Document:

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EXHIBIT 10.2

                                    KFX, INC.

                          REGISTRATION RIGHTS AGREEMENT

                               DATED JULY 16, 2001
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                                TABLE OF CONTENTS
                                                                           Page
                                                                           ----

1.         Registration Rights................................................1

           1.1       Definitions..............................................1
           1.2       Request for Registration.................................2
           1.3       Obligations of the Company...............................3
           1.4       Furnish Information......................................4
           1.5       Expenses of Demand Registration..........................4
           1.6       Indemnification..........................................5
           1.7       Reports Under Securities Exchange Act of 1934............7
           1.8       Form S-3 Registration....................................7
           1.9       Termination of Registration Rights.......................8

2.         Miscellaneous......................................................8

           2.1       Governing Law............................................8
           2.2       Waivers and Amendments...................................8
           2.3       Successors and Assigns...................................8
           2.4       Entire Agreement.........................................8
           2.5       Notices..................................................8
           2.6       Interpretation...........................................9
           2.7       Severability.............................................9
           2.8       Counterparts.............................................9
           2.9       Specific Performance.....................................9
           2.10      Telecopy Execution and Delivery..........................9
           2.11      Attorneys' Fees..........................................9
           2.12      Construction.............................................9
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                          REGISTRATION RIGHTS AGREEMENT

    THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into by and
between KFX, INC., a Delaware corporation (the "Company"), and BAYOU FUND, LLC,
a New York limited liability company ("Bayou"). This Agreement shall only become
effective upon the closing (the "Closing") of the Common Stock and Warrant
Purchase Agreement (the "Purchase Agreement") between the Company and Bayou
dated July 16, 2001 (the "Effective Date").

                                 R E C I T A L S

    WHEREAS, the Company and Bayou are parties to the Purchase Agreement July
16, 2001; and

    WHEREAS, the execution and delivery the Purchase Agreement conditioned,
among other things, upon the execution of this Agreement by the Company for the
benefit of Bayou.

    NOW, THEREFORE, in consideration of the premises, covenants, and conditions
set forth herein, the parties hereto hereby agree as follows:

    1. Registration Rights. The Company covenants and agrees as follows:

        1.1 Definitions. For purposes of this Agreement:

            (a) The term "1934 Act" shall mean the Securities Exchange Act of
        1934, as amended.

            (b) The term "Act" means the Securities Act of 1933, as amended.

            (c) The term "Common Stock" means the common stock, par value
        $0.001, of the Company.

            (d) The term "Form S-3" means such form under the Act as in effect
        on the date hereof or any registration form under the Act subsequently
        adopted by the SEC that permits inclusion or incorporation of
        substantial information by reference to other documents filed by the
        Company with the SEC.

            (e) The term "Holder" shall mean Bayou.

            (f) The terms "register," "registered," and "registration" refer to
        a registration effected by preparing and filing a registration statement
        or similar document in compliance with the Act, and the declaration or
        ordering of effectiveness of such registration statement or document.

            (g) The term "Registrable Securities" means (i) the Shares, and
        (iii) any Common Stock of the Company issued as (or issuable upon the
        conversion or exercise of any warrant, right or other security that is
        issued as) a dividend or other distribution with
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        respect to, or in exchange for, or in replacement of, the Shares;
        provided, however, that the term "Registrable Securities" shall exclude
        in all cases any Registrable Securities sold by a person in a
        transaction in which his rights under this Section 1 are not assigned.

            (h) The number of shares of "Registrable Securities then
        outstanding" shall be determined by the number of shares of Common Stock
        outstanding that are, and the number of shares of Common Stock issuable
        pursuant to then immediately exercisable or convertible securities that
        are, Registrable Securities.

            (i) The term "Rule 144" shall mean Rule 144 as promulgated by the
        SEC under the Act, as such Rule may be amended from time to time, or any
        similar successor rule that may be promulgated by the SEC.

            (j) The term "SEC" shall mean the United States Securities and
        Exchange Commission.

            (k) The term "Shares" shall mean

                (A) 1,000,000 shares of the Company's Common Stock sold to Bayou
            under the Purchase Agreement; and

                (B) 500,000 shares to be issued upon exercise of the Warrant.

