
 	
 	
6,460	
 	
 	
6,483	
 	
 	
5,997	
 	
 	
6,734	
 	
 	
 8,870	
 
	Income from operations	 	 	(1,318	)	 	(2,219	)	 	(2,454	)	 	(2,833	)	 	(2,779	)	 	(3,058	)	 	(1,224	)	 	 6,054	 
	
 Net income (loss) for the year	
 	
 	
(1,208	
)	
 	
(2,249	
)	
 	
(1,941	
)	
 	
(1,677	
)	
 	
(221	
)	
 	
(2,150	
)	
 	
(2,883	
)	
 	
 6,291	
 
	
 Net income (loss) per share	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 
	 	Basic	 	 	(0.04	)	 	(0.08	)	 	(0.07	)	 	(0.06	)	 	(0.01	)	 	(0.08	)	 	(0.10	)	 	 0.22	 
	 	Diluted	 	 	(0.04	)	 	(0.08	)	 	(0.07	)	 	(0.06	)	 	(0.01	)	 	(0.08	)	 	(0.10	)	 	 0.21	 
	Weighted average number of

shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Basic	 	 	27,646,025	 	 	28,440,355	 	 	28,480,522	 	 	28,555,335	 	 	28,555,716	 	 	28,536,427	 	 	28,569,238	 	 	 28,620,162	 
	 	Diluted	 	 	27,646,025	 	 	28,440,355	 	 	28,480,522	 	 	28,555,335	 	 	28,555,716	 	 	28,536,427	 	 	28,569,238	 	 	 29,675,696	 
	
 Total Assets	
 	
 	
62,268	
 	
 	
59,815	
 	
 	
54,988	
 	
 	
55,371	
 	
 	
56,102	
 	
 	
51,828	
 	
 	
49,818	
 	
 	
 69,816	
 

        Historically, our operating results have fluctuated on a quarterly basis and we expect that quarterly financial results will continue to fluctuate
in the future. The results of operations for interim periods should not be relied upon as an indication of the results to be expected or achieved in any future period or any fiscal year as a whole.
Fluctuations in results relate to the growth in our revenue, and the project nature of the network installations of our end-customers. In addition, results may fluctuate as a result of the
timing of staffing, infrastructure additions required to support growth, and material costs required to support design initiatives. 

4

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Overview  

        DragonWave is a leading provider of high-capacity Ethernet microwave solutions that drive next-generation IP
networks. Our carrier-grade point-to-point Ethernet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and
other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our products is wireless network backhaul. 

        We
provided guidance on July 14, 2009 that revenue for our second quarter would approximately double from $16.0 million, the revenue recorded in the first quarter of our
fiscal 2010. We were able to exceed this expectation with revenue of $35.5 million for the three months ended August 31, 2009. This represents a 123% increase over the first quarter of
fiscal 2010 and 207% greater than the next largest quarterly revenue in our history ($11.5 million which was achieved in the three months ended November 30, 2007). In order to achieve
this level of growth, our operations team worked closely with our suppliers to successfully adjust the output levels for this increase in demand. In addition to focusing on increasing volumes to meet
customer demands, significant effort was made to secure our manufactured product at a lower cost. The impact of this effort is evident in our improved margin this quarter. Our gross margin in the
second quarter of fiscal 2010 is 42.0%, an improvement of 7.7% over the same period in the previous fiscal year and an improvement of 7.5% over the first quarter of fiscal 2010. Higher sales levels
combined with improved margin have resulted in our first quarterly operating profit. Income from operations of $6.1 million for the second quarter of fiscal 2010 represents an improvement of
$8.9 million over the second quarter of the previous fiscal year. On a year-to-date basis, the income from operations of $4.8 million represents an improvement of
$10.1 million from the first six months of fiscal 2009. We also recorded our first profit at the net income level of $6.3 million and $3.4 million respectively for the three and
six month periods ended August 31, 2009 (second quarter of fiscal 2009 — ($1.7 million); year-to-date fiscal
2009 — ($3.6 million)). 

        We
continue to focus on meeting the demands of existing customers, while increasing efforts to broaden our geographic reach and win business with other national carriers in North America
and abroad. All of the eight new customers shipped to in the second quarter of fiscal 2010 were located outside of North America, and of the nineteen new customers we shipped to in the first six
months of fiscal 2010, two were located within the United States. We have demonstrated our commitment to attracting other major national carriers in the United States by hiring two
senior executives who will be dedicated to this effort. We are also targeting our efforts at companies within the United States who will be expanding networks under the U.S. government
stimulus program. To meet our objective of expanding our global reach we have created a Singapore office where sales representatives have been recruited. In July 2009, we announced that
Globalive Wireless Management Corp. ("Globalive") had selected us to provide Ethernet microwave backhaul equipment for its multi-million dollar 3G+ (HSPA) cellular network in North
America. We will begin shipping product to Globalive in the third and fourth quarters of fiscal 2010. In September 2009, we announced both a multi-year exclusive supply agreement
with Unwired Australia to supply wireless backhaul for the forthcoming Vivid Wireless Perth network and the deployment by IBW of our Horizon Compact product to supply wireless backhaul for its WiMAX
business services in Costa Rica. 

5

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        The increase in sales in the second quarter of fiscal 2010 was fuelled by the North American WiMAX network build out by our largest
customer. Sales to this customer accounted for 77% of our revenue for the three months ended August 31, 2009. We have successfully scaled to meet this customer's volume requirements. 

        While
we have dedicated a significant effort to revenue growth, we also focused on improving our gross margin performance. There are three key elements to that improvement:
(i) securing lower cost sources of supply, (ii) achieving sales levels which enable us to access volume discounts, and (iii) migrating manufacturing and test functions to contract
manufacturers as the most significant element of a program of cost restraint and control. In the second quarter of fiscal 2010, we began to migrate elements of our outsourced manufacturing that were
previously conducted in North America to the Malaysian site of one of our existing contract manufacturers. This move is resulting in lower per part costs, and has enabled us to quickly meet the
dramatic demand increase in the quarter. It has also broadened our supply chain so that we are now using three rather than two contract manufacturing locations to source our manufactured product. The
increase in sales demand has resulted in a purchasing level where volume discounts are more significant and the fixed costs of operations can be more effectively leveraged. We will continue to focus
on finding the highest quality and lowest cost manufacturing sources of supply, while concentrating internally on cost constraint to maximize our gross margin results. Our design team are continuing
to focus on developing products and modifying existing designs to minimize manufacturing costs. 

        We
continue to be a leader in developing products which offer innovative solutions to customers' capacity requirements and cost concerns. In September 2009, we launched a new
solution called "Horizon Quantum" which is designed to provide significantly increased bandwidth capacity of up to 4 Gbps per link in a half-rack-unit device
incorporating a bandwidth accelerator feature that enables superior spectral efficiency by up to a factor of 2.5 times as compared to conventional systems. As wireless networks increasingly
shift to more bandwidth-intensive data applications, we believe that network traffic, and associated service provider costs, have increased and will continue to increase more rapidly than subscriber
revenue. We believe that Horizon Quantum addresses this dynamic by offering a lower cost per bit and lower operational costs for carriers than conventional systems. The marketplace is already
providing feedback on the launch of Horizon Quantum. In September 2009, xchange magazine presented us with the Best of 4G Award for our Horizon Quantum Ethernet microwave solution in the Best
4G Enabling Technology Innovation category. 

        We
announced our outlook for annual revenues for FY 2010 in a news release dated September 9, 2009. The September 9, 2009 outlook has been further updated in our news
release dated October 8, 2009. 

 Equity Financing  

        In September 2009, we announced that we had filed a registration statement in the United States concurrently with a
preliminary short form base PREP prospectus (the "Preliminary Prospectus") in all of the provinces of Canada, except Quebec. This will constitute our initial public offering of common shares in
the United States (the "U.S. IPO"). In connection with the U.S. IPO and the filing of the Preliminary Prospectus, we propose to offer 7,454,050 common shares and
certain selling shareholders propose to offer 5,518,250 common shares (the "Offering"). In connection with its U.S. IPO, we have received conditional approval to list our common
shares on the NASDAQ Global Market. Listing of our common shares on NASDAQ will be subject to our fulfillment of all applicable listing requirements. 

6

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Revenue and Expenses  

        We target customers principally in the global wireless communications service providers market and in particular, service providers
offering high-capacity wireless communication services. We also target enterprise and municipal/government customers that own or operate private networks requiring
point-to-point applications. We distribute our products and services through a combination of direct and indirect sales channels. In the service provider market, our direct
sales efforts target customers worldwide implementing or planning networks, and include marketing to prospective customers where spectrum is being sold in anticipation
of a network build. The sales cycle to this class of customer typically involves a trial (or trials), and generally requires nine to twelve months from first contact before orders are received.
Once the order stage is reached, a supply agreement is usually established and multiple orders are processed under one master supply arrangement. We distribute our products and services to the
remainder of the market through a network of distributors, Value Added Resellers ("VARs") and Original Equipment Manufacturers ("OEMs"), leveraging the market specific expertise of these channel
partners. 

        We
evaluate revenue performance over three main geographic regions. These regions are North America; Europe, the Middle East and Africa ("EMEA"); and Rest of World ("ROW"). The following
table sets out the portion of new customers and existing customers we shipped to in the second quarter of 2010. 

 Number of Customers Shipped to in the Quarter Ended August 31, 2009  

  

7

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        The success of our European sales organization in attracting new customers is evident in the table above. We believe that our growth
strategy hinges, in part, on new customer acquisition and on our ability to penetrate markets outside of North America where the wireless backhaul market is also expanding. In order to give better
visibility to our solutions, we have successfully recruited sales personnel for an office in Singapore. From this location, we plan to increase our presence in the Asia Pacific region. 

        The
table below breaks down the revenue earned by region for both the three and six month periods ending August 31, 2009 and compares these figures to the same periods in the
prior fiscal year. Although the pace of growth is not as great as in North America, the increasing number of customers in EMEA, including large regional carriers in Pakistan and France continues to
push sales to higher levels when compared to the same periods in the previous year. 

																										
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	Aug 31, 2009 	 	Aug 31, 2008 	 	Aug 31, 2009 	 	Aug 31, 2008 	 
	 
	 	$
	 	%
	 	$
	 	%
	 	$
	 	%
	 	$
	 	%
	 
	 Revenue
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 North America
	 	 	31,869	 	 	90	%	 	7,644	 	 	72	%	 	44,721	 	 	87	%	 	15,703	 	 	74	%
	 Europe, Middle East and Africa
	 	 	2,965	 	 	8	%	 	2,751	 	 	26	%	 	5,992	 	 	12	%	 	5,167	 	 	24	%
	 Rest of World
	 	 	675	 	 	2	%	 	177	 	 	2	%	 	746	 	 	1	%	 	427	 	 	2	%
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 35,509	 	 	 	 	 	 10,572	 	 	 	 	 	 51,459	 	 	 	 	 	 21,297	 	 	 	 

        Our manufacturing strategy continues to centre on the utilization of outsourced manufacturing to meet the increasing demand for our products
worldwide. As such, a large component of our cost of sales is the cost of product purchased from outsourced manufacturers. In addition to the cost of product payable to outsourced manufacturers, we
incur expenses associated with final configuration, testing, logistics and warranty activities. Final test and assembly for the links sold by us is carried out mainly on our premises. We use primarily
the services of two outsourced manufacturers with locations in North America and Malaysia. One of those manufacturers is BreconRidge Corporation ("BreconRidge"). BreconRidge is a related party because
Terence Matthews, one of our directors, holds a significant equity interest. Management believes that the commercial terms of our arrangement with BreconRidge reflect fair market terms and payment
provisions. 

        Research
and development costs relate mainly to the compensation of our engineering group and the material consumption associated with prototyping activities. 

        Selling
and marketing expenses include the remuneration of sales staff, travel and trade show activities and customer support services. 

        General
and administrative expenses relate to the remuneration of related personnel, professional fees associated with tax, accounting and legal advice, and insurance costs. 

        Occupancy
and information systems costs are related to our leasing costs and communications networks and are accumulated and allocated, based on headcount, to all functional areas in our
business. Our facilities are leased from a related party that is controlled by one of our directors and shareholders. Our management believes the terms of the lease reflect fair market terms and
payment provisions. 

8

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        As a consequence of being a publicly traded company the federal portion of Investment Tax Credits ("ITCs") earned by us are no longer
refundable but are still available to us to reduce future cash taxes payable. There remains a refundable provincial investment tax credit available to us. 

        We
conduct the majority of our business transactions in two currencies, U.S. dollars and Canadian dollars. Most of our sales and cost of sales are denominated in
U.S. dollars. Since our headquarters are located in Canada, the majority of our operating expenses (including salaries and operating costs but excluding cost of sales) are denominated in
Canadian dollars. The majority of the proceeds from our initial public offering and follow on offering were received by us in Canadian dollars. This supply of Canadian currency significantly reduces
the requirement for us to purchase Canadian dollars to pay Canadian based expenses. The expense or gain on the consolidated statement of operations is driven largely by the requirement to translate
U.S. based cash deposits and accounts receivable into Canadian dollars. 

        Our
cost structure is not fixed and we do expect some upward pressure on expenses to support higher levels of activity. 

 Comparison of the three and six months ended August 31, 2009 and August 31, 2008  

 Revenue  

												
	Three months ended

August 31 	 	Six months ended

August 31 	 
	2009 	 	2008 	 	2009 	 	2008 	 
	$	35,509	 	$	10,572	 	 $	51,459	 	$	21,297	 

        Revenue
increased by 236% or $24.9 million for the second quarter of fiscal 2010 compared with the same period in the previous year. On a year-to-date
basis, revenue for
the six months ended August 31, 2009 increased by 142% or $30.2 million over the same period in the previous year. 

 Changes to Revenue: Three months ended August 31, 2009 vs Three months ended August 31, 2008  

					
	 North American national carrier
	 	 	25.1	 
	 New Customers (EMEA)
	 	 	0.6	 
	 Canada national carrier
	 	 	0.3	 
	 Regional Carriers and Distributors in EMEA
	 	 	(0.2	)
	 North American regional carriers and distributors
	 	 	(0.3	)
	 Engineering Services — contract terminated at the end of Q2 FY09
	 	 	(0.6	)
	 	 	 	 
	 Total
	 	 	24.9	 
	 	 	 	 

 Changes to Revenue: Six months ended August 31, 2009 vs Six months ended August 31, 2008  

					
	 North American national carrier
	 	 	29.6	 
	 New customers (primarily in EMEA)
	 	 	1.1	 
	 Canadian national carrier
	 	 	0.5	 
	 North American regional carriers and distributors
	 	 	(0.1	)
	 Distributors and VARs (ROW)
	 	 	(0.4	)
	 Engineering services
	 	 	(0.5	)
	 	 	 	 
	 
	 	 	30.2	 
	 	 	 	 

9

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Gross Profit  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$14,925	 	 $3,627	 	 $20,435	 	 $8,008
	42.0%	 	 34.3%	 	 39.7%	 	 37.6%

        Our
gross margin climbed to 42.0% and 39.7% for the three and six month periods ended August 31, 2009 respectively. This represents a 7.7%, and 2.1% increase respectively over the
same periods in the previous fiscal year. We have been working toward reducing the costs of supply for several quarters by moving some of our more labour intensive activities to a contract
manufacturing facility in Malaysia. The cost reduction benefits associated with this decision began to be realized in the second quarter of fiscal 2010. Cost reduction benefits were also realized
because of the significant increase in the raw material volume we ordered. While the sales volume has increased by 123% over the first quarter of fiscal 2010, labour and manufacturing costs incurred
have not increased as significantly and this too has benefited the gross margin in the second quarter of fiscal 2010. We continue to invest in design changes which will reduce manufacturing costs and
will continue to pursue the best suppliers globally that meet our quality and cost objectives. 42% gross margin is at the high end of our expected margin range and we expect margin levels to normalize
in the current and subsequent quarters. 

 Research and Development  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$3,544	 	 $2,594	 	 $6,568	 	 $5,725

        Research
and development ("R&D") expenses increased by $1.0 million for the three month period ended August 31, 2009 and $0.8 million for the six month period ended
August 31, 2009, when compared with the same periods in the prior fiscal year. 

        The
main contributors to the increase were compensation related charges and reduced recoveries associated with external contract work. The compensation costs grew as a result of the
costs associated with variable compensation spending and higher external contractor costs for test engineering resources. These costs were only partially offset by the staff reduction of senior
engineering resources which resulted from a company-wide restructuring effort which took place on December 1, 2008. (Second quarter of fiscal 2010 higher by $0.5 million;
year-to-date fiscal 2010 higher by $0.2 million). A decrease in the revenue generated from external engineering contracts also impacted both the quarter and year to date
comparisons. When revenue is recognized on these contracts the associated costs are removed from R&D and recognized in cost of goods sold. (Negative variance: Second quarter fiscal
2010 — $0.3 million; year-to-date fiscal 2010 — $0.6 million). Higher equipment costs
and materials purchased for prototypes accounted for the majority of the remaining increase (Second quarter of fiscal 2010 higher by $0.2 million; year to date fiscal 2010 $ nil change). 

10

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Selling and Marketing  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$3,567	 	 $2,783	 	 $6,106	 	 $5,407

        Sales
and marketing expenses increased $0.8 million in the three months ended August 31, 2009 relative to the same three month period in the previous fiscal year, and
$0.7 million for the six months ended August 31, 2009 compared to the same six month period in the previous fiscal year. 