            (j) The term "Warrant" shall mean the warrants #BF-1 and #BF-2
        issued to Bayou each exercisable for 250,000 shares of Common Stock at
        an exercise price of $3.65 per share, copies of which is attached hereto
        as Exhibit A.

        1.2 Request for Registration.

            (a) Subject to the conditions of this Section 1.2, if the Company
        shall receive at any time subsequent to the Effective Date of this
        Agreement, a written request from the Holder that the Company file a
        registration statement under the Act covering the registration of all of
        the Registrable Securities then outstanding, then the Company shall (i)
        give written notice of such request to the Holder promptly following
        receipt of such request and (ii) subject to the limitations of
        subsection 1.2(b), use its reasonable efforts to effect as soon as
        practicable (and in any event within one hundred twenty (120) calendar
        days of the receipt of such request) the registration under the Act of
        all Registrable Securities of the Holder in accordance with Section
        1.2(c).

            (b) If the Holder intends to distribute the Registrable Securities
        covered by its request by means of an underwriting, it shall so advise
        the Company as a part of its request made pursuant to subsection 1.2(a)
        and the Company shall include such information in the written notice
        referred to in subsection 1.2(a). The underwriter will be selected by
        the Company and shall be reasonably acceptable to the Holder requesting
        registration. The Holder, if proposing to distribute its securities
        through such underwriting shall (together with the Company as provided
        in subsection 1.3(e)) enter into an underwriting agreement, or similar
        agreement, in customary form with the underwriter or underwriters
        selected for such

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        underwriting. Notwithstanding any other provision of this Section 1.2,
        if the underwriter advises the Holder in writing that marketing factors
        require a limitation of the number of shares to be underwritten, the
        Holder shall agree to reduce to the number of shares included in the
        underwriting. In the event that the number of securities being
        registered is reduced pursuant to this Section 1.2(b), the Holder of the
        Registrable Securities which were not included in the registration shall
        be treated as if there had been no registration effected pursuant to
        this Section 1.2 and shall be entitled to the benefit of Section 1.2
        with respect to the Registrable Securities which were not included as if
        the registration pursuant to Section 1.2 had not been requested;
        provided, that any registration with respect to the Registrable
        Securities which were not included shall not be required to become
        effective within 180 days of the effective date of the first
        registration. The Company shall not be obligated to effect, or to take
        any action to effect, any registration pursuant to this Section 1.2, if
        the Holder proposes to dispose of shares of Registrable Securities that
        may be registered on Form S-3 pursuant to a request made pursuant to
        Section 1.8.

            (c) The Holder may not include any of its Registrable Securities in
        the registration statement pursuant to this Agreement unless it
        furnishes to the Company in writing, prior to or on the 15th calendar
        day after receipt of a request therefore, such information as the
        Company may reasonably request for use in connection with the
        registration statement and in any application to be filed with or under
        state securities laws. In connection with all such requests for
        information from the Holder, the Company shall notify the Holder of the
        requirements set forth in the preceding sentence. The Holder agrees to
        furnish promptly to the Company all information required to be disclosed
        in order to make information previously furnished to the Company by the
        Holder not materially misleading.

        1.3 Obligations of the Company. Whenever required under this Section 1
    to effect the registration of any Registrable Securities, the Company shall,
    use its reasonable best efforts to:

            (a) Prepare and file with the SEC a registration statement with
        respect to such Registrable Securities and use its reasonable best
        efforts to cause such registration statement to become effective, and,
        upon the request of the Holder, use its reasonable best efforts to keep
        such registration statement effective for a period of up to ninety (90)
        calendar days or any less period of time in the event the distribution
        described in the registration statement has been completed; provided,
        however, that (i) such 90-day period shall be extended for a period of
        time equal to the period the Holder refrains from selling any securities
        included in such registration at the request of an underwriter of Common
        Stock (or other securities) of the Company and (ii) in the case of any
        registration statement on Form S-3 which are intended to be offered on a
        continuous or delayed basis, such 90-day period shall be extended, if
        necessary, to keep the registration statement effective for the shorter
        of (x) two years from the filing of the registration statement, (y) the
        expiration of the holding period applicable to the Registrable
        Securities held by holders that are not affiliates of the Company under
        Rule 144(k) under the Act, or (iii) until all such Registrable
        Securities are sold, provided that Rule 415, or any successor rule under
        the Act, permits an offering on a continuous or delayed basis, and
        provided further that applicable rules under the Act governing the
        obligation to file a post-effective amendment permit, in lieu of filing
        a post-effective amendment which (A) includes any prospectus required by
        Section 10(a)(3) of the Act or (B) reflects facts or events representing
        a

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        material or fundamental change in the information set forth in the
        registration statement, the incorporation by reference of information
        required to be included in (A) and (B) above to be contained in periodic
        reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the
        registration statement.

            (b) From time to time prepare and file with the SEC such amendments
        and supplements to such registration statement and the prospectus used
        in connection with such registration statement as may be necessary to
        comply with the provisions of the Act with respect to the disposition of
        all securities covered by such registration statement;

            (c) Furnish to the Holder such numbers of copies of a prospectus,
        including a preliminary prospectus, in conformity with the requirements
        of the Act, and such other documents as they may reasonably request in
        order to facilitate the disposition of Registrable Securities owned by
        them;

            (d) Use its reasonable commercial efforts to register and qualify
        the securities covered by such registration statement under such other
        securities or blue sky laws of such jurisdictions as shall be reasonably
        requested by the Holder;

            (e) In the event of any underwritten public offering, enter into and
        perform its obligations under an underwriting agreement, in usual and
        customary form acceptable to the Company and its counsel, with the
        managing underwriter(s) of such offering (the Holder shall also enter
        into and perform its obligations under such an agreement);

            (f) Notify the Holder when a prospectus relating thereto is required
        to be delivered under the Act of the happening of any event as a result
        of which the prospectus included in such registration statement, as then
        in effect, includes an untrue statement of a material fact or omits to
        state a material fact required to be stated therein or necessary to make
        the statements therein not misleading in the light of the circumstances
        then existing;

            (g) Cause all such Registrable Securities registered pursuant
        hereunder to be listed on each securities exchange or nationally
        recognized quotation system on which similar securities issued by the
        Company are then listed;

            (h) Provide a transfer agent and registrar for all Registrable
        Securities registered pursuant hereunder and a CUSIP number for all such
        Registrable Securities, in each case not later than the effective date
        of such registration.

        1.4 Furnish Information. It shall be a condition precedent to the
    obligations of the Company to take any action pursuant to this Section 1
    with respect to the Registrable Securities of the Holder that the Holder
    shall furnish to the Company such information regarding itself, the
    Registrable Securities held by it, and the intended method of disposition of
    such securities as shall reasonably be required by the Company or the
    managing underwriters, if any, to effect the registration of the Holder's
    Registrable Securities.

        1.5 Expenses of Demand Registration. All expenses incurred in connection
    with registrations, filings or qualifications pursuant to Section 1.2,
    including all registration, filing and qualification fees, printer's fees,
    accounting fees and fees and disbursements of

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    counsel for the Company and the reasonable fees and disbursements of one
    counsel for the Holder (selected by the Holder), and reasonably acceptable
    to the Company, shall be borne by the Company. The Company, however, shall
    not be required to pay an underwriter discount, commission or similar fees
    related to the sale of the Registrable Securities.