        Higher
variable compensation spending associated with revenue performance and compensation costs related to the increase in sales and customer support personnel accounted for the
majority of the increase in spending. (Second quarter of fiscal 2010 higher by $0.9 million; year-to-date fiscal 2010 higher by $1.0 million) The increased number
of sales and support staff located in regions where our customers are located is helping us to reduce travel expenditures (Second quarter of fiscal 2010 lower by $0.1 million; year to date
fiscal 2010 lower by $0.3 million). 

 General and Administrative  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$1,819	 	 $1,133	 	 $3,050	 	 $2,263

        General
and administrative expenses increased by $0.7 million for the three months ended August 31, 2009 when compared to the same three month period in the previous fiscal
year, and increased by $0.8 million for the six months ended August 31, 2009 when compared to the same six month period in the prior fiscal year. 

        The
$0.7 million increase in spending in the quarter can be primarily attributed to higher variable compensation costs and compensation spending related to an increase in
headcount resources (Second quarter of FY10 higher by $0.5 million; year-to-date fiscal 2010 higher by $0.5 million). Higher travel related spending costs
including trips to manufacturing locations in the Far East and higher business taxes and insurance accounted for the remaining differences (Second quarter of fiscal 2010 higher by $0.2 million;
year-to-date fiscal 2010 higher by $0.3 million). 

11

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Investment Tax Credits  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$(60)	 	 $(50)	 	 $(120)	 	 $(100)

        We
continue to accrue an amount related to the refundable portion of the ITCs available in the province of Ontario. There has been no significant change in the value accrued in the first
half of fiscal 2010 over the amount accrued in the same period in the previous fiscal year. 

 Interest Income (Net)  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$(5)	 	 $170	 	 $22	 	 $415

        Interest
income is calculated on our guaranteed short term investment. We value the investment at market value. Interest expense is paid on our line of credit. 

        The
decreased principal as well as the decrease in the prime lending rate has resulted in lower interest income values in the second quarter, when compared to the same period in the
previous year. The line of credit balance in its native currency has remained unchanged for the last six fiscal quarters, which resulted in no significant variance in interest expense. 

 Gain on Sale of Property and Equipment  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$35	 	 $—	 	 $35	 	 $—

        We
triggered a small gain on the sale of a piece of test equipment when we exchanged the unit and purchased a new asset. 

12

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Foreign Exchange Gain (Loss)  

							
	Three months ended

August 31 	 	Six months ended

August 31 
	2009 	 	2008 	 	2009 	 	2008 
	$70	 	 $997	 	 $(1,616)	 	 $1,265

        The
small foreign exchange gain recognized in the second quarter of fiscal 2010 reflected the stability of the Canadian dollar relative to the U.S. dollar over the three month
period. The foreign exchange loss over the six month period was recorded when the Canadian dollar strengthened against the U.S. dollar earlier in the year. The impact to the P&L was created
when U.S. denominated monetary assets were translated into Canadian dollars at the balance sheet date. 

 Income Taxes  

														
	 
	 	Three months ended

August 31 	 	Six months ended

August 31 	 
	 
	 	2009 	 	2008 	 	2009 	 	2008 	 
	Income Tax Expense	 	$	(209	)	$	(11	)	$	(209	)	$	(11	)
	Future Tax Recovery	 	$	346	 	$	—	 	$	346	 	$	—	 

        Both
the income tax expense and the income tax recovery recorded for the three and six month periods ended August 31, 2009 relate primarily to DragonWave's wholly owned
U.S. subsidiary. Given its recent history of positive net income, it was determined that the benefit of the tax losses available to the US company should be recorded in the current quarter. At
the same time, an accrual was made for the estimated taxes payable associated with net income in excess of available tax losses for the U.S. subsidiary for the first six months of
fiscal 2010. 

 Liquidity and Capital Resources  

        As at August 31, 2009, we had a credit line in place with a major U.S.-based bank which allows borrowing to support working
capital requirements of up to U.S.$10.0 million and capital expenditure requirements of up to U.S.$3 million. 

        The
table below outlines selected balance sheet accounts and key ratios: 

									
	 
	 	As at

August 31, 2009 	 	As at

February 28, 2009 	 
	 Key Balance Sheet Amounts and Ratios:
	 	 	 	 	 	 	 
	 	 Cash and Cash Equivalents
	 	 	 21,349	 	 	 8,504	 
	 	 Short Term Investments
	 	 	 —	 	 	 14,994	 
	 	 Working Capital
	 	 	 42,367	 	 	 40,619	 
	 	 Long Term Assets
	 	 	 4,926	 	 	 2,676	 
	 	 Long Term Liabilities
	 	 	 —	 	 	 —	 
	 	 Working Capital Ratio
	 	 	 2.9 : 1	 	 	 5.8 : 1	 
	 	 Days Sales Outstanding in accounts receivable
	 	 	 58 days	 	 	 76 days	 
	 	 Inventory Turnover
	 	 	 7.1 times	 	 	 2.3 times	 

13

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Cash  

        As at August 31, 2009, we had $21.3 million in cash and cash equivalents ("Cash") representing a $2.1 million
decrease from the Cash and short term investments balance at February 28, 2009. The cash outflow in the first six months of fiscal 2010 was minimized because of the net income of
$3.4 million. When adjusted for non-cash items depreciation, stock-based compensation and the benefit on recognition of future income tax asset, the net income becomes
$4.4 million. Offsetting this positive income was the $4.4 million increase in non-cash working capital items. We continue to invest in capital equipment which used a further
$2.1 million. 

 Working Capital  

					
	Changes in working capital

 
	 	February 28, 2009

to

August 31, 2009 	 
	 Beginning Working Capital Balance (current assets — current liabilities)
	 	 	 40,619	 
	 Cash and cash equivalents and Short Term Investments
	 	 	(2,149	)
	 Accounts Receivable
	 	 	15,479	 
	 Other receivables
	 	 	520	 
	 Inventory
	 	 	1,108	 
	 Prepaid Expenses
	 	 	573	 
	 Current Income Tax Asset
	 	 	207	 
	 Line of Credit
	 	 	54	 
	 Accounts Payable and accrued liabilities
	 	 	(14,488	)
	 Taxes Payable
	 	 	(209	)
	 Deferred Revenue
	 	 	653	 
	 	 	 	 
	 Net Change in Working Capital
	 	 	 1,748	 
	 	 	 	 
	 Ending Working Capital Balance
	 	 	 42,367	 
	 	 	 	 

        Working
capital is calculated as the difference between our current assets and current liabilities. Our working capital balance increased by $1.7 million between
February 28, 2009 and August 31, 2009. The increase in accounts receivable had a significant impact, as did the increase in inventory. However, the growth in both the Accounts Receivable
and Inventory balances was offset by the growth in Accounts Payable and accrued liabilities amounts. 

        The
days sales outstanding in accounts receivable, ("DSO"), as at August 31, 2009 was 58 days. This calculation was 18 days lower than the DSO of 76 days at
February 28, 2009. We evaluate DSO by determining the number of days of sales in the ending accounts receivable balance with reference to
the most recent monthly sales, rather than average yearly or quarterly values. Our favourable DSO performance relates to strong collection efforts and timely receipt of payments. 

14

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        Inventory turnover for August 31, 2009 was 7.1 times for the six month period then ended, an improvement to that
experienced at February 28, 2009. Turnover is calculated with reference to the most recent monthly standard cost of goods sold and is based on the period ending inventory balance of production
related inventory (net of labour and overhead allocations). 

 Cash Inflows and Outflows:  

        Our cash utilization has continued to decline: 

																	
	 
	 	Aug 31

2008 	 	Nov 30

2008 	 	Feb 28

2009 	 	May 31

2009 	 	Aug 31

2009 	 
	 Beginning Cash (incl Short Term Investments)
	 	 	31,002	 	 	27,697	 	 	25,220	 	 	23,498	 	 	21,975	 
	 Net Income (Loss)
	 	 	(1,677	)	 	(221	)	 	(2,150	)	 	(2,883	)	 	6,291	 
	 Changes in Non-Cash Working Capital
	 	 	(1,711	)	 	(2,625	)	 	79	 	 	1,451	 	 	(5,709	)
	 Investing Activities
	 	 	(347	)	 	(136	)	 	(117	)	 	(592	)	 	(1,501	)
	 Financing Activities
	 	 	22	 	 	59	 	 	15	 	 	(44	)	 	36	 
	 Non Cash items
	 	 	408	 	 	446	 	 	451	 	 	545	 	 	257	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 Ending Cash
	 	 	 27,697	 	 	 25,220	 	 	 23,498	 	 	 21,975	 	 	 21,349	 
	 Total Cash Used
	 	 	

(3,305	
)	 	

(2,477	
)	 	

(1,722	
)	 	

(1,523	
)	 	

(626	
)

 Cash Used in Operating Activities  

        The positive impact to cash of the net income of $6.3 million was not fully offset by the $5.7 million increase in
non-cash working capital in the second quarter of fiscal 2010. 

 Investing Activities (Purchase of Capital Assets)  

        We are continuing to invest in capital equipment to support engineering programs as well as the capacity requirements associated with
the increase in sales demand. In the quarter, spending on capital equipment used $1.5 million in cash resources. 

 Financing Activities  

        There was minimal financing activity in the second quarter of fiscal 2010. We anticipate that the Offering discussed in "Overview"
above, will be completed in the third quarter of fiscal 2010. 

 Liquidity and Capital Resource Requirements  

        Based on our recent performance, current revenue expectations, and funds raised through the financing activities of the previous year,
our management believes cash resources will be available to satisfy working capital needs for at least the next 12 months. 

        In
connection with the Offering, we intend to spend the net proceeds of the Offering as follows: (i) as to approximately 40% of the net proceeds, to strengthen our balance sheet
in preparation for new mobile broadband network deployments and to better position us to be selected as an equipment vendor for large network service providers; (ii) as to approximately 30% of
the net proceeds, to fund working capital requirements associated with accelerating sales and production of our products; (iii) as to approximately 

15

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

20%
of the net proceeds, to continue to fund our efforts to increase sales penetration in regions outside North America, including increasing global direct sales activity, expanding our distribution,
VAR and OEM network, and providing training and support to strengthen the systems engineering and support organizations of our VARs and OEMs. We also plan to invest in human resources and
supporting infrastructure to support this effort; and (iv) as to the balance, to provide an available source of funding for potential future acquisition opportunities. 

 Commitments as at August 31, 2009  

        Future minimum operating lease payments as at August 31, 2009 per fiscal year are as follows: 

					
	Fiscal Year    

 
	 	$(000's) 	 
	 2010
	 	 	527	 
	 2011
	 	 	1,059	 
	 2012
	 	 	750	 
	 2013
	 	 	77	 
	 Thereafter
	 	 	13	 
	 	 	 	 
	 Total
	 	 	 2,426	 
	 	 	 	 

        In
addition to the above, on December 1, 2008, we issued a letter of credit to support a guarantee with a European bank. The guarantee expires on April 30, 2010 and has an
amount of up to 860,000 Euros. We are selling equipment to an integrator who will resell the equipment to a service provider. We will be required to fulfill our obligations under the guarantee
in the event that the service provider defaults on its obligations to the bank. We have recourse against the integrator in the event that the guarantee is exercised. 

        In
the normal course of its business activities, the Company is subject to claims and legal actions. The Company recognizes a provision for estimated loss contingencies when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In management's opinion, adequate provisions have been made for all current and
future claims. 

 Outstanding Share Data  

        The common shares of the Corporation are listed on the TSX under the symbol DWI. 

										
	 
	 	Outstanding 	 	Exercise Price

Range 	 	Weighted Avg

Exerice Price 	 
	 Common shares
	 	 	28,633,995	 	n/a	 	 	n/a	 
	 DWI.TO on Oct 1, 2009
	 	$	8.70	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 Market Capitalization
	 	$	249,115,757	 	 	 	 	 	 
	 Stock options — common shares
	 	 	

2,135,217	 	

$1.34 — $6.44	 	
$	

2.93	 
	 Warrants — common shares
	 	 	252,020	 	$3.55 — $9.10	 	$	4.48	 

16

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        The information presented is at October 1, 2009. There were no material transactions between October 1 and the date of
this Management Discussion & Analysis that would materially affect the number of common shares outstanding. 

 Off-Balance Sheet Arrangements  

        We lease space for our headquarters in Ottawa, Ontario, Canada. Our R&D, services and support, and general and administrative groups
operate from our headquarters. We also lease warehouse space in Ottawa, Ontario, Canada. Both leases expire in November 2011. We lease additional warehouse space on a month by month basis. Our
rental costs including operating expenses total $77,303 per month. In April, 2008 we signed a lease agreement in England. The lease expires in April, 2013 and rental costs including operating costs
total $6,261 per month. 

        We
use an outsourced manufacturing model whereby most of the component acquisition and assembly of our products is executed by third parties. Generally, we provide the supplier with a
purchase order 90 days in advance of expected delivery. We are responsible for the financial impact of any changes to the product requirements within this period. We have purchase orders in
place currently for raw materials and manufactured products in addition to capital expenses and services. All purchase orders reflect our current view on revenue and cash flow. 

 Financial Instruments  

        Under Canadian generally accepted accounting principles, financial instruments are classified into one of the following categories:
held for trading, held-to-maturity, available-for-sale, loans and receivables, or other liabilities. 

 Fair Value  

        The following table summarizes the carrying values of the Company's financial instruments: 

								
	 
	 	August 31

2009 	 	February 28

2009 	 
	 Held for Trading (1)
	 	 	21,349	 	 	23,498	 
	 Loans and receivables (2)
	 	 	26,124	 	 	11,243	 
	 Other financial liabilities (3)
	 	 	19,088	 	 	5,934	 

	(1)
	Includes
cash and cash equivalents, and short-term investments

	(2)
	Includes
accounts receivable and other receivables

	(3)
	Includes
line of credit, accounts payable and accrued liabilities which are financial in nature 

        Cash
and cash equivalents, short term investments, accounts receivables, other receivables, line of credit, accounts payable and accrued liabilities are short term financial instruments
whose fair value approximates the carrying amount given that they will mature shortly. As at the balance sheet date, there are no significant differences between the carrying value of these items and
their estimated fair values. 

17

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Transactions with Related Parties  

        We lease premises from a real estate company controlled by one of our directors, Terence Matthews. During the three month and six month
periods ended August 31, 2009, we paid $0.3 million and $0.5 million respectively (three and six months ended August 31,
2008 — $0.2 million and $0.4 million respectively) relating to the rent and operating costs associated with this real estate. We have allocated
these amounts among our various expense accounts. 

        We
also purchased products and services from two companies controlled or significantly influenced by Mr. Matthews (BreconRidge and Wesley Clover Corporation). Total net product
and services purchased for the three months and six month periods ended August 31, 2009, were $5.1 million and $6.4 million respectively (three and six months ended
August 31, 2008 — $2.6 million and $6.2 million respectively) and the value owing for net purchases at August 31, 2009 was
$1.4 million (fiscal year ended February 28, 2009 — $1.4 million) and is included in accounts payable and accrued liabilities. The majority
of the purchases have been recorded in inventory and ultimately in cost of sales. 

        All
transactions are in the normal course of business and have been recorded at the exchange amount. 

 Description of Credit Facilities  

 Bank Line of Credit  

        As at August 31, 2009, we had drawn $0.6 million (February 28,
2009 — $0.6 million), on an operating credit facility with a limit of U.S.$10.0 million (February 28,
2009 — C$5.0 million). Interest is calculated at the bank's U.S. prime rate of interest plus 1.75% and resulted in a weighted average effective rate
of 4.59% and 4.25% for the three and six month periods ended August 31, 2009 (three and six months ended August 31, 2008 — 5.89% and 6.06%). The
draw on the line of credit is denominated in both Canadian and U.S. currencies. An additional U.S.$1.6 million has been reserved against the operating line of credit to secure letters of
credit to support performance guarantees. We have provided a general security agreement on accounts receivable. We were in compliance with the financial covenants included in the lending agreement as
at August 31, 2009. 

        We
also hold a capital expenditure facility with a limit of U.S.$3.0 million (February 28, 2009 — Nil). This facility was not utilized
as at August 31, 2009. 

 Controls and Procedures  

        In compliance with the Canadian Securities Administrators' National
Instrument 52-109 — Certification of Disclosure in Issuers' Annual and Interim Filings, we have
filed certificates signed by our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") that, among other things, report on the design and effectiveness of disclosure controls and
procedures and the design and effectiveness of internal controls over financial reporting. These reports were filed for the six months ended August 31, 2009 and the twelve months ended
February 28, 2009. During the three and six months periods ending August 31, 2009 no significant changes in internal controls occurred. 

18

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

 Critical Accounting Policies and Estimates  

 Inventory  

        We value inventory at the lower of cost and market. We calculate the cost of raw materials on a standard cost basis, which approximates
average cost. Market is determined as net realizable value for finished goods, raw materials and work in progress. Indirect manufacturing costs and direct labour expenses are allocated systematically
to the total production inventory. 