        1.6 Indemnification.

            (a) To the extent permitted by law, the Company will indemnify and
        hold harmless the Holder, any underwriter (as defined in the Act) for
        the Holder and each person, if any, who controls the Holder or
        underwriter within the meaning of the Act or the 1934 Act, against any
        losses, claims, damages, or liabilities (joint or several) to which they
        may become subject under the Act, the 1934 Act or other federal or state
        securities law, insofar as such losses, claims, damages, or liabilities
        (or actions in respect thereof) arise out of or are based upon any of
        the following statements, omissions or violations (collectively, a
        "Violation"): (i) any untrue statement or alleged untrue statement of a
        material fact contained in a registration statement, including any
        preliminary prospectus or final prospectus contained therein or any
        amendments or supplements thereto (collectively, the "Filings"), (ii)
        the omission or alleged omission to state in the Filings a material fact
        required to be stated therein, or necessary to make the statements
        therein not misleading, or (iii) any violation or alleged violation by
        the Company of the Act, the 1934 Act, any state securities law or any
        rule or regulation promulgated under the Act, the 1934 Act or any state
        securities law; and the Company will pay to the Holder, underwriter or
        controlling person, as incurred, any legal or other expenses reasonably
        incurred by them in connection with investigating or defending any such
        loss, claim, damage, liability, or action; provided, however, that the
        indemnity agreement contained in this subsection 1.6(a) shall not apply
        to amounts paid in settlement of any such loss, claim, damage,
        liability, or action if such settlement is effected without the consent
        of the Company (which consent shall not be unreasonably withheld), nor
        shall the Company be liable in any such case for any such loss, claim,
        damage, liability, or action to the extent that it arises out of or is
        based upon a Violation that occurs in reliance upon and in conformity
        with written information furnished expressly for use in connection with
        such registration by the Holder, underwriter or controlling person.

            (b) To the extent permitted by law, the Holder will indemnify and
        hold harmless the Company, each of its directors, each of its officers
        who has signed the registration statement, each person, if any, who
        controls the Company within the meaning of the Act, any underwriter, any
        other Holder selling securities in such registration statement and any
        controlling person of any such underwriter or other Holder, against any
        losses, claims, damages, or liabilities (joint or several) to which any
        of the foregoing persons may become subject, under the Act, the 1934 Act
        or other federal or state securities law insofar as such losses, claims,
        damages, or liabilities (or actions in respect thereto) arise out of or
        are based upon any Violation, in each case to the extent (and only to
        the extent) that such Violation occurs in reliance upon and in
        conformity with written information furnished by the Holder expressly
        for use in connection with such registration; and the Holder will pay
        any legal or other expenses reasonably incurred by any person intended
        to be indemnified pursuant to this subsection 1.6(b), in connection with
        investigating or defending any such loss, claim, damage, liability, or
        action; provided, however, that the indemnity agreement contained in
        this subsection 1.6(b) shall not apply to amounts paid in settlement of
        any such loss, claim, damage, liability or action if such settlement is
        effected without the consent of the Holder, which consent shall not be
        unreasonably withheld; provided,

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        that, in no event shall any indemnification obligation of the Holder
        under this subsection 1.6(b) exceed the net proceeds from the offering
        received by the Holder.

            (c) Promptly after receipt by an indemnified party under this
        Section 1.6 of notice of the commencement of any action (including any
        governmental action), such indemnified party will, if a claim in respect
        thereof is to be made against any indemnifying party under this Section
        1.6, deliver to the indemnifying party a written notice of the
        commencement thereof and the indemnifying party shall have the right to
        participate in, and, to the extent the indemnifying party so desires,
        jointly with any other indemnifying party similarly noticed, to assume
        the defense thereof with counsel mutually satisfactory to the parties;
        provided, however, that an indemnified party (together with all other
        indemnified parties that may be represented without conflict by one
        counsel) shall have the right to retain one separate counsel, with the
        fees and expenses to be paid by the indemnifying party, if
        representation of such indemnified party by the counsel retained by the
        indemnifying party would be inappropriate due to actual or potential
        differing interests between such indemnified party and any other party
        represented by such counsel in such proceeding. The failure to deliver
        written notice to the indemnifying party within a reasonable time of the
        indemnified party's acquiring actual knowledge of the commencement of
        any such action, if materially prejudicial to the indemnifying party's
        ability to defend such action, shall relieve such indemnifying party of
        any liability to the indemnified party under this Section 1.6, but the
        omission so to deliver written notice to the indemnifying party will not
        relieve it of any liability that it may have to any indemnified party
        otherwise than under this Section 1.6.

            (d) If the indemnification provided for in this Section 1.6 is held
        by a court of competent jurisdiction to be unavailable to an indemnified
        party with respect to any loss, claim, damage or expense referred to
        therein, then the indemnifying party in lieu of indemnifying such
        indemnified party hereunder, shall contribute to the amount paid or
        payable by such indemnified party as a result of such loss, claim,
        damage or expense in such proportion as is appropriate to reflect the
        relative fault of the indemnifying party on the one hand and of the
        indemnified party on the other in connection with the statements or
        omissions that resulted in such loss, liability, claim or expense as
        well as any other relevant equitable considerations. The relative fault
        of the indemnifying party and of the indemnified party shall be
        determined by reference to, among other things, whether the untrue or
        alleged untrue statement of a material fact relates to information
        supplied by the indemnifying party or by the indemnified party and the
        parties' relative intent, knowledge, access to information and
        opportunity to correct or prevent such statement or omission. In no
        event shall the Holder be required to contribute an amount in excess of
        the net proceeds from the offering received by the Holder. No person
        guilty of fraudulent misrepresentation (within the meaning of Section
        11(f) of the Act) shall be entitled to indemnification from a person who
        was not guilty of fraudulent misrepresentation.

            (e) Notwithstanding the foregoing, to the extent that the provisions
        on indemnification and contribution contained in the underwriting
        agreement entered into in connection with the underwritten public
        offering are in conflict with the foregoing provisions, the provisions
        of the underwriting agreement shall control.

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            (f) The obligations of the Company and the Holder under this Section
        1.6 shall survive the completion of any offering of Registrable
        Securities in a registration statement under this Section 1, and
        otherwise.

        1.7 Reports Under Securities Exchange Act of 1934. With a view to making
    available the benefits of certain rules and regulations of the SEC,
    including Rule 144, that may at any time permit a Holder to sell securities
    of the Company to the public without registration or pursuant to a
    registration on Form S-3, the Company agrees to:

            (a) make and keep public information available, as those terms are
        understood and defined in Rule 144 and;

            (b) file with the SEC in a timely manner all reports and other
        documents required of the Company under the Act and the 1934 Act.

        1.8 Form S-3 Registration. If the Company shall receive from the Holder
    a written request or requests that the Company effect a registration of the
    Registrable Securities that are registrable on Form S-3 and any related
    qualification or compliance with respect to all of the Registrable
    Securities owned by the Holder, the Company will use its reasonable best
    efforts to effect, as soon as reasonably practicable (and in any event
    within one hundred twenty (120) calendar days of the receipt of such
    request), such registration and all such qualifications and compliances as
    may be so requested and as would permit or facilitate the sale and
    distribution of all or such portion of the Holder's Registrable Securities
    as are specified in such request; provided, however, that the Company shall
    not be obligated to effect any such registration, qualification or
    compliance, pursuant to this Section 1.8, if Form S-3 is not available for
    such offering by the Holder, in which case the Company shall file a
    registration statement respecting the Shares in accordance with the terms
    and provisions of Section 1.2.

            (a) If the Holder requests registration pursuant to this Section 1.8
        intends to distribute the Registrable Securities covered by its request
        by means of an underwriting, it shall so advise the Company as part of
        its request made pursuant to this Section 1.8 and the Company shall
        include such information in the written notice referred to in clause (a)
        of this Section 1.8. The underwriter will be selected by the Company and
        shall be reasonably acceptable to the Holder requesting registration. In
        such event, the right of the Holder to include its Registrable
        Securities in such registration shall be conditioned upon the Holder's
        participation in such underwriting and the inclusion of the Holder's
        Registrable Securities in the underwriting to the extent provided
        herein. The Holder upon proposing to distribute its securities through
        such underwriting shall (together with the Company as provided in
        Section 1.3(e)) enter into an underwriting agreement, or similar
        agreement, in customary form with the underwriter or underwriters
        selected for such underwriting. Notwithstanding any other provision of
        this Section 1.8, if the underwriter advises the Holder requesting
        registration in writing that marketing factors require a limitation of
        the number of shares to be underwritten, then the Holder agrees to
        reduce the number of shares of Registrable Securities provided, however,
        that the number of shares of Registrable Securities to be included in
        such underwriting shall not be reduced unless all securities to be sold
        by or for the account of any stockholder, person or party other than an
        the Holder (including those shares to be sold for the Company's
        account), are first entirely excluded from the underwriting. In the
        event that the number of securities being registered is reduced

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        pursuant to this Section 1.8(a), the