 Revenue recognition  

        We derive revenue from the sale of our broadband wireless backhaul equipment which includes embedded software and a license to use said
software and extended product warranties. We consider software to be incidental to the product. Services range from installation and training to basic consulting. We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred and there are no significant remaining vendor obligations, collection of receivables is reasonably assured and the fee is fixed and
determinable. Where final acceptance of the product is specified by the customer, revenue is deferred until acceptance criteria have been met. Additionally, our business agreements may contain
multiple elements. Accordingly, we are required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate
units of accounting for revenue recognition purposes, the fair value of these separate units of accounting and when to recognize revenue for each element. For arrangements involving multiple elements,
we allocate revenue to each component of the arrangement using the residual value method, based on vendor-specific objective evidence of the fair value of the undelivered elements. These elements may
include one or more of the following: advanced replacement, extended warranties, training, and installation. We allocate the arrangement fee, in a
multiple-element transaction, to the undelivered elements based on the total fair value of those undelivered elements, as indicated by vendor-specific objective evidence. This portion of the
arrangement fee is deferred. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. In some
instances, a group of contracts or agreements with the same customer may be so closely related that they are, in effect, part of a single multiple element arrangement and, therefore, we would allocate
the corresponding revenue among the various components, as described above. 

        We
generate revenue through direct sales and sales to distributors. Revenue on stocking orders sold to distributors is not recognized until the end-user is identified. 

        We
evaluate arrangements that include services such as training and installation to determine whether those services are essential to the functionality of other elements of the
arrangement. When services are considered essential, revenue allocable to the other elements is deferred until the services have been performed. When services are not considered essential, the revenue
allocable to the services is recognized as the services are performed. 

        We
recognize revenue associated with extended warranty and advanced replacement rateably over the life of the contract. 

        We
recognize revenue from engineering services or development agreements according to the specific terms and acceptance criteria as services are rendered. 

19

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

        We accrue estimated potential product liability as warranty costs when revenue on the sale of equipment is recognized. We calculate
warranty costs on a percentage of revenue per month based on current actual warranty costs and return experience. 

        We
record shipping and handling costs borne by us in costs of sales. Shipping and handling costs charged to customers are recorded as revenue, if billed at the time of shipment. Costs
charged to customers after delivery are recorded in cost of sales. 

 Research and development  

        Our research costs are expensed as incurred. Our development costs other than property and equipment are expensed as incurred unless
they meet generally accepted accounting criteria for deferral and amortization. Development costs incurred prior to establishment of technological feasibility do not meet these criteria, and are
expensed as incurred. Government assistance and investment tax credits relating to ongoing R&D costs are recorded as a recovery of the related R&D expenses, where such assistance is reasonably
assured. 

 Foreign currency translation  

        Our U.S. subsidiary, DragonWave Corp., is considered financially and operationally integrated and is translated into Canadian
dollars using the temporal method of translation: monetary assets and liabilities are translated at the period end exchange rate, non-monetary assets are translated at the historical
exchange rate, and revenue and expense items are translated at the average exchange rate. Gains or losses resulting from the translation adjustments are included in our income. 

 Income taxes  

        We follow the liability method in accounting for income taxes. Under this method, current income taxes are recognized based on an
estimate of the current year. Future tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the
financial statements. The future benefit of losses available to be carried forward, and likely to be realized are measured using the substantively enacted tax rate in effect at the time in which the
losses will be utilized. A valuation allowance is recorded when it is more likely than not that the benefit of the future income tax asset will not be realized. 

 Future Accounting Changes  

        In 2006, Canada's Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as used by public companies,
being evolved and converged with International Financial Reporting Standards ("IFRS") over a transitional period to be complete by 2011 (first quarter of fiscal 2012). We will be required to report
using the converged standards effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Canadian GAAP will be converged with IFRS
through a combination of two methods: as current joint-convergence projects of the United States' Financial Accounting Standards Board and the International Accounting Standards Board are
agreed upon, they will be adopted by Canada's Accounting Standards Board and may be introduced in Canada 

20

 

  

 DragonWave Inc.

Management's Discussion and Analysis

For the three month and six months ended August 31, 2009
  Tables are expressed in Canadian $000's except share and per share amounts  

before
the complete changeover to IFRS; and standards not subject to a joint-convergence project will be exposed in an omnibus manner for introduction at the time of the complete changeover to IFRS.
The International Accounting Standards Board currently has projects underway that should result in new pronouncements that continue to evolve IFRS. 

 Transition to IFRS  

        We will be required to report consolidated year end financial statements under IFRS for the first time on February 28, 2012 and
the interim financial statements starting March 1, 2011. We are aware of the magnitude of the effort involved to succeed in such a transition and have begun the process to prepare for this
eventuality. 

        We
started on the conversion plan in the first half of our 2010 fiscal year with the help of an external advisor. The project consists of three phases to be completed in order to change
over to IFRS: diagnostic, development and implementation. 

        The
first phase includes the identification of significant differences between the current Canadian GAAP standards and IFRS that are relevant to us and a review of the alternatives
available upon adoption. We performed a diagnostic review and established the most significant differences applicable to us. Canadian GAAP and IFRS differ in the following areas: share based payments,
revenue recognition, property and equipment, leases, provisions, reporting currency, presentation and additional disclosure requirements under IFRS. Additional differences might be identified in the
future as changes to IFRS standards are released. 

        The
second phase includes identification, evaluation and selection of accounting policies necessary for us to change over to IFRS as well as potential first-time adoption
exemptions. During this phase, we will assess the impact of the transition on the data system and internal control over financial reporting, the further training required for the financial team and
the impact on business activities such as foreign currency, capital requirements, banking agreements or compensation arrangements. We will begin this phase in the third and fourth fiscal quarters of
our 2010 fiscal year. 

        The
implementation phase will integrate all the solutions into our financial system and processes that are necessary for us to convert to IFRS. 

21

QuickLinks

Exhibit 4.8Exhibit
10.7

 

EXECUTION VERSION

 

 

SIMULTANEOUS EXCHANGE AGREEMENT

 

between

 

COBALT INTERNATIONAL ENERGY, L.P.

 

and

 

TOTAL E&P USA, INC.

 

 

 

TABLE OF CONTENTS

 

	
  ARTICLE 1

  	
  DEFINITIONS

  	
  1

  
	
   

  	
   

  	
   

  
	
  ARTICLE 2

  	
  OBLIGATION WELL PROGRAM
  DESCRIPTION; DRILLING COSTS AND ADDITIONAL PAYMENTS; DRILLING RIG

  	
  12

  
	
   

  	
   

  	
   

  
	
  2.01

  	
  Joint Participation

  	
  12

  
	
  2.02

  	
  Drilling Costs and
  Additional Payments

  	
  12

  
	
  2.03

  	
  DD-1

  	
  16

  
	
  2.04

  	
  Second Rig

  	
  16

  
	
  2.05

  	
  Replacement Rig

  	
  17

  
	
   

  	
   

  	
   

  
	
  ARTICLE 3

  	
  EXCHANGE OF ASSETS;
  CONDITIONS TO CLOSING; CLOSING; ADDITIONAL PAYMENT

  	
  17

  
	
   

  	
   

  	
   

  
	
  3.01

  	
  Exchange of Assets

  	
  17

  
	
  3.02

  	
  Conditions to Total’s
  Obligations at Closing

  	
  18

  
	
  3.03

  	
  Conditions to Cobalt’s
  Obligations at Closing

  	
  18

  
	
  3.04

  	
  Closing

  	
  18

  
	
  3.05

  	
  Total’s Obligations at
  Closing

  	
  19

  
	
  3.06

  	
  Cobalt’s Obligations at
  Closing

  	
  19

  
	
  3.07

  	
  Contractual Special
  Warranty

  	
  20

  
	
  3.08

  	
  Additional Payment

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE 4

  	
  CERTAIN COVENANTS

  	
  20

  
	
   

  	
   

  	
   

  
	
  4.01

  	
  Prohibited Action

  	
  20

  
	
  4.02

  	
  Required Conduct

  	
  21

  
	
   

  	
   

  	
   

  
	
  ARTICLE 5

  	
  TERM

  	
  23

  
	
   

  	
   

  	
   

  
	
  5.01

  	
  Term

  	
  23

  
	
  5.02

  	
  Event of Default

  	
  23

  
	
  5.03

  	
  Effect of Termination

  	
  23

  
	
   

  	
   

  	
   

  
	
  ARTICLE 6

  	
  RELATIONSHIP OF PARTIES;
  TAX MATTERS

  	
  24

  
	
   

  	
   

  	
   

  
	
  6.01

  	
  Relationship of the
  Parties

  	
  24

  
	
  6.02

  	
  Tax Partnership; Tax
  Treatment

  	
  24

  
	
  6.03

  	
  Responsibility for Taxes

  	
  25

  
	
  6.04

  	
  Confidentiality

  	
  25

  
	
   

  	
   

  	
   

  
	
  ARTICLE 7

  	
  MISCELLANEOUS

  	
  26

  
	
   

  	
   

  	
   

  
	
  7.01

  	
  Public Announcements

  	
  26

  
	
  7.02

  	
  Total Representations

  	
  26

  
	
  7.03

  	
  Cobalt Representations

  	
  29

  
	
  7.04

  	
  No Preferential Purchase
  or Title Representations

  	
  32

  
	
  7.05

  	
  Survival of
  Representations and Warranties

  	
  33

  
	
  7.06

  	
  Assumption of Liabilities

  	
  33

  

 

 

i

 

	
  7.07

  	
  Notices

  	
  33

  
	
  7.08

  	
  Further Assurances

  	
  34

  
	
  7.09

  	
  No Waiver

  	
  34

  
	
  7.10

  	
  Waiver of Certain Damages

  	
  34

  
	
  7.11

  	
  Construction

  	
  34

  
	
  7.12

  	
  Entire Agreement

  	
  35

  
	
  7.13

  	
  Severability

  	
  35

  
	
  7.14

  	
  Binding Effect

  	
  35

  
	
  7.15

  	
  GOVERNING LAW

  	
  35

  
	
  7.16

  	
  Dispute Resolution

  	
  35

  
	
  7.17

  	
  Disclaimer

  	
  35

  
	
  7.18

  	
  Drafting of Agreement

  	
  36

  
	
  7.19

  	
  Multiple Originals

  	
  36

  

 

EXHIBITS

 

	
  Exhibit A

  	
  Obligation Wells

  	
   

  
	
  Exhibit B

  	
  Form of Operating
  Agreement

  	
   

  
	
  Exhibit C

  	
  Drilling Rigs

  	
   

  
	
  Exhibit D

  	
  Pre-Agreement Cobalt
  Interests

  	
   

  
	
  Exhibit E

  	
  Pre-Agreement Total Interests

  	
   

  
	
  Exhibit F

  	
  Total Excluded Interests

  	
   

  
	
  Exhibit G

  	
  Sonangol Blocks

  	
   

  
	
  Exhibit H

  	
  Form of Assignment

  	
   

  
	
  Exhibit I

  	
  Dispute Resolution-Arbitration

  	
   

  
	
  Exhibit J

  	
  Press Releases

  	
   

  
	
  Exhibit K

  	
  Tax Partnership Agreement

  	
   

  

 

 

ii

 

SIMULTANEOUS
EXCHANGE AGREEMENT

 

This Simultaneous Exchange
Agreement is made and entered into effective this 6th day of April,
2009 (the “Effective Date”) by and between Cobalt International Energy,
L.P., a Delaware limited partnership (“Cobalt”), and TOTAL E&P USA,
INC., a Delaware corporation (“Total”).

 

W I T N
E S S E T H :

 

WHEREAS, Total desires
(i) to participate with Cobalt in the Obligation Well Program (as defined
below) and (ii) to exchange an interest in the Pre-Agreement Total
Interests (as defined below) for an interest in the Pre-Agreement Cobalt
Interests (as defined below), all in the manner described in this Agreement (as
defined below) and subject to the provisions hereof; and

 

WHEREAS, Cobalt desires
(i) to participate with Total in the Obligation Well Program, (ii) to
have Total deliver the DD-1 (as defined below) to the Delivery Location (as
defined below) before July 1, 2009 to drill the Obligation Well Program and
(iii) to exchange an interest in the Pre-Agreement Cobalt Interests for an
interest in the Pre-Agreement Total Interests, all in the manner described in
this Agreement and subject to the provisions hereof;

 

NOW THEREFORE, in
consideration of the premises and the mutual benefits and obligations set forth
herein, Cobalt and Total hereby agree as follows:

 

ARTICLE
1

DEFINITIONS

 

The following terms when
used in this Agreement or any exhibit hereto shall have the following meanings:

 

“Additional Payment” has the
meaning provided such term in Section 3.08.

 

“Adriatic Prospect” means
Green Canyon Blocks 587, 588, 589 (SW/4; W/2 SE/4 only), 632, 631, 633, 675,
676, 677, 719, 720 and 721.

 

“Affiliate” means any Person
that:

 

(a)                                  is owned or
controlled by a Party;

 

(b)                                 is owned or
controlled by any other Person that is owned or controlled by a Party;

 

(c)                                  owns or
controls a Party; or

 

(d)                                 is owned or
controlled by any Person that owns or controls a Party.

 

For the purposes of this
definition, ownership or control means (i) the ownership or control,
directly or indirectly, of fifty percent (50%) or more of the shares,

 

 

1

 

voting rights, or interest
(or similar rights to direct the management and policies of) in any Person and
(ii) the general partner in any limited partnership. Notwithstanding the
foregoing, no private equity fund or its affiliate will be deemed to be an
“Affiliate” as long as such private equity fund is not a private equity fund
(x) controlled by a Person whose primary business is oil and gas
operations or (y) qualified by the Minerals Management Service to hold oil
and gas leases in the Gulf of Mexico. For the avoidance of doubt, as of the
Effective Date, none of the current limited partners of Cobalt are controlled
by a Person whose primary business is oil and gas operations.

 

“Agreement” means this
Simultaneous Exchange Agreement, as amended from time to time.

 

“Agreement Term” has the
meaning provided such term in Section 5.01.

 

“Assignment” means the form
of assignment, substantially attached hereto as Exhibit H.

 

“Authorization for
Expenditure” or “AFE” has the meaning provided in the applicable Operating
Agreement.

 

“BHP Billiton” means BHP
Billiton Petroleum (Americas) Inc., a Delaware corporation. 

 

“BHP Block” means Green
Canyon Block 187.

 

“BHP Interest” means 50% of
all of the oil and gas leasehold interests held by Cobalt or any of its
Affiliates as of the Effective Date with respect to the Lease covering the BHP
Block.

 

“BHP/Cobalt Block” means
Green Canyon Block 233.

 

“BHP/Cobalt Interest” means
50% of all of the oil and gas leasehold interests with respect to the Lease
covering the BHP/Cobalt Block.

 

“business day” means a day
other than a Saturday, a Sunday, a federal holiday or a day on which commercial
banks in the jurisdiction of receipt are authorized by law to close.

 

“Carried Obligation Well
Costs” has the meaning provided such term in Section 2.02(b). 

 

“Carried Non-Obligation
Costs” has the meaning provided such term in Section 2.02(c).

 

“Catalan Prospect” means
Walker Ridge Blocks 46, 89, 90 133 and 134 and Keathley Canyon Blocks 85, 129
and 173.

 

“Change of Control” means
the acquisition (whether through one or more transactions), directly or
indirectly through one or more Affiliates, of more than 50% of the voting
interests (or similar rights granting the acquiring entity power to direct the
activities or operations of a Party) in a Party.

 

 

2

 

“Closing” has the meaning
provided such term in Section 3.04.

 

“Closing Date” has the
meaning provided such term in Section 3.04.

 

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

 

“Cobalt Excluded Interests”
means all of the oil and gas leasehold interests held by Cobalt or any of its
Affiliates with respect to the Leases covering Walker Ridge Blocks 8, 51 and 52
(the Shenandoah prospect) and Green Canyon Blocks 816, 859, 860 and 903 (the
Heidelberg prospect), the Sonangol Interest, BHP Interest, the Nexen Interest
and the Kispiox/Caspian Interest.

 

“Cobalt’s Acquired
Interests” means an undivided 60% of all of Total’s rights, title and interests
in, to and under or derived from the following: (i) the Pre-Agreement
Total Interests and the production of oil, gas or other hydrocarbon substances
attributable thereto, (ii) all unitization, communitization and pooling
declarations, orders and agreements (including all units formed by voluntary
agreement and those formed under the rules, regulations, orders or other
official acts of any governmental entity having jurisdiction) to the extent
they relate to the Pre-Agreement Total Interests, or the production of oil, gas
or other hydrocarbon substances attributable thereto and (iii) all
contracts to the extent and only to the extent that they relate to the
Pre-Agreement Total Interests, or the production of oil, gas or other
hydrocarbon substances attributable thereto; provided that with respect to the
Pre-Agreement Total Interests relating to the Kispiox/Caspian Interest the
properties and interests described under the foregoing subsections (i) through
(iii) shall relate to only 20% of all of Total’s rights, title and
interests; provided further that with respect to the Pre-Agreement Total
Interests relating to Keathley Canyon Block 129 the properties and interests
described under the foregoing subsections (i) through (iii) shall
relate to only 40% of all of Total’s rights, title and interests.

 

“Code” means the Internal
Revenue Code of 1986, as amended and in effect on the date hereof and, to the
extent applicable, as subsequently amended.

 

“Cost Recovery Payment” has
the meaning provided such term in Section 2.03(b). 

 

“DD-1” means Transocean’s
GSF Development Driller 1 drilling rig.

 

“Defensible Title”
means such title of the assigning Party that, subject to and except for the
Permitted Encumbrances:

 

(a)                                  with respect to any Lease:

 

(i)                                     entitles such Party to
receive not less than the percentage set forth in Exhibit D or
Exhibit E, as applicable, as the net revenue interest for
such Leases of all hydrocarbons produced, saved and marketed from such Lease,
except (A) as set forth in Exhibit D or Exhibit E, as
applicable, (B) decreases in connection with those operations in which
such Party may from and after the date of this Agreement be a non-consenting

 

 

3

 

co-owner and
(C) decreases resulting from the establishment or
amendment of pools or units from and after the date of this Agreement;

 

(ii)                                 obligates such
Party to bear a percentage of the costs and expenses relating to the
maintenance, development and operation of each Lease not greater than the
working interest for such Lease (shown in Exhibit D or Exhibit E, as
applicable), except (A) as set forth in Exhibit D or Exhibit E,
as applicable, (B) increases resulting from contribution requirements with
respect to defaulting co-owners under applicable operating agreements, and
(C) increases to the extent that they are accompanied by a proportionate
increase in such Party’s corresponding net revenue interest (set forth in
Exhibit D or Exhibit E, as applicable); and

 

(b)                                is free and
clear of all material liens and encumbrances.

 

“Delivery Location” means,
with respect to the DD-1, one (1) mile from its previous location, and
with respect to the Second Rig, if the Second Rig is being mobilized from a
location outside of the Gulf of Mexico, one (1) mile from the location of
the next Obligation Well that has not already been drilled, or if the Second
Rig is being mobilized from a location within the Gulf of Mexico, one
(1) mile from its previous location.

 

“Discovery” has the meaning
provided such term in Section 2.02(d).

 

“Dollars” and “$” means the
lawful currency of the United States of America.

 

“Drill Ready” means ready,
willing and able to begin drilling the Initial Obligation Well or, if the Initial
Obligation Well has been drilled, the next Obligation Well that has not already
been drilled, including having necessary drilling permits, equipment, offshore
support vessels, company representatives and supervisory personnel (including
HSSE personnel), fungibles and other supplies necessary for compliance with all
Laws and good oilfield practices, except to the extent any of the foregoing
should have been provided to Cobalt pursuant to the terms of the rig contract
and rig assignment applicable to the applicable drilling rig upon delivery.

 

“Effective Date” has the meaning
set forth in the opening paragraph of this Agreement.

 

“Encumbrance” means any
interest (including any security interest), charge, pledge, mortgage,
prohibition, restriction, lien, charge, claim of any nature whatsoever or other
right or interest of third parties (including any purchase option, call, right
of first refusal, or similar rights).

 

“ENSCO 8503” means a
new-build, dynamic-position, semi-submersible drilling rig named ENSCO 8503.

 

“Environmental Laws” means
all Laws and any permits and Governmental Orders issued under such Laws that
are applicable to either the Pre-Agreement Cobalt Interests or the
Pre-Agreement Total Interests that relate to (a) the control of any
potential pollutant, (b) protection of the air, water, land or natural
resources, (c) solid, gaseous or liquid waste generation, handling,

 

 

4

 

remediation, treatment, storage, disposal or
transportation or (d) exposure to hazardous, toxic or other substances
alleged to be harmful, including any record keeping, notification, disclosure
or reporting with respect to such matters.

 

“Event of Default” means
(a) with respect to Total one or more of the following:

 

(i)                                     a default by
Total in the observance or performance in any material respect of any of the
material obligations of Total hereunder (other than its obligations under any
Operating Agreement) with such default continuing for thirty (30) days (or five
(5) business days in the case of failure to pay money) after written
notice is received by Total from Cobalt specifying the default and demanding
that the same be remedied;

 

(ii)                                  an entry of a
decree or order which remains in force, undischarged or unstayed for sixty (60)
days relating to Total by a court having jurisdiction (A) granting relief
under Title 11 of the United States Code; (B) approving as properly filed
a petition seeking reorganization of Total under Title 11 of the United States
Code, or any other state or federal law; (C) for the appointment of a
receiver or liquidator or trustee in bankruptcy or insolvency of Total or of
the property of Total; (D) appointing a custodian, trustee, receiver or
agent with authorization to take charge of a material portion of the property
of Total for the purpose of enforcing a lien against such property; or
(E) for the winding up or liquidation of the affairs of Total; or

 

(iii)                               Total having
taken any of the following actions: (A) instituting proceedings or
consenting to the institution of proceedings under any state or federal law
relating to debtor rehabilitation, insolvency, bankruptcy, liquidation or
reorganization, including specifically Title 11 of the United States Code;
(B) consenting to the appointment of a receiver, liquidator or trustee in
bankruptcy or other insolvency proceedings of it or of its property or any
substantial portion of its property; (C) procuring, permitting or
suffering the appointment of a custodian, trustee, receiver or agent with
authorization to take charge of a material portion of its property or for the
purposes of enforcing a lien against such property; (D) making an
assignment for the benefit of creditors, or admitting it is generally not able
to pay its debts as they become due; or (E) failing to pay its material
debts as they become due.

 

(b)                                 with respect to
Cobalt one or more of the following:

 

(i)                                     a default by
Cobalt in the observance or performance in any material respect of any of the
material obligations of Cobalt hereunder (other than its obligations under any
Operating Agreement) with such default continuing for thirty (30) days (or five
(5) business days in the case of

 

 

5

 

failure to pay money) after
written notice is received by Cobalt from Total
specifying the default and demanding that the same be remedied;

 

(ii)                                  an entry of a
decree or order which remains in force, undischarged or unstayed for sixty (60)
days relating to Cobalt by a court having jurisdiction (A) granting relief
under Title 11 of the United States Code; (B) approving as properly filed
a petition seeking reorganization of Cobalt under Title 11 of the United States
Code, or any other state or federal law; (C) for the appointment of a
receiver or liquidator or trustee in bankruptcy or insolvency of Cobalt or of
the property of Cobalt; (D) appointing a custodian, trustee, receiver or
agent with authorization to take charge of a material portion of the property
of Cobalt for the purpose of enforcing a lien against such property; or
(E) for the winding up or liquidation of the affairs of Cobalt; or

 

(iii)                               Cobalt having
taken any of the following actions: (A) instituting proceedings or
consenting to the institution of proceedings under any state or federal law
relating to debtor rehabilitation, insolvency, bankruptcy, liquidation or
reorganization, including specifically Title 11 of the United States Code;
(B) consenting to the appointment of a receiver, liquidator or trustee in
bankruptcy or other insolvency proceedings of it or of its property or any
substantial portion of its property; (C) procuring, permitting or
suffering the appointment of a custodian, trustee, receiver or agent with
authorization to take charge of a material portion of its property or for the
purposes of enforcing a lien against such property; (D) making an
assignment for the benefit of creditors, or admitting it is generally not able
to pay its debts as they become due; or (E) failing to pay its material
debts as they become due.

 

“Firefox Prospect” means
Green Canyon Blocks 772, 773, 774, 816, 817, 818, 860, 861 and 862.

 

“Force Majeure” means
hurricanes, tornadoes, lightning, severe storms, loop and eddy currents, rough
seas, earthquakes, or other acts of God, strike, lockout, or other industrial
disturbance, acts of the public enemy, sabotage, terrorism, riots, war,
blockade, explosion, governmental action, governmental delay, restraint or
inaction, unanticipated mechanical break-down, unavailability of labor, goods,
transportation or equipment, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is not reasonably within the
control of the Party claiming suspension.

 

“Form JOA” means a
joint operating agreement in the same form as the operating agreement attached hereto
as Exhibit B.

 

“Governmental Authority”
means any federal, state, municipal or local government, governmental
authority, regulatory or administrative agency, governmental commission,
department, board, bureau, agency or instrumentality, court, tribunal,
arbitrator or arbitral body,

 

 

6

 

foreign or domestic, including the MMS and
those of the United States of America and of the jurisdictions where either
Party hereto is domiciled and organized. Governmental Authority shall include
any arbitrator or arbitral body, whether established under Law or by private
agreement.

 

“Governmental Order”
means any order, writ, rule, ruling, judgment, injunction, decree, stipulation,
determination, award, directive or other official act issued by any
Governmental Authority.

 

“include” and “including”
mean without limitation.

 

“Initial Amount” means One
Hundred Ninety-Seven Million One Hundred Seventy-Seven Thousand Dollars
($197,177,000).

 

“Initial Obligation Well”
means the first well identified in Exhibit A. 

 

“Jack Ryan” means
Transocean’s GSF Jack Ryan drilling rig.

 

“Joint Lease” means any
Lease in which both Cobalt and Total own an undivided interest, as of or after
the Effective Date.

 

“Kispiox/Caspian Interest”
means Garden Banks Blocks 495, 496, 539, 545, 589, 590, 591, 633, 634, 635, 722
and 853.

 

“Law” means any applicable
statute, law (including civil and common law and principles of equity),
ordinance, regulation, rule, code or other similar official act of or by any
Governmental Authority.

 

“Lease” means any Outer
Continental Shelf of the Gulf of Mexico federal oil and gas lease (or portion
thereof).

 

“Ligurian Prospect” means
Green Canyon Blocks 813, 814, 858 and 902.

 

“Lynx Prospect” means
Keathley Canyon Blocks 129 and 173 and Walker Ridge Blocks 89, 90, 133 and 134.

 

“Material Contract” means as
to Cobalt, any of the following agreements, contracts, commitments,
arrangements and other understandings, together with all amendments and/or side
agreements thereto, to or by which Total’s Acquired Interests will be bound
after Closing, and as to Total, any of the following agreements,
contracts, commitments, arrangements and other understandings, together with
all amendments and/or side agreements thereto, to or by which Cobalt’s Acquired
Interests will be bound after Closing: (i) agreements for the dedication,
gathering, balancing, storage, sale, hedging, or option to purchase or call
upon, or transportation of hydrocarbons, except those which can be terminated
by a Party upon 30 days’ notice or less, without penalty, (ii) operating,
unitization, pooling, development, facilities construction, equipment purchase
or other similar contracts, (iii) agreements for the lending or borrowing
of money or guarantees for borrowed money which create an Encumbrance on a
Lease owned by

 

 

7

 

such Party, (iv) areas of mutual
interest and areas of mutual interest agreements Cobalt is obligated to
negotiate or enter into pursuant to existing agreements, (v) drilling or
other service contracts or (vi) joint bidding agreements.

 

“MMS” means the Minerals
Management Service. 

 

“Newfield” means Newfield
Exploration Company.

 

“Newfield Agreement” means
that certain Agreement governing the Lyell Prospect made and entered into
effective the 1st day of July, 2006 between Newfield and Cobalt,
as amended.

 

“Nexen Interest” means
Garden Banks Blocks 457, 502, 503, 517, 518, 544, 647, 648, 823, 865, 866, 867
and 870 and Keathley Canyon Blocks 110, 302, 330, 346, 347, 420 and 655.

 

“Non-Operated Obligation
Well” has the meaning provided such term in Section 2.01.

 

“Non-Obligation Well Carry”
has the meaning provided such term in Section 2.02(c). 

 

“Obligation Well Carry” has
the meaning provided such term in Section 2.02(b). 

 

“Obligation Well Program”
has the meaning provided such term in Section 2.01.

 

“Obligation Well Program
Term” means the period of time from the date the Initial Obligation Well is
spudded to the date the applicable drilling rig is released from the final
Obligation Well.

 

“Obligation Wells” means the
five (5) exploratory wells identified on Exhibit A.

 

“Operating Agreement” means
the Form JOA or, if applicable, any Third Party Operating Agreement.

 

“Operator” means the
operator designated under the applicable Operating Agreement. 

 

“Parties” means Cobalt and
Total and a “Party” means either of the Parties.

 

“Permitted Encumbrances”
means:

 

(i)                                     the terms,
conditions, restrictions, exceptions, reservations, limitations and other matters
contained in the Leases and assignments that create or reserve to the assigning
Party its interests in any of the relevant property, including the Leases and
assignments thereof, to the extent that such agreements, instruments and
documents do not operate to reduce any net revenue interest of such Party (as
set forth in Exhibit D or Exhibit E, as applicable) or increase any
working interest of such Party (as set forth in Exhibit D or
Exhibit E, as applicable) without a proportionate increase in the corresponding
net revenue interest of such Party;

 

 

8

 

(ii)                                  preferential
rights to purchase, rights of first refusal, consents to assign and similar
contractual provisions, with respect to Cobalt’s Acquired Interests, that are
set forth in Schedule 7.02(x) or created pursuant to a Material Contract
set forth in Schedule 7.02(1) and with respect to Total’s Acquired
Interests, that are set forth in Schedule 7.03(x) or created pursuant to a
Material Contract set forth in Schedule 7.03(1);

 

(iii)                               materialman’s,
mechanic’s, repairman’s, employee’s, contractor’s, operator’s and other similar
liens or charges arising in the ordinary course of business: (A) if they
have not been filed pursuant to Law or if they are liens or mortgages to be
released at Closing, (B) if filed, payment is being withheld as provided
by Law; or (C) if they are against a Lease in which a Party owns an
undivided interest and they arise pursuant to operations governed by any
agreement which disclaims the existence of joint and several liability, then in
such a proportion as such lien or charge encumbers interests other than the
undivided interest of such Party;

 

(iv)                              restrictions,
exceptions, reservations, conditions, limitations and other matters, if any,
set forth on the final property descriptions attached to the Assignment
executed pursuant to this Agreement;

 

(v)                                 claims, liens,
charges, burdens, encumbrances, contracts, agreements, instruments,
obligations, and defects or irregularities of title which in the aggregate
(A) are not such as to interfere materially with the ownership, operation
or use of, or materially affect the value of a Lease or (B) do not operate
to reduce any net revenue interest of the assigning Party (as set forth in
Exhibit D or Exhibit E, as applicable) or increase any working
interest of such Party (as set forth in Exhibit D or Exhibit E, as
applicable) without a proportionate increase in the corresponding net revenue
interest of such Party or (C) which have been expressly waived in writing;

 

(vi)                              all rights to
require consent by, notice to, filings with or other actions by, the United
States Department of Interior or the MMS in connection with the sale or
conveyance of federal oil and gas leases or interests therein or related
thereto;

 

(vii)                           agreements for
the gathering, balancing, storage, sale or transportation of hydrocarbons which
can be terminated on 30 days’ notice or less;

 

(viii)                        the Material
Contracts; and

 

(ix)                                any liens for
Taxes not yet delinquent or, if delinquent, that are being contested in good
faith in the ordinary course of business.

 

“Person” means any
individual, corporation, limited liability company, partnership, limited
partnership, trust, association, or other entity.

 

 

9

 

“Petroleum Expert” means
Netherland, Sewell & Associates, Inc.

 

“Pre-Agreement Cobalt
Interests” means all of Cobalt’s rights, title and interests in, to and under
or derived from all oil and gas leasehold interests that are attributable to
the Leases listed in Exhibit D and all other interests of Cobalt or any of
its Affiliates in any Lease other than the Cobalt Excluded Interests.

 

“Pre-Agreement Total
Interests” means all of Total’s rights, title and interests in, to and under or
derived from all oil and gas leasehold interests that are attributable to the
Leases listed in Exhibit E and all other interests of Total or any of its
Affiliates in any Lease other than the Total Excluded Interests.

 

“Racer Prospect” means Green
Canyon Blocks 717, 718, 760, 761, 762, 763, 805, 806 and 807.

 

“Replacement Rig” has the
meaning provided such term in Section 2.05.

 

“Rig Assignment” means an
assignment to and assumption by Cobalt of the drilling rig contract applicable
to the DD-1 or the Second Rig, as applicable, in the same form as the rig
assignment provided to Cobalt in accordance with the second sentence of
Section 2.03(a) or Section 2.04(b), as applicable.

 

“Second Rig” has the meaning
provided such term in Section 2.04(b).

 

“Sonangol” means Sociedade
Nacional de Combustíveis de Angola – Empresa Pública (Sonangol, E.P.), a
company with its headquarters in Luanda, Republic of Angola, incorporated in
accordance with Decree n° 52/76, of 9 June 1976.

 

“Sonangol Blocks” means
those blocks depicted on Exhibit G as the “Sonangol Blocks.” 

 

“Sonangol Consideration” has
the meaning provided such term in Section 4.02(c).

 

“Sonangol Interest” means
25% of all of the oil and gas leasehold interests held by Cobalt or any of its
Affiliates as of the Effective Date with respect to the Leases covering the
Sonangol Blocks.

 

“Storehouse Stock Inventory
Consideration” means Twelve Million Dollars ($12,000,000), which amount
represents Total’s reimbursement of Cobalt’s storehouse stock inventory.

 

“Successful Well” has the
meaning provided such term in Section 2.02(d).

 

“Tax” or “Taxes” means
(a) any taxes, assessments, fees, unclaimed property and escheat
obligations imposed by any Governmental Authority, including income, profits,
gross receipts, net proceeds, alternative or add on minimum, ad valorem, value
added, turnover, sales, use, property, personal property (tangible and
intangible), environmental, stamp, leasing, lease, user,

 

 

10

 

excise, duty, franchise, capital stock, transfer,
registration, license, withholding, social security (or similar), unemployment,
disability, payroll, employment, social contributions, fuel, excess profits,
occupational, premium, windfall profit, severance, estimated, or other charge
of any kind whatsoever, including any interest, penalty, or addition thereto,
whether disputed or not; (b) any liability for the payment of any amounts
described in clause (a) arising by reason of transferee or successor
liability; and (c) any liability for the payment of any amounts of the
type described in (a) or (b) as a result of the operation of law or
any express or implied obligation to indemnify any other Person.

 

“Tax Partnership” has the
meaning provided such term in Section 6.02(a).

 

“Third Party Operating Agreement”
means any operating agreement with any third party to which any oil and gas
leasehold interest that is attributable to a Lease owned by a Party is subject
or which a Party is obligated to enter into or negotiate pursuant to the terms
of an agreement that is in effect as of the Effective Date.

 

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

 

“Total Excluded Interests”
means all of the oil and gas leasehold interests and overriding royalty
interests listed on Exhibit F.

 

“Total’s Acquired Interests”
means an undivided 40% of all of Cobalt’s rights, title and interests in, to
and under or derived from the following: (i) the Pre-Agreement Cobalt
Interests and the production of oil, gas or other hydrocarbon substances attributable
thereto, (ii) all unitization, communitization and pooling declarations,
orders and agreements (including all units formed by voluntary agreement and
those formed under the rules, regulations, orders or other official acts of any
governmental entity having jurisdiction) to the extent they relate to the
Pre-Agreement Cobalt Interests, or the production of oil, gas or other
hydrocarbon substances attributable thereto and (iii) all contracts to the
extent and only to the extent that they relate to the Pre-Agreement Cobalt
Interests, or the production of oil, gas or other hydrocarbon substances
attributable thereto; provided that with respect to the Pre-Agreement Cobalt
Interests relating to Walker Ridge Block 89, the properties and interests
described under the foregoing subsections (i) through (iii) shall
relate to 50% of all of Cobalt’s rights, title and interests.

 

“Transocean” means
GlobalSantaFe Drilling Company.

 

“Transfer” has the meaning
provided such term in Section 4.02(g).

 

“Well Activities” means the
drilling, sidetracking, coring, equipping, evaluating, logging, testing,
appraising and temporary or permanent plugging and abandonment of any well and
all other operations conducted on any well. For the avoidance of doubt, this
term includes, without limitation, preparation for drilling, movement of a
drilling rig between Obligation Wells and for the initial mobilization to the
location of such drilling rig’s first applicable Obligation Well and the final
demobilization of such drilling rig and restoration of the well site in
accordance with applicable governmental and/or Lease requirements, except that
this term shall not include any initial mobilization or final demobilization if
such drilling rig (other than a drilling rig contracted

 

 

11

 

by Cobalt pursuant to Section 2.05) is
being mobilized from outside the Gulf of Mexico, which shall be at Total’s sole
expense.

 

“Well Costs” means all
direct and indirect costs, expenses and liabilities incurred in association
with the Well Activities chargeable under the terms of the applicable Operating
Agreement, including the accounting procedure contained in such Operating
Agreement.

 

ARTICLE
2

OBLIGATION
WELL PROGRAM DESCRIPTION; DRILLING COSTS AND ADDITIONAL

PAYMENTS; DRILLING RIG

 

2.01                           Joint
Participation.   Subject to and in accordance with
the terms of this Agreement, the Parties shall participate in the obligation
well program, which shall consist of drilling the Obligation Wells (the “Obligation
Well Program”). Absent mutual agreement to the contrary, the Obligation
Wells shall be drilled in the order such wells are set forth in Exhibit A
and on a continuous basis; provided that if Cobalt is not the Operator
of an Obligation Well (a “Non-Operated Obligation Well”), such
Non-Operated Obligation Well may be drilled out of sequence. If a Non-Operated
Obligation Well is being drilled, Cobalt shall be Drill Ready and commence
drilling the next Obligation Well in the order set forth on Exhibit A (the
Non-Operated Obligation Well excepted). Each well in the Obligation Well
Program shall be proposed and drilled in accordance with the procedures set
forth in the applicable Operating Agreement, except that (i) Cobalt shall
freely consult with Total and keep Total promptly informed of all material
matters concerning the Obligation Well Program, but if after reasonable
consultation the Parties are unable to agree on a matter related to an
Obligation Well, then Cobalt, as Operator, shall have the right and authority to
issue all of the AFEs and well plans (and any amendments to any such AFE)
related to such Obligation Well and (ii) if the applicable Operating
Agreement requires execution of an AFE, an affirmative vote or other approval
for the drilling of an Obligation Well or the well plan associated with such
Obligation Well, each Party shall execute such AFE (except to the extent an AFE
would cause aggregate Well Costs to exceed $150,000,000 for any Obligation
Well), vote their interest in favor of or give such other approval. For the
avoidance of doubt, if Cobalt votes its interest in favor of or otherwise gives
its approval for any AFE or well plan (including any amendments to any such
AFE) related to any Non-Operated Obligation Well, then Cobalt shall direct
Total and Total shall vote its interest in favor of or otherwise give its
approval for such AFE or well plan (except to the extent an AFE would cause
aggregate Well Costs to exceed $150,000,000 for any Obligation Well).

 

2.02                           Drilling Costs
and Additional Payments.

 

(a)                                  Except as
otherwise provided in this Agreement, the Parties shall pay all costs incurred
in the conduct of activities and operations upon any Joint Lease as
contemplated by the Operating Agreement applicable to such Joint Lease and in
accordance with the terms set forth in such Operating Agreement.

 

(b)                                 The “Obligation
Well Carry” shall initially be Three Hundred Million Dollars ($300,000,000)
and shall be decreased in accordance with this Section 2.02(b) and
Section 2.02(f). Out of the Obligation Well Carry Total shall pay, as and
when due and in

 

 

12

 

accordance with the terms of this
Section 2.02(b), two-thirds (2/3) of Cobalt’s proportionate share of all
Well Costs with respect to each Obligation Well (“Carried Obligation Well
Costs”) until the aggregate gross Well Costs for such Obligation Well
equals One Hundred Fifty Million Dollars ($150,000,000). Subject to
Section 2.01, the Carried Obligation Well Costs shall be paid by Total as
follows: Cobalt shall (i) notify and invoice Total for the Carried
Obligation Well Costs as part of the cash call, invoicing and/or reimbursement
procedures set forth in the applicable Operating Agreement (or, if Cobalt is
not the Operator, Cobalt shall otherwise invoice Total for such amount and
Total shall fund and pay to Cobalt such amount within the earlier of
(x) fifteen (15) business days after receipt of such invoice or
(y) the payment date provided for in the applicable Third Party Operating
Agreement), and (ii) confirm that it has made or will make payment of its
remaining one-third (1/3) proportionate share of all Well Costs and that it has
complied in all material respects with all other payment obligations under the
applicable Operating Agreement. Upon payment of any Carried Obligation Well
Costs by Total, the Obligation Well Carry shall be reduced by the amount of
such payment. If the aggregate amount of Carried Obligation Well Costs paid by
Total for any Obligation Well is less than Sixty Million Dollars ($60,000,000),
then, upon the earlier of (A) the release of the drilling rig from the
location of such Obligation Well and (B) the commencement of a subsequent
drilling activity related to such Obligation Well, the difference, if any,
between Sixty Million Dollars ($60,000,000) and the aggregate amount of Carried
Obligation Well Costs paid by Total for such Obligation Well shall be added to
the Non-Obligation Well Carry and paid in accordance with
Section 2.02(c) and such amount shall also be subtracted from the
Obligation Well Carry.

 

(c)                                  The “Non-Obligation
Well Carry” shall initially be zero and shall be increased in accordance
with the last sentence of Section 2.02(b) and
Section 2.02(e) and decreased in accordance with this
Section 2.02(c) and Section 2.02(f). Out of the Non-Obligation
Well Carry, if any, Total shall pay, as and when due and in accordance with
this Section 2.02(c), two-thirds (2/3) of Cobalt’s proportionate share of
(i) all Well Costs with respect to any exploratory well other than an
Obligation Well to be drilled on a Joint Lease and in which Total has agreed to
participate (provided that such amounts shall be payable by Total without
regard to Total’s participation in such Well from and after the second
anniversary of the end of the Obligation Well Program Term) or (ii) all
Well Costs or other costs with respect to any drilling or other operations
conducted prior to the development phase (including seismic acquisition) on any
Joint Lease related to a prospect on which a Successful Well has been drilled;
until, with respect to clause (i), the aggregate gross Well Costs equal One
Hundred Fifty Million Dollars ($150,000,000) and with respect to clause (ii),
the aggregate gross of all costs, including Well Costs and other costs, equals
One Hundred Fifty Million Dollars ($150,000,000) (“Carried Non-Obligation
Costs”). The Carried Non-Obligation Costs shall be paid by Total as
follows: Cobalt shall (x) notify and invoice Total for the Carried
Non-Obligation Costs as part of the cash call, invoicing and/or reimbursement
procedures set forth in the applicable Operating Agreement (or, if Cobalt is
not the Operator, Cobalt shall otherwise invoice Total for such amount and
Total shall pay to Cobalt such amount within fifteen (15) business days after
receipt of such invoice) and (y) confirm that it has made or will make
payment of its remaining one-third (1/3) proportionate share of all Well Costs
or drilling or other costs, as applicable, and that it has complied in all
material respects with all other payment obligations under the applicable

 

 

13

 

Operating Agreement. Upon payment of any
Carried Non-Obligation Costs by Total, the Non-Obligation Well Carry shall be
reduced by the amount of such payment.

 

(d)                                 For the
purposes of this Agreement, a “Successful Well” is a well:

 

(i)                                     that is an
exploratory well;

 

(ii)                                  that is drilled
on a Joint Lease (other than a Joint Lease that constituted part of the
Pre-Agreement Total Interests or a Joint Lease constituting part of the Catalan
Prospect or the Lynx Prospect);

 

(iii)                               that is drilled
during the Obligation Well Program Term (other than with respect to a well
drilled on the Firefox Prospect, which will be considered to have satisfied
this clause (iii) even if drilled prior to beginning of the Obligation
Well Program Term);

 

(iv)                              in which Total
has a 20% or more working interest (unless such well is drilled on the Racer
Prospect or Adriatic Prospect, in which case no minimum Total working interest
shall be required);

 

(v)                                 that has logged
100 feet (true vertical thickness) of potentially moveable hydrocarbons for a
Miocene objective or 250 feet (true vertical thickness) of potentially moveable
hydrocarbons for a Paleogene objective; and

 

(vi)                              that
establishes a Discovery.

 

For purposes of this Section 2.02(d), a “Discovery”
is one petroleum accumulation, or several petroleum accumulations collectively,
for which one or several exploratory wells have established through testing,
sampling, and/or logging the existence of a significant quantity of potentially
moveable hydrocarbons. In this context, “significant” implies that there is
evidence of a sufficient quantity of petroleum to justify estimating the
in-place volume demonstrated by the well(s) and for evaluating the potential
for economic recovery. Estimated recoverable quantities within such a
discovered (known) accumulation(s) shall initially be classified as
“Contingent Resources” pending definition of projects with sufficient chance of
commercial development to reclassify all, or a portion, as “Reserves.” Where
in-place hydrocarbons are identified but are not considered currently
recoverable, such quantities may be classified as “Discovered Unrecoverable,”
if considered appropriate for resource management purposes; a portion of these
quantities may become recoverable resources in the future as commercial
circumstances change or technological developments occur. The two immediately
preceding sentences were included herein for the sake of replicating in its
entirety Section 2.1.1. “Determination of Discovery Status” of the
Petroleum Resources Management System sponsored by the Society of Petroleum
Engineers, the American Association of Petroleum Geologists, the World
Petroleum Council and the Society of Petroleum Evaluation Engineers.

 

For the avoidance of doubt, a Successful Well
may be drilled by any drilling rig, including any rig contracted for by Cobalt
pursuant to Section 2.05.

 

 

14

 

(e)                                  If Cobalt
reasonably believes that a well may qualify as a Successful Well, then it shall
promptly notify Total in writing of such belief. As soon as practicable
thereafter, the Parties shall meet to review the well results and the way
forward. Not later than 100 days after receipt by Total of Cobalt’s notice,
Total shall notify Cobalt in writing that it either agrees or disagrees that
the well is a Successful Well. If Total agrees, then the Non-Obligation Well
Carry shall increase by Sixty Million Dollars ($60,000,000). If Total disagrees,
it shall state in such notice its reasons for disagreeing and a member of the
senior technical management team of each Party shall meet to discuss the
disagreement within ten (10) days of such notification. If after such
meeting, such disagreement is continuing and such disagreement does not relate
to clause (v) or (vi) of the definition of “Successful Well,” then
such disagreement shall immediately be resolved by the procedures set forth in
Section 7.16. If such disagreement is continuing and relates to clauses
(v) or (vi) of the definition of “Successful Well,” then the
Petroleum Expert shall be promptly engaged to determine whether or not the well
meets the definition of a “Successful Well.” The Petroleum Expert shall assume
in its determination that the well meets clauses (i), (ii), (iii) and
(iv) of the definition of “Successful Well” and the Petroleum Expert shall
consider only whether the well satisfies clause (v) and (vi) as
written. The Petroleum Expert shall make its determination within 30 days of
being engaged to make such determination. The determination of the Petroleum
Expert shall be binding on the Parties. Cobalt shall supply the Petroleum
Expert will all relevant data (including, but not limited to, geological,
geophysical, reservoir and engineering data), and Total and Cobalt shall have
equal access to the Petroleum Expert and each may provide any supplemental data
to the Petroleum Expert as each desires. If the Petroleum Expert determines
that the well meets the definition of a “Successful Well,” then the
Non-Obligation Well Carry shall increase by Sixty Million Dollars ($60,000,000)
and Total shall pay the reasonable costs of the Petroleum Expert. If the
Petroleum Expert determines that the well does not meet the definition of a “Successful
Well,” then the Non-Obligation Well Carry shall not increase and Cobalt shall
pay the reasonable costs of the Petroleum Expert. In no event shall more than
three (3) wells be recognized as Successful Wells, and as a result, the
Non-Obligation Well Carry may be increased in recognition of such Successful
Wells by up to One Hundred Eighty Million Dollars ($180,000,000).

 

(f)                                    The Obligation
Well Carry and the Non-Obligation Well Carry are unique to Cobalt and may not
be assigned to a third party in whole or in part other than to an Affiliate, in
which case the Affiliate must remain an Affiliate for at least two years. If
any company whose primary business is exploration and production of oil and gas
acquires (directly or indirectly through one or more Affiliates) more than 50%
of the voting interests (or similar rights granting the acquiring entity power
to direct the management or policies of Cobalt) in Cobalt (or any Affiliate of
Cobalt to which the Obligation Well Carry or the Non-Obligation Well Carry has
been assigned in whole or in part) during the first two years after the Closing
Date, then (i) the Obligation Well Carry shall be reduced to zero and
(ii) the Non-Obligation Well Carry, if any at such time, shall not
thereafter be increased (pursuant to Section 2.02(e) or otherwise)
but such Non-Obligation Well Carry may continue to be used by such successor
company pursuant to Section 2.02(c). For the avoidance of doubt, if such a
company acquires Cobalt after the second anniversary of the Closing Date, the
Obligation Well Carry and the Non-Obligation Well Carry shall not be affected
(including with respect to any possible future increases of the Non-

 

 

15

 

Obligation Well Carry pursuant to
Section 2.02(e)) by such acquisition whatsoever and shall continue to
apply pursuant to Section 2.02(b) and Section 2.02(c),
respectively.

 

(g)                                 In any instance
in which Total pays a portion of Cobalt’s proportionate share of Well Costs or
other costs as provided for under this Section 2.02, Cobalt and Total
shall each pay its remaining share of such Well Costs or other costs pursuant
to the applicable Operating Agreement.

 

2.03                           DD-1.

 

(a)                                  Total shall
mobilize and deliver the DD-1 to the Delivery Location by July 1, 2009 and
Cobalt shall be Drill Ready by such date. Prior to the Effective Date, Total
provided Cobalt with (i) the specifications of the DD-1, (ii) the rig
contract applicable to the DD-1, (iii) the form of drilling rig assignment
among BHP Billiton, Transocean and Total contemplated for the temporary
assignment of the DD-1 to Total and (iv) the form of drilling
sub-assignment agreement among Transocean, Total and Cobalt contemplated for
the assignment of the DD-1 to Cobalt. At Closing, Transocean, Total and Cobalt
shall execute the Rig Assignment, such assignment to be effective as of and
upon delivery of the DD-1 to the Delivery Location.

 

(b)                                 If the DD-1
fails to be at the Delivery Location by July 1, 2009, and such failure is not
caused by an event of Force Majeure and Cobalt is Drill Ready, then Total shall
pay to Cobalt a Three Million Dollar ($3,000,000) monthly cost recovery payment
(the “Cost Recovery Payment”). Any such payments shall be due on the 1st
day of each month pro-rated for any partial month (up to and including the date
on which the DD-1, the Second Rig or a Replacement Rig is delivered to the
Delivery Location) during which the DD-1 is not located at the Delivery
Location, with the first payment being due on August 1, 2009. This Section 2.03 (b) shall apply only to the
period between July 1, 2009 and the date on which the DD-1, the Second Rig or a
Replacement Rig is delivered to the Delivery Location.

 

(c)                                  If the DD-1,
the Second Rig or a Replacement Rig is delivered to the Delivery Location by
July 1, 2009 and Cobalt is not Drill Ready, other than as a result of an event
of Force Majeure, then Cobalt shall pay all costs associated with such failure
until Cobalt is Drill Ready.

 

(d)                                 Total shall use
reasonable efforts to make the DD-1 available for an inspection by Cobalt.

 

2.04                           Second Rig.

 

(a)                                  Section 2.04(b),
(c) and (d) shall only be applicable if the Rig Assignment applicable
to the DD-1 executed pursuant to Section 2.03(a) does not cover the
drilling of all of the Obligation Wells other than any Non-Operated Obligation
Wells.

 

(b)                                 Total shall
mobilize and deliver the Jack Ryan or any rig on Exhibit C (the “Second
Rig”) to the Delivery Location not later than thirty (30) days after the
DD-1 has been released from the last Obligation Well it is scheduled to drill.
Not later than sixty (60) days prior

 

 

16

 

to the expected delivery date of the Second
Rig, Total shall provide Cobalt (i) the name of the Second Rig,
(ii) specifications of the Second Rig, (iii) the rig contract
applicable to the Second Rig and (iv) the form of drilling rig assignment
contemplated for the assignment of the Second Rig to Cobalt. Not later than
thirty (30) days prior to the expected delivery date of the Second Rig, the
owner/contractor of the Second Rig, Total (if applicable) and Cobalt shall
execute the Rig Assignment, such assignment to be effective as of and upon
delivery by Total of the Second Rig to the Delivery Location and such
assignment shall continue for the remainder of the Obligation Well Program Term
or otherwise cover the drilling of the Obligation Wells, except for any
Non-Operated Obligation Wells that have not already been drilled at the time of
such delivery.

 

(c)                                  If the Second
Rig fails to be at the Delivery Location thirty (30) days after the DD-1 has
been released from the last Obligation Well it is scheduled to drill, and such
failure is not caused by an event of Force Majeure and Cobalt is Drill Ready,
then Total shall pay the monthly Cost Recovery Payment. Any such payments shall
be due on the 1st day of each month pro-rated for any partial month (up to and
including the date on which the Second Rig, a Replacement Rig or the ENSCO 8503
is delivered to the Delivery Location) during which the Second Rig is not
located at the Delivery Location, with the first payment being due sixty (60)
days after the DD-1 has been released from the last Obligation Well it is
scheduled to drill. This Section 2.04(c) shall apply only to the
period between the date that is thirty (30) days after the DD-1 has been
released from the last Obligation Well it is scheduled to drill and the date on
which the Second Rig, a Replacement Rig or the ENSCO 8503 is delivered to the
Delivery Location.

 

(d)                                 Total shall use
reasonable efforts to make the Second Rig available for an inspection by
Cobalt.

 

2.05                           Replacement Rig. If the DD-1
and/or the Second Rig (if Section 2.04(b) is applicable) has not been
delivered to its Delivery Location by July 1, 2009 or thirty (30) days after
the DD-1 has been released from the last Obligation Well it is scheduled to
drill, respectively, and it is not likely, in the reasonable opinion of either
Party, to be delivered by October 1, 2009 or 120 days after the DD-1 has been
released from the last Obligation Well it is scheduled to drill, respectively,
because of an event of Force Majeure or otherwise, then (i) the Parties
shall work in good faith with each other with respect to contracting for a
replacement drilling rig and (ii) either Party shall have the option to
contract for any replacement drilling rig listed in Exhibit C (a “Replacement
Rig”) to drill any of the Obligation Wells.

 

ARTICLE
3

EXCHANGE
OF ASSETS; CONDITIONS TO CLOSING; CLOSING; ADDITIONAL PAYMENT

 

3.01                           Exchange of
Assets. Subject to and in accordance with the terms of this Agreement, on the
Closing Date:

 

(a)                                  Total shall
transfer and assign (or cause to be transferred and assigned) to Cobalt, and
Cobalt shall expressly accept from Total, Cobalt’s Acquired Interests pursuant
to

 

 

17

 

Assignments executed by the Parties. Such
Assignments shall be made subject to (i) the Permitted Encumbrances,
(ii) this Agreement and (iii) the applicable Operating Agreement.

 

(b)                                 Cobalt shall
transfer and assign (or cause to be transferred and assigned) to Total, and
Total shall expressly accept from Cobalt, Total’s Acquired Interests pursuant
to Assignments executed by the Parties. Such Assignments shall be made subject
to (i) the Permitted Encumbrances, (ii) this Agreement and
(iii) the applicable Operating Agreement.

 

3.02                           Conditions to
Total’s Obligations at Closing.   The obligations
of Total to consummate the transactions contemplated herein shall be subject to
the fulfillment or waiver by Total of each of the following conditions:

 

(a)                                  The
representations and warranties of Cobalt contained herein shall be true and
correct in all material respects as of the Effective Date and as of the Closing
Date.

 

(b)                                 Cobalt shall
have performed and complied with in all material respects all agreements and
obligations required by this Agreement to be performed or complied with by it
on or prior to the Closing Date.

 

(c)                                  No material
claims have been threatened or asserted and remain unresolved relating to the
Ligurian Prospect.

 

(d)                                 No company
whose primary business is exploration and production of oil and gas shall have
acquired (directly or indirectly through one or more Affiliates) more than 50%
of the voting interests (or similar rights granting the acquiring entity power
to direct the activities or operations of Cobalt) in Cobalt (or any Affiliate
of Cobalt to which any portion of this Agreement may have been assigned).

 

3.03                           Conditions to
Cobalt’s Obligations at Closing.   The obligations
of Cobalt to consummate the transactions contemplated herein shall be subject
to the fulfillment or waiver by Cobalt of each of the following conditions:

 

(a)                                  The
representations and warranties of Total contained herein shall be true and
correct in all material respects as of the Effective Date and as of the Closing
Date.

 

(b)                                 Total shall
have performed and complied with in all material respects all agreements and
obligations required by this Agreement to be performed or complied with by it
on or prior to the Closing Date.

 

(c)                                  No material
claims have been threatened or asserted and remain unresolved relating to the
Ligurian prospect.

 

3.04                           Closing.   The
consummation of this Agreement (the “Closing”) shall take
place (i) as soon as reasonably practical and before the fifth business day
after the Effective Date, or (ii) on such other date as the Parties agree
upon in writing. The date and time of the Closing are referred to herein as the
“Closing Date.”

 

 

18

 

3.05                           Total’s Obligations at
Closing.

 

(a)                                  At the Closing,
Total shall deliver or cause to be delivered to Cobalt:

 

(i)                                     The Initial
Amount;

 

(ii)                                  The Storehouse
Stock Inventory Consideration;

 

(iii)                               Assignments,
duly executed by Total, such Assignments being sufficient to assign to Cobalt
Cobalt’s Acquired Interests, together with four (4) duly executed
originals of MMS Form 150 for each Lease comprising the Cobalt’s Acquired
Interests;

 

(iv)                              Four
(4) duly executed originals of the MMS Designation of Operator
Form for each Joint Lease not operated by a third party designating Cobalt
as operator;

 

(v)                                 The certificate
of a duly authorized officer of Total, dated the Closing Date, certifying that:
(A) the representations and warranties of Total contained herein are true
and correct in all material respects (and, in the case of representations and
warranties that are already qualified by materiality or by the requirement of
material adverse effect or similar requirement, to the same degree as so
stated) as of the Effective Date with the same effect as though made at and as
of the Closing Date and (B) Total has performed and complied with in all
material respects all agreements and obligations required by this Agreement to
be performed or complied with by it on or prior to the Closing Date;

 

(vi)                              The opinion of
counsel to Total as to the matters set forth in Section 7.02(a) and
Section 7.02(c) (other than the matters set forth in
Section 7.02(c)(i));

 

(vii)                           The Rig
Assignment contemplated by the last sentence of Section 2.03(a), duly
executed by Transocean and Total; and

 

(viii)                        A fully
executed copy of the rig assignment contemplated by Section 2.03(a)(iii).

 

3.06                           Cobalt’s Obligations at
Closing.

 

(a)                                  At the Closing,
Cobalt shall deliver or cause to be delivered to Total:

 

(i)                                     Assignments, duly
executed by Cobalt, such Assignments being sufficient to assign to Total
Total’s Acquired Interests, together with four (4) duly executed originals
of MMS Form 150 for each Lease comprising the Total’s Acquired Interests;

 

 

19

 

(ii)                                  Four
(4) duly executed originals of the MMS Designation of Operator
Form for each Joint Lease not operated by a third party designating Cobalt
as operator;

 

(iii)                               The certificate
of a duly authorized officer of Cobalt, dated the Closing Date, certifying
that: (A) the representations and warranties of Cobalt contained herein
are true and correct in all material respects (and, in the case of
representations and warranties that are already qualified by materiality or by
the requirement of material adverse effect or similar requirement, to the same
degree as so stated) as of the Effective Date with the same effect as though
made at and as of the Closing Date and (B) Cobalt has performed and
complied with in all material respects all agreements and obligations required
by this Agreement to be performed or complied with by it on or prior to the
Closing Date;

 

(iv)                              The opinion of
counsel to Cobalt as to the matters set forth in Section 7.03(a) and
Section 7.03(c) (other than the matters set forth in Section 7.02(c)(i));
and

 

(v)                                 The Rig
Assignment contemplated by the last sentence of Section 2.03(a), duly
executed by Cobalt.

 

3.07                           Contractual
Special Warranty.   If the Closing occurs, then
effective as of the Closing Date, the assigning Party warrants Defensible Title
as to and only with respect to Cobalt’s Acquired Interests or Total’s Acquired
Interests, as applicable, being assigned to the other Party unto such other
Party against every Person whomsoever lawfully claiming or to claim such
interest or any part thereof by, through or under the assigning Party or its
Affiliates, but not otherwise, subject, however, to the Permitted Encumbrances.
No warranty of title shall be contained in the assignments delivered by the
Parties pursuant to Section 3.01, Section 3.05(a)(iii) and
Section 3.06(a)(i).

 

3.08                           Additional
Payment.   On the day after the seventh anniversary of
the Closing Date, Total shall pay to Cobalt One Hundred Thousand Dollars
($100,000) (the “Additional Payment”) as additional
consideration under this Agreement.

 

ARTICLE
4

CERTAIN
COVENANTS

 

4.01                           Prohibited
Action.   Except as set forth on Schedule 4.01 and
except as contemplated by this Agreement, from the Execution Date through the
Closing Date, neither Party shall engage in any of the following without the
prior written consent of the other Party:

 

(a)                                  permit or allow
all or any part of the Leases related to the Pre-Agreement Cobalt Interests or
the Pre-Agreement Total Interests, as applicable, to be subject to any
additional Encumbrance not existing as of the Effective Date, other than
Permitted Encumbrances, or sell, assign, transfer, lease or otherwise dispose
of all or any part of such Leases;

 

 

20

 

(b)                                 enter into or
approve any amendment to an Operating Agreement or approve the entering into or
amendment to any other Material Contract;

 

(c)                                  except with
respect to the Obligation Wells, make any cash contribution or authorize the
taking or refraining of taking of any action by the Operator in connection with
the Leases, except as expressly required by the terms of the Material
Contracts;

 

(d)                                 take any action
which, if the Execution Date were the same date as the Closing Date, would
cause any of the warranties or representations contained herein not to be true
and correct at and as of the Closing Date with the same effect as though made
at and as of the Closing Date;

 

(e)                                  except in the
case of emergency and as necessary to preserve and protect life, the
environment or property, issue or approve any Authority for Expenditures under
any Operating Agreement in excess of One Hundred Thousand Dollars ($100,000);
and

 

(f)                                    neither Party
nor any of its representatives, Affiliates, directors, officers, employees,
subsidiaries or agents will, directly or indirectly, solicit, consider,
encourage or accept any other offers to acquire all or any part of the Leases
related to the Pre-Agreement Cobalt Interests or the Pre-Agreement Total
Interests or assist any third party in preparing or soliciting such an offer, except
with respect to any preferential rights to purchase, rights of first refusal,
consents to assign and similar contractual provisions.

 

4.02                           Required
Conduct.

 

(a)                                  Promptly after
the Effective Date, (i) Cobalt shall furnish to Total copies of all of the
Leases and Material Contracts related to Total’s Acquired Interests,
assignments thereof or of parts or portions thereof, delay rental receipts and
any other pertinent contracts, agreements and information relating to such
Leases, (in each case) in the possession or control of Cobalt, and
(ii) Total shall furnish to Cobalt copies of all of the Leases and
Material Contracts related to Cobalt’s Acquired Interests, assignments thereof
or of parts or portions thereof, delay rental receipts and any other pertinent
contracts, agreements and information relating to such Leases, (in each case)
in the possession or control of Total. Each Party shall keep each other
informed of all significant matters related to Total’s Acquired Interests or
Cobalt’s Acquired Interests.

 

(b)                                 On the
Effective Date, Cobalt shall invoice Total for the Storehouse Stock Inventory
Consideration, and Total shall pay the Storehouse Stock Inventory Consideration
to Cobalt at Closing. Upon payment, Total shall own an undivided 40% interest
in Cobalt’s storehouse stock inventory as existing as of the Closing Date. For
the avoidance of doubt, Total shall not thereafter be obligated to separately
pay for Cobalt’s storehouse stock inventory as existing as of the Effective
Date as and when it is actually used for an Obligation Well; provided that once
such inventory is used as part of the Obligation Well Program, Total shall be
obligated to pay for its proportionate share of any replacement inventory.

 

 

21

 

(c)                                  If Sonangol
does not acquire the Sonangol Interest by the date on which the approval of a
development plan with respect to any part of the Sonangol Interest occurs or if
Sonangol releases Cobalt from its obligation to sell the Sonangol Interest to
Sonangol in writing, then Cobalt shall (within five (5) business days)
notify Total in writing of such. Not later than thirty (30) days after such
notice, Total shall notify Cobalt in writing if Total elects (at its sole
option) to acquire 40% of the Sonangol Interest for an amount equal to the sum
of Twenty Million Sixty-Seven Thousand Dollars ($20,067,000) and 40% of the
aggregate of all amounts paid by Cobalt under the Operating Agreements
applicable to the Sonangol Interest as of the time of Cobalt’s notice (the “Sonangol
Consideration”). Not later than five (5) business days after
such election, Total shall pay Cobalt the Sonangol Consideration and Cobalt
shall transfer and assign (or cause to be transferred and assigned) to Total,
and Total shall expressly accept from Cobalt, an undivided 40% interest in the
Sonangol Interest. Such transfer and assignment shall be made subject to
(a) the Permitted Encumbrances, (b) this Agreement and (c) the
applicable Operating Agreement.

 

(d)                                 If Cobalt has
not received an assignment of the BHP/Cobalt Interest by Closing, then within
five (5) business days of Cobalt receiving an assignment of the BHP/Cobalt
Interest, Cobalt shall transfer and assign (or cause to be transferred and
assigned) to Total and Total shall expressly accept from Cobalt an undivided
40% interest in the BHP/Cobalt Interest. Such transfer and assignment shall be
made subject to (a) the Permitted Encumbrances, (b) this Agreement
and (c) the applicable Operating Agreement.

 

(e)                                  Not later than
thirty (30) days after the Closing Date, the Parties shall enter into an
operating agreement in the same form as the Form JOA with respect to each
Joint Lease that is not subject to a Third Party Operating Agreement, and each
of the Parties shall enter into, assume and be bound by any Third Party
Operating Agreement by which the interest acquired by it under this Agreement
is bound.

 

(f)                                    The Obligation
Well Program shall be conducted subject to the terms of this Agreement and the
applicable Operating Agreement. In the event of any conflict or inconsistency
between the provisions of this Agreement and the provisions of any Operating
Agreement, the provisions of this Agreement (excluding Exhibit B) shall
prevail as between Cobalt and Total.

 

(g)                                 Neither Party
may assign, transfer or convey by assignment, sale, farmout, exchange or
otherwise (collectively, a “Transfer”) in whole or in
part this Agreement, except in accordance with Section 2.02(f) and
this Section 4.02(g). The foregoing notwithstanding, either Party shall be
entitled to Transfer an interest in this Agreement to an Affiliate without the
consent of the other Party, but the transferring Party shall remain liable for
the performance of its obligations hereunder notwithstanding such transfer, and
the Affiliate shall be bound by its transferor’s transfer restrictions
hereunder. Notwithstanding the foregoing, if any transferee Affiliate ceases to
be an Affiliate of the transferring Party within two (2) years of the
Transfer to such Affiliate, then such transferred interest in this Agreement
shall be immediately reassigned to the original transferring Party before the
transferee Affiliate ceases to be an Affiliate of the

 

 

22

 

original transferring Party. The foregoing
notwithstanding, and subject to Section 2.02(f), a Change of Control shall
not be deemed to be a Transfer.

 

(h)                                 The Parties
understand and agree that the assignment of the Newfield Agreement requires the
prior written consent of Newfield. Not later than five (5) business days
after the Closing Date, Cobalt shall request consent from Newfield to assign a
40% interest in the Newfield Agreement to Total. If Newfield consents to such
assignment, then such assignment shall be made and Total shall assume 40% of
Cobalt’s obligations under the Newfield Agreement. If Newfield does not consent
to such assignment, then Total shall promptly reimburse Cobalt for 40% of any
expenses and costs paid by Cobalt under the Newfield Agreement on or after the
Effective Date.

 

ARTICLE
5

TERM

 

5.01                           Term.   The term of
this Agreement (the “Agreement Term”) shall commence on the
Effective Date and shall continue until the date (i) upon which all the
wells in the Obligation Well Program have been drilled and all Well Costs have
been paid in full as provided in this Agreement, (ii) upon which the
Obligation Well Carry and the Non-Obligation Well Carry shall have been reduced
to and equal zero and (iii) upon which the Additional Payment is paid
pursuant to Section 3.08, unless earlier terminated (x) by Cobalt or
Total in accordance with Section 5.02 or (z) by Cobalt or Total if
the Closing has not occurred within 30 days after the Effective Date (provided
such Party’s failure to fulfill any obligation under this Agreement was not the
cause of or resulted in the failure of the Closing to occur prior to such
date).

 

5.02                           Event of
Default.   If, during the Agreement Term, an Event of
Default occurs, then the non-defaulting Party may proceed to enforce
performance of this Agreement or to recover from the defaulting Party any and
all damages or expenses (including reasonable attorney’s fees) sustained by
reason of such Event of Default or on account of enforcement of remedies
hereunder, and/or terminate the Agreement effective as of the date of such
Event of Default.

 

5.03                           Effect of
Termination.

 

(a)                                  Termination of
the Agreement Term for any reason shall not relieve any Party of any obligation
to pay for invoices received prior to termination to the extent such invoices
are for properly charged items under an Operating Agreement.

 

(b)                                 Upon the
termination of the Agreement Term, the rights and obligations of the Parties
with respect to any Joint Lease shall be governed by the applicable Operating
Agreement.

 

(c)                                  Notwithstanding
the preceding, the provisions of Section 3.08, Section 5.02 and this
Section 5.03 and the provisions of Articles 6 and 7 shall survive the
termination of this Agreement until fully performed and the provisions of
Exhibit K shall continue to apply until Exhibit K is terminated in
accordance with its terms.

 

 

23

 

ARTICLE
6

RELATIONSHIP
OF PARTIES; TAX MATTERS

 

6.01                           Relationship of
the Parties.   Except as expressly set forth in
Section 6.02, (i) this Agreement is not intended to create, and shall
not be construed to create, an association for profit, a trust, a joint venture
or other relationship of partnership, or entity of any kind between the Parties
and (ii) the Parties understand and agree that the liabilities of the Parties
shall be several, not joint or collective, and that each Party shall be solely
responsible for its own obligations.

 

6.02                           Tax Partnership;
Tax Treatment.

 

(a)                                  Notwithstanding
anything to the contrary contained herein, the Parties understand and agree
that the arrangement and undertakings evidenced by this Agreement, taken
together, result in a partnership (the “Tax Partnership”) for purposes
of federal income taxation and for purposes of certain state income tax laws
which incorporate or follow federal income tax principles as to tax
partnerships. For these purposes, the Parties agree to be governed by the tax
partnership provisions attached as Exhibit K, which are incorporated
herein and made a part of this Agreement by this reference. The Parties will
not elect to exclude the Tax Partnership from the application of Subchapter K
of the Code or any similar provisions of applicable state laws.

 

(b)                                 The Parties
intend and expect that the transactions contemplated by this Agreement will be
treated, for purposes of federal income taxation and for purposes of certain
state income tax laws that follow federal income tax principles, as resulting
in (i) the creation of a Tax Partnership in which Cobalt and Total are
treated as partners, with the Tax Partnership being treated for tax purposes as
(x) holding the following Joint Leases: (1) the Pre-Agreement Cobalt
Interests, (2) the Pre-Agreement Total Interests, or (3) any other
Joint Leases that become subject to the Non-Obligation Well Carry and
(y) engaging in all activities of the Parties with respect to the Joint
Leases described in the preceding clause (x), (ii) a contribution to the
Tax Partnership by Total of the Pre-Agreement Total Interests and the Initial
Amount, a commitment by Total to the Tax Partnership to fund the Obligation
Well Carry and the Non-Obligation Well Carry in the manner described in
Article 2, and a commitment by Total to the Tax Partnership to fund the
Additional Payment in the manner described in Section 3.08, in exchange for
an interest in the Tax Partnership, (iii) a contribution to the Tax
Partnership by Cobalt of the Pre-Agreement Cobalt Interests in exchange for an
interest therein and the right to receive a distribution of the Initial Amount
from the Tax Partnership, which shall be subject to treatment under
Section 707(a) of the Code (and its implementing Treasury
Regulations) as in part a sale, and in part a contribution, of the
Pre-Agreement Cobalt Interests to the Tax Partnership, (iv) in the event a
Joint Lease becomes subject to the Non-Obligation Well Carry as described in
clause (i)(x)(3) of this Section 6.02(b), the Parties will be treated
as having contributed such Joint Lease to the Tax Partnership in proportion to
their respective Percentage Interests, the fair market value of such Joint
Lease will be determined by the Parties in a manner consistent with the
purchase price set forth in the Purchase and Sale Agreement with respect to
such Joint Lease (or, with respect to the Sonangol Interest, the value assigned
to it in Section 4.02(c) of this Agreement), and the Capital Accounts
of the Parties will be credited accordingly, and (v) the realization by
the Tax

 

 

24

 

Partnership of all items of income or gain
and the incurrence by the Tax Partnership of all items of costs or expenses
attributable to the ownership, operation or disposition of the Joint Leases
that are subject to the Tax Partnership, notwithstanding that such items are
realized, paid or incurred by the Parties individually.

 

(c)                                  As more fully
provided in Exhibit K, Cobalt shall prepare all tax returns required to be
filed by the Tax Partnership, and shall provide each Party with such
information as such Party may reasonably request with respect to operations
under this Agreement for purposes of preparing such Party’s tax returns or
responding to any audit or other tax proceeding.

 

6.03                           Responsibility
for Taxes.

 

(a)                                  Each Party
shall bear all transfer, sales, recording, notarial, gross receipts, stamp, use
or similar taxes, related to or arising from the interests it acquires pursuant
to this Agreement.

 

(b)                                 Each Party
shall bear all Taxes and assessments attributable to ownership or operation of
its transferred interest prior to the Closing Date, shall indemnify the other
Party against all such Taxes and assessments, and shall be entitled to all
deductions, credits or refunds pertaining to such Taxes and assessments, no
matter when received. Subject to the allocations in Exhibit K, each Party
shall bear all Taxes and assessments, including sales taxes, excise taxes,
severance or other production taxes, ad valorem taxes and any other federal,
state or local taxes and assessments attributable to ownership or operation of
its acquired interest on and after the Closing Date and shall be entitled to
all deductions, credits and refunds pertaining to such Taxes and assessments,
no matter when received.

 

6.04                           Confidentiality.   The
existence of this Agreement and the terms hereof shall be held by all Parties
on a confidential basis and shall remain confidential from the Effective Date
until two (2) years after the expiration of the Agreement Term; provided
that nothing herein shall prevent any Party from disclosing any such
information (a) to any institutional entity or its Affiliates that lend or
propose to lend funds to a Party hereto, (b) upon the order of any court
or administrative agency having jurisdiction over such Party, (c) upon the
request or demand of any regulatory agency, stock exchange or authority having
jurisdiction over such Party, (d) in connection with the exercise of any
right or remedy hereunder, (e) to any independent geological, geophysical
or reservoir consultants working under contract to any Party hereto,
(f) to any Party’s attorneys, accountants, representatives or advisors,
(g) to any Party’s direct or indirect limited partners, members, or other
equity owners or potential equity owners, bona fide permitted prospective
purchasers, participants or consultants or (h) to the extent necessary, to
any third party operator or any working interest owners under any Third Party
Operating Agreement; provided that any Person furnished information pursuant to
(a), (e), (f) or (g) of this Section 6.04 agrees in writing to
hold such information confidential and not to use it for such Person’s own
benefit in a manner adverse to the interests of the Parties during the period
the Parties are required to keep such information confidential.

 

 

25

 

ARTICLE
7

MISCELLANEOUS

 

7.01                           Public
Announcements.   Subject to the confidentiality
provisions of this Agreement (specifically Section 6.04) and the Operating
Agreements, any Party shall have the right to make public announcements of the
existence of this Agreement and the results of operations conducted hereunder; provided
that no such announcement will be made by any Party unless the same is in
writing and the form and contents thereof have been approved in writing by the
other Party, which approval shall not be unreasonably withheld. Upon the
Effective Date, the Parties shall make a public announcement in one of the
forms attached hereto at Exhibit J.

 

7.02                           Total
Representations.   Total represents, warrants and
agrees that:

 

(a)                                  it is a
corporation duly formed, validly existing, and in good standing under the laws
of the State of its formation, and is authorized to conduct business and is in
good standing in the State of Texas;

 

(b)                                 it is not a
“foreign person” within the meaning of Sections 1445 and 7701 of the Code (i.e.
Total is not a nonresident alien, foreign corporation, foreign partnership,
foreign trust or foreign estate as those terms are defined in the code and any
regulations promulgated thereunder);

 

(c)                                  it has full
power and authority to enter into this Agreement and to perform its obligations
hereunder; its execution, delivery and performance of this Agreement have been
duly authorized by all necessary action and no other act or proceeding on its
part is necessary to authorize and consummate this Agreement or the documents,
agreements and transactions contemplated hereby; such authorization, execution,
delivery and performance do not violate or conflict with (i) any other
material agreement or arrangement to which Total is a party or by which it or
any of its properties is bound or (ii) any provision of Total’s charter,
bylaws or other governing instruments of Total;

 

(d)                                 the
authorization, execution, delivery and performance of this Agreement and
transactions contemplated hereby do not (i) violate or conflict with any Law
or Governmental Order or (ii) contravene, conflict with, or result in a
violation or breach (with or without due notice or lapse of time or both) of
any provision of, or give any Person (with or without due notice or lapse of
time or both) the right to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate or
modify, any contract to which Total or its assets are bound;

 

(e)                                  this Agreement
constitutes a legal, valid and binding obligation of Total, enforceable against
Total in accordance with its terms, except as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws affecting the enforcement of creditors’ rights generally and
general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity);

 

(f)                                    prior to
entering into this Agreement, (i) it has made such investigation of Cobalt
and has been furnished such information with respect to Cobalt and the proposed
acquisition, exploration and development of Total’s Acquired Interests as it
deems necessary to evaluate the merits and risks involved in acquiring Total’s
Acquired Interests, has been advised

 

 

26

 

that Cobalt (and officers and employees
thereof) are available to answer questions about Total’s Acquired Interests,
and has asked any questions of Cobalt (and officers and employees thereof)
which it desires to ask and has received answers with respect to all such
questions; (ii) it understands that the transferability of Total’s
Acquired Interests hereunder is restricted as set forth in this Agreement and
that it cannot expect to be able readily to liquidate its investment in case of
an emergency, it may have to continue to bear the risk of holding the interest
for an indefinite period, prior to the date hereof there has been no public
market for such interests and it is likely that after the date hereof there
will be no such market for such interests, and Cobalt is not registering, nor
does it have any present intention ever to register, the interests under the
Securities Act of 1933, as amended, or any state securities laws; (iii) it
recognizes that Total’s Acquired Interests have been recently acquired by
Cobalt and are of a speculative nature; (iv) it has consulted with its
attorney and/or with such other Persons as it deemed appropriate concerning
this Agreement, including its representations and warranties that are contained
in this Agreement; and (v) it is acquiring Total’s Acquired Interests
hereunder for its own account for investment, and not with a view to any
distribution, resale, subdivision, or fractionalization thereof in violation of
the Securities Act of 1933, as amended, or any other applicable domestic or
foreign securities law, and it has no present plans to enter into any contract,
undertaking, agreement, or arrangement for any such distribution, resale,
subdivision, or fractionalization;

 

(g)                                 it is qualified
to hold and to conduct operations as operator of Total’s Acquired Interests
under all applicable Laws;

 

(h)                                 no material
default exists in connection with the performance of Total under any of the
Leases related to the Pre-Agreement Total Interests that would entitle the
lessor to cancel or terminate such Lease and, to Total’s knowledge, no material
default exists thereunder by any other Person a party thereto;

 

(i)                                     there is no
action, suit, claim, litigation, investigation or proceeding pending or, to the
knowledge of Total threatened, relating to any of the Pre-Agreement Total
Interests or against Total or its shareholders that may materially adversely
affect title to the Pre-Agreement Total Interests as of the Effective Date;

 

(j)                                     the
Pre-Agreement Total Interests do not include any seismic or similar data where
the transactions contemplated by this Agreement will trigger a payment or other
transfer penalty;

 

(k)                                  with respect to
the Pre-Agreement Total Interests, (i) there are no outstanding authorizations
for expenditures or other written commitments or proposals to conduct
operations, (ii) no Person has any call upon, option to purchase, or
similar rights with respect to the production of hydrocarbons produced from
such assets, and (iii) there are no wells, equipment or other personal
property included in such assets;

 

(1)                                  except as set
forth in Schedule 7.02(1), none of the Pre-Agreement Total Interests include,
or are subject to or burdened by, any Material Contract, including (i) any
contract that can reasonably be expected to result in any aggregate payments or
receipts of revenue by Total in excess of Five Hundred Thousand Dollars
($500,000) during the current or

 

 

27

 

any subsequent year, (ii) any transportation,
processing, platform or similar contract or hydrocarbon sales contract (in each
case) that is not terminable without penalty on 30 days or less notice,
(iii) any indenture, mortgage, loan, credit or sale-leaseback or similar
contract that will not be terminated at or prior to the Effective Date,
(iv) any tax partnership agreement or (v) any operating agreement.

 

(m)                               Total is not
and, to Total’s knowledge, no other Person is in default of any Material
Contract applicable to the Pre-Agreement Total Interests;

 

(n)                                 except as set
forth in Schedule 7.02(n), Total has not entered into, and the Pre-Agreement
Total Interests are not subject to, an area of mutual interest agreement or
similar agreement;

 

(o)                                 except as set
forth in Schedule 7.02(o), none of the Pre-Agreement Total Interests are
subject to any depth restrictions;

 

(p)                                 Total is not a
party to any Material Contract with any of its partners, Affiliates or their
respective officers, directors, employees or consultants;

 

(q)                                 to Total’s
knowledge, there are no abandonment liabilities in existence as of the
Effective Date burdening the Pre-Agreement Total Interests;

 

(r)                                    neither Total
nor any of its Affiliates nor any of their directors, officers or employees has
employed any broker, agent, finder or investment banker or has incurred or will
incur any liability for any brokerage fees, commissions, finders’ fees or
similar fees to any Person for which Cobalt or any of its Affiliates may be
directly or indirectly responsible in connection with the transactions
contemplated by this Agreement;

 

(s)                                  except as set
forth on Schedule 7.02(s), to Total’s knowledge the Leases related to Total’s
Pre-Agreement Interests are not the subject of any Tax sharing or Tax indemnity
agreements or outstanding agreement or waivers extending the period for
assessment or collection of taxes or extending or waiving the application of
any statute of limitation with respect thereto;

 

(t)                                    with respect to
the Pre-Agreement Total Interests, to the knowledge of Total: (i) Total and
any third party operator were in compliance, in all material respects and as of
the Effective Date, with all Environmental Laws applicable to the Leases, and
(ii) there are no environmental conditions or environmental, health or
safety matters that could have a material adverse effect on any of the Leases
related to the Pre-Agreement Total Interests or that could result in the
imposition of potential liability on Cobalt;

 

(u)                                 Total has
provided Cobalt with copies of all information, reports, correspondence and
other documentation in Total’s possession pertaining to environmental
conditions or environmental, health or safety matters affecting the
Pre-Agreement Total Interests that could have an adverse impact on the Well
Activities or any further exploration or development of the Pre-Agreement Total
Interests; and, to the knowledge of Total, there are no

 

 

28

 

environmental conditions or environmental,
health or safety matters that could materially adversely interfere with or
impair the Well Activities or any further exploration or development of the
Pre-Agreement Total Interests, or that could result in the imposition of any
potentially material liabilities on Cobalt;

 

(v)                                 in entering
into this Agreement, it has relied solely on its own independent investigation,
review and analysis of the Total’s Acquired Interests and Cobalt and not on any
representations or warranties of Cobalt or any Affiliate of Cobalt or their
respective representatives, other than the representations and warranties
contained in Section 7.03;

 

(w)                               Total has
Defensible Title to the Pre-Agreement Total Interests;

 

(x)                                   Schedule
7.02(x) lists all preferential rights to purchase, rights of first
refusal, consents to assign and similar contractual provisions that burden the
Pre-Agreement Total Interests; and

 

(y)                                 Total is not
aware of the existence of any fact or condition with respect to Total or the
Pre-Agreement Total Interests that may cause the MMS to withhold approval, to
the extent MMS approval is required under applicable Law, of the transfer of
the Pre-Agreement Total Interests.

 

7.03                           Cobalt
Representations.   Cobalt represents, warrants and
agrees that:

 

(a)                                  it is a limited
partnership duly formed, validly existing, and in good standing under the laws
of the State of its formation, and is authorized to conduct business and is in
good standing in the State of Texas;

 

(b)                                 it is not a
“foreign person” within the meaning of Sections 1445 and 7701 of the Code (i.e.
Cobalt is not a nonresident alien, foreign corporation, foreign partnership,
foreign trust or foreign estate as those terms are defined in the code and any
regulations promulgated thereunder);

 

(c)                                  it has full
power and authority to enter into this Agreement and to perform its obligations
hereunder; its execution, delivery and performance of this Agreement have been
duly authorized by all necessary action and no other act or proceeding on its
part is necessary to authorize and consummate this Agreement or the documents,
agreements and transactions contemplated hereby; such authorization, execution,
delivery and performance do not violate or conflict with (i) any other
material agreement or arrangement to which Cobalt is a party or by which it or
any of its properties is bound or (ii) any provision of Cobalt’s charter,
bylaws or other governing instruments of Cobalt;

 

(d)                                 the
authorization, execution, delivery and performance of this Agreement and
transactions contemplated hereby do not (i) violate or conflict with any
Law or Governmental Order or (ii) contravene, conflict with, or result in
a violation or breach (with or without due notice or lapse of time or both) of
any provision of, or give any Person (with or without due notice or lapse of
time or both) the right to declare a default or exercise any remedy

 

 

29

 

under, or to accelerate the maturity or
performance of, or to cancel, terminate or modify, any contract to which Cobalt
or its assets are bound;

 

(e)                                  this Agreement
constitutes a legal, valid and binding obligation of Cobalt, enforceable
against Cobalt in accordance with its terms, except as the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting the enforcement of creditors’ rights
generally and general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity);

 

(f)                                    prior to
entering into this Agreement, (i) it has made such investigation of Total
and has been furnished such information with respect to Total and the proposed
acquisition, exploration and development of Cobalt’s Acquired Interests as it
deems necessary to evaluate the merits and risks involved in acquiring Cobalt’s
Acquired Interests, has been advised that Total (and officers and employees
thereof) are available to answer questions about Cobalt’s Acquired Interests,
and has asked any questions of Total (and officers and employees thereof) which
it desires to ask and has received answers with respect to all such questions;
(ii) it understands that the transferability of Cobalt’s Acquired
Interests hereunder is restricted as set forth in this Agreement and that it
cannot expect to be able readily to liquidate its investment in case of an
emergency, it may have to continue to bear the risk of holding the interest for
an indefinite period, prior to the date hereof there has been no public market
for such interests and it is likely that after the date hereof there will be no
such market for such interests, and Total is not registering, nor does it have
any present intention ever to register, the interests under the Securities Act
of 1933, as amended, or any state securities laws; (iii) it recognizes
that Cobalt’s Acquired Interests have been recently acquired by Total and are
of a speculative nature; (iv) it has consulted with its attorney and/or
with such other Persons as it deemed appropriate concerning this Agreement,
including its representations and warranties that are contained in this
Agreement; and (v) it is acquiring Cobalt’s Acquired Interests hereunder
for its own account for investment, and not with a view to any distribution,
resale, subdivision, or fractionalization thereof in violation of the
Securities Act of 1933, as amended, or any other applicable domestic or foreign
securities law, and it has no present plans to enter into any contract,
undertaking, agreement, or arrangement for any such distribution, resale,
subdivision, or fractionalization;

 

(g)                                 it is qualified
to hold and to conduct operations as operator of Cobalt’s Acquired Interests
under all applicable Laws;

 

(h)                                 no material
default exists in connection with the performance of Cobalt under any of the
Leases related to the Pre-Agreement Cobalt Interests that would entitle the
lessor to cancel or terminate such Lease and, to Cobalt’s knowledge, no
material default exists thereunder by any other Person a party thereto;

 

(i)                                     there is no
action, suit, claim, litigation, investigation or proceeding pending or, to the
knowledge of Cobalt threatened, relating to any of the Pre-Agreement Cobalt
Interests or against Cobalt or its partners that may materially adversely
affect title to the Pre-Agreement Cobalt Interests as of the Effective Date;

 

 

30

 

(j)                                     the
Pre-Agreement Cobalt Interests do not include any seismic or similar data where
the transactions contemplated by this Agreement will trigger a payment or other
transfer penalty;

 

(k)                                  with respect to
the Pre-Agreement Cobalt Interests, (i) there are no outstanding
authorizations for expenditures or other written commitments or proposals to
conduct operations, (ii) no Person has any call upon, option to purchase,
or similar rights with respect to the production of hydrocarbons produced from
such assets, and (iii) there are no wells, equipment or other personal
property included in such assets;

 

(1)                                  except as set
forth in Schedule 7.03(1), none of the Pre-Agreement Cobalt Interests include,
or are subject to or burdened by, any Material Contract, including (i) any
contract that can reasonably be expected to result in any aggregate payments or
receipts of revenue by Cobalt in excess of Five Hundred Thousand Dollars
($500,000) during the current or any subsequent year, (ii) transportation,
processing, platform or similar contract or hydrocarbon sales contract (in each
case) that is not terminable without penalty on 30 days or less notice,
(iii) any indenture, mortgage, loan, credit or sale-leaseback or similar
contract that will not be terminated at or prior to the Effective Date,
(iv) any tax partnership agreement or (v) any operating agreement;

 

(m)                               Cobalt is not
and, to Cobalt’s knowledge, no other Person is in default of any Material
Contract applicable to the Pre-Agreement Cobalt Interests;

 

(n)                                 except as set
forth in Schedule 7.03(n), Cobalt has not entered into, and the Pre-Agreement
Cobalt Interests are not subject to, an area of mutual interest agreement or
similar agreement;

 

(o)                                 except as set
forth in Schedule 7.03(o), none of the Pre-Agreement Cobalt Interests are
subject to any depth restrictions;

 

(p)                                 Cobalt is not a
party to any Material Contract with any of its partners, Affiliates or their
respective officers, directors, employees or consultants;

 

(q)                                 to Cobalt’s
knowledge, there are no abandonment liabilities in existence as of the
Effective Date burdening the Pre-Agreement Cobalt Interests;

 

(r)                                    neither Cobalt
nor any of its Affiliates nor any of their directors, officers or employees has
employed any broker, agent, finder or investment banker or has incurred or will
incur any liability for any brokerage fees, commissions, finders’ fees or
similar fees to any Person for which Total or any of its Affiliates may be
directly or indirectly responsible in connection with the transactions contemplated
by this Agreement;

 

(s)                                  except as set
forth on Schedule 7.03(s), to Cobalt’s knowledge the Leases related to Cobalt’s
Pre-Agreement Interests are not the subject of any Tax sharing or Tax indemnity
agreements or outstanding agreement or waivers extending the period for
assessment

 

 

31

 

or collection of taxes or extending or
waiving the application of any statute of limitation with respect thereto;

 

(t)                                    with respect to
the Pre-Agreement Cobalt Interests, to the knowledge of Cobalt: (i) Cobalt
and any third party operator were in compliance, in all material respects and
as of the Effective Date, with all Environmental Laws applicable to the Leases,
and (ii) there are no environmental conditions or environmental, health or
safety matters that could have a material adverse effect on any of the Leases
related to the Pre-Agreement Cobalt Interests or that could result in the
imposition of potential liability on Total;

 

(u)                                 Cobalt has
provided Total with copies of all information, reports, correspondence and
other documentation in Cobalt’s possession pertaining to environmental
conditions or environmental, health or safety matters affecting the
Pre-Agreement Cobalt Interests that could have an adverse impact on the Well
Activities or any further exploration or development of the Pre-Agreement
Cobalt Interests; and, to the knowledge of Cobalt, there are no environmental
conditions or environmental, health or safety matters that could materially
adversely interfere with or impair the Well Activities or any further
exploration or development of the Pre-Agreement Cobalt Interests, or that could
result in the imposition of any potentially material liabilities on Total;

 

(v)                                 in entering
into this Agreement, it has relied solely on its own independent investigation,
review and analysis of Cobalt’s Acquired Interests and Total and not on any
representations or warranties of Total or any Affiliate of Total or their
respective representatives, other than the representations and warranties
contained in Section 7.02;

 

(w)                               Cobalt has
Defensible Title to the Pre-Agreement Cobalt Interests;

 

(x)                                   Schedule
7.03(x) lists all preferential rights to purchase, rights of first
refusal, consents to assign and similar contractual provisions that burden the
Pre-Agreement Cobalt Interests;

 

(y)                                 Cobalt is not
aware of the existence of any fact or condition with respect to Cobalt or the
Pre-Agreement Cobalt Interests that may cause the MMS to withhold approval, to
the extent MMS approval is required under applicable Law, of the transfer of
the Pre-Agreement Cobalt Interests; and

 

(z)                                   Schedule
7.03(z) lists all of the current partners of Cobalt.

 

7.04                           No Preferential
Purchase or Title Representations.   Notwithstanding
any provisions of this Agreement to the contrary, the Parties are not making
any representation or warranty with respect to (i) any preferential right
to purchase, right of first refusal, consent to assign or similar contractual
provision other than the representations contained in Section 7.02(x) and
Section 7.03(x) or (ii) any representation or warranty with respect
to title of Cobalt’s Acquired Interests or Total’s Acquired Interests other
than the representations contained in Section 7.02(w) and
Section 7.03(w) and the contractual special warranty of title
described in Section 3.07.

 

 

32

 

7.05                           Survival of
Representations and Warranties.   The
representations and warranties of Cobalt and Total shall survive for the
respective periods set forth below and shall be of no further force and effect
after the applicable date of expiration; except that, if written notice of a
claim arising prior to the applicable date of expiration is given to the other
Party by the Party in whose favor such representation and warranty was made on
or before the date of expiration of the applicable representation or warranty,
then the relevant representation or warranty shall survive as to such claim
until the claim has been finally resolved:

 

(a)                                  All representations
and warranties contained in Section 7.02(w) and Section 7.03(w) shall
terminate upon Closing.

 

(b)                                 All
representations and warranties relating in any way to Taxes shall survive for
the applicable statute of limitations period.

 

(c)                                  The contractual
special warranty of title described in Section 3.07 shall survive for the
life of the interest.

 

(d)                                 All other
representations and warranties shall survive for a period of one (1) year
after the Closing Date.

 

7.06                           Assumption of
Liabilities.

 

(a)                                  Effective from
and after Closing, Total hereby expressly assumes and agrees to be bound to the
extent of its interest by all contractually binding arrangements that will be
binding on Total’s Acquired Interests after Closing that are listed on Schedule
7.06(a). Total agrees to enter into any specific agreements of assumption with
respect to the obligations of Cobalt to be assumed by Total pursuant to this
Agreement which may be required by third parties or Governmental Authorities.

 

(b)                                 Effective from
and after Closing, Cobalt hereby expressly assumes and agrees to be bound to
the extent of its interest by all contractually binding arrangements that will
be binding on Cobalt’s Acquired Interests after Closing that are listed on
Schedule 7.06(b). Cobalt agrees to enter into any specific agreements of
assumption with respect to the obligations of Total to be assumed by Cobalt
pursuant to this Agreement which may be required by third parties or
Governmental Authorities.

 

7.07                           Notices.   All
notices authorized or required between the Parties and required by any of the
provisions of this Agreement, unless otherwise specifically provided, shall be
given in writing by mail, postage or charges prepaid, and addressed to the
Party to whom the notice is given as follows:

 

(a)                                  If to Cobalt:

 

Cobalt International Energy,
L.P. 

Two Post Oak Central

1980 Post Oak Blvd.,
Suite 1200

Houston, Texas 77056

Attention: Lynne L.
Hackedorn, Land Manager

 

 

33

 

(b)                                 If to Total:

 

TOTAL E&P USA, INC.

1201 Louisiana,
Suite 1800

Houston, Texas 77002

Attention: Eric Bonnin, Vice
President Business Development & Strategy

 

or to such other address within the
continental limits of the United States specified by a Party giving the other
Party hereto written notice in accordance with this Section. Alternatively,
notice may be given by personal delivery in writing to the Parties at their
respective addresses as set forth above. Notice shall be deemed given on the
date of service or transmission if personally served; provided, that if
such service is not on a business day or is after normal business hours, then
such notice shall be deemed given on the next business day. Notice otherwise
sent as provided herein shall be deemed given on the next business day following
timely delivery of such notice to a reputable air courier service with an order
for next day delivery.

 

7.08                           Further
Assurances.   Each Party hereto shall, from
time to time, do and perform such further acts and execute and deliver such
further instruments, assignments and documents as may be required or reasonably
requested by the other Party to establish, maintain or protect the respective
rights and remedies of the Parties hereto and to carry out and effect the
intentions and purposes of this Agreement.

 

7.09                           No Waiver.   The
failure of any Party hereto to insist upon strict performance of any provision
hereof shall not constitute a waiver of, or estoppel against asserting, the
right to require such performance in the future, nor shall a waiver or estoppel
in any one instance constitute a waiver or estoppel with respect to a later
breach of a similar nature or otherwise.

 

7.10                           Waiver of
Certain Damages.   Each Party
irrevocably waives and agrees not to seek indirect, consequential, punitive or
exemplary damages of any kind in connection with any dispute arising out of or
related to this Agreement or the breach hereof; provided that this
Section 7.10 shall not modify Section 2.03 in any manner.

 

7.11                           Construction.   The
headings in this Agreement are inserted for convenience and identification only
and are not intended to describe, interpret, define or limit the scope, extent
or intent of this Agreement or any provision hereof. Whenever the context
requires, the gender of all words used in this Agreement shall include the
masculine, feminine, and neuter, and the number of all words shall include the
singular and the plural. In the event of a conflict between this Agreement and
the exhibits, this Agreement shall control.

 

 

34

 

7.12                           Entire
Agreement.   This Agreement (including the
exhibits to this Agreement and forms of assignment) and any applicable
Operating Agreement (subject to Section 4.02(f)), which incorporates all
prior understandings relating to the subject matter hereof, sets forth the
entire agreement of the Parties with respect to the matters set forth herein
and shall not be modified except by written instrument executed by all Parties.

 

7.13                           Severability.   If
any term or other provision of this Agreement is invalid, illegal or incapable
of being enforced by any rule of applicable Law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the greatest extent possible.

 

7.14                           Binding Effect.   Subject
to the other provisions of this Agreement and the applicable Operating
Agreement, all of the terms and provisions hereof shall be binding upon and
inure to the use and benefit of the Parties and their respective heirs,
successors, legal representatives and assigns.

 

7.15                           GOVERNING LAW.   THE
PROVISIONS OF THIS AGREEMENT AND THE RELATIONSHIP OF THE PARTIES SHALL BE
GOVERNED AND INTERPRETED ACCORDING TO FEDERAL LAWS AND LAWS OF THE STATE OF
TEXAS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD REFER THE
MATTER TO THE LAWS OF ANOTHER JURISDICTION.

 

7.16                           Dispute
Resolution.   Any dispute, controversy or claim
between the Parties arising out of or in connection with this Agreement,
including but not limited to any question as to its existence, enforceability,
validity, interpretation or termination, shall be resolved pursuant to the
dispute resolution procedures set forth in Exhibit I.

 

7.17                           Disclaimer.   EACH
PARTY ACKNOWLEDGES THAT NO OTHER PARTY NOR ANY AFFILIATE OF ANY OTHER PARTY HAS
MADE, AND EACH PARTY ON BEHALF OF ITSELF AND ITS AFFILIATES HEREBY EXPRESSLY
DISCLAIMS AND NEGATES, AND EACH OTHER PARTY HEREBY EXPRESSLY WAIVES, ANY
REPRESENTATION OR WARRANTY OF ANY NATURE, EXPRESS, STATUTORY OR IMPLIED, WITH
RESPECT TO (A) ANY LEASE OTHER THAN THE SPECIAL WARRANTY OF TITLE TO BE
GRANTED AS PROVIDED IN SECTION 3.07, (B) THE ACCURACY OF COST
ESTIMATES CONTAINED HEREIN OR MADE IN CONNECTION HEREWITH, (C) THE
HYDROCARBON POTENTIAL OF THE LEASEHOLD INTERESTS OR ANY WELL PROPOSED
HEREUNDER, (D) THE ACCURACY OR QUALITY OF ANY SEISMIC DATA ACQUIRED,
PROCESSED OR OTHERWISE USED HEREUNDER, (E) PRODUCTION RATES, RECOMPLETION
OPPORTUNITIES, DECLINE RATES, THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES
OF HYDROCARBONS, IF

 

 

35

 

ANY, PROBABILITY OF SUCCESS, NET ECONOMICS,
RETURN ON INVESTMENT, INTERNAL RATE OF RETURN, OR PAYOUT PERIOD ATTRIBUTABLE TO
THE LEASEHOLD INTERESTS OR ANY WELL PROPOSED IN CONNECTION HEREWITH OR
(F) THE ACCURACY, COMPLETENESS OR QUALITY OF ANY INFORMATION, DATA,
GEOLOGIC OR GEOPHYSICAL MAPS, ANALYSIS, INTERPRETATIONS, EVALUATIONS OR OTHER
MATERIALS (WRITTEN OR ORAL) NOW, HERETOFOR OR HEREAFTER FURNISHED TO SUCH PARTY
BY OR ON BEHALF OF ANY OTHER PARTY. Each Party agrees that, to the extent required
by applicable law to be effective, the disclaimers of certain warranties
contained in this Section 7.17 are “conspicuous” disclaimers for the
purposes of any applicable law, rule or order. The express representations
and warranties of the Parties contained in this Agreement are exclusive and are
in lieu of all other representations and warranties, express, implied or
statutory.

 

7.18                           Drafting of
Agreement.   Each Party acknowledges that it
and its attorneys have contributed to the drafting of this Agreement. It is
expressly agreed that this Agreement shall not be construed against any Party
on the basis of who drafted this Agreement or who supplied the form of
Agreement. Each Party agrees that this Agreement has been purposefully drawn
and correctly reflects its understanding of the transactions contemplated
hereby. Each Party further acknowledges that it has been advised and
represented by its own counsel in negotiating and entering into this Agreement.

 

7.19                           Multiple
Originals.   This Agreement may be executed in
multiple originals, each of which shall be deemed an original but all of which
shall constitute but one Agreement.

 

[Remainder
of Page Left Blank]

 

 

36

 

WITNESS, the execution
hereof as of the date first set forth above.

 

 

	
   

  	
  COBALT INTERNATIONAL
  ENERGY, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph H. Bryant

  
	
   

  	
  Name:

  	
  Joseph H. Bryant

  
	
   

  	
  Title:

  	
  Chairman & CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TOTAL E&P USA, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jean-Michel Lavergne

  
	
   

  	
  Name:

  	
  Jean-Michel Lavergne

  
	
   

  	
  Title:

  	
  President & CEO

  

 

 

Signature
Page to

Gulf of Mexico Simultaneous Exchange Agreement

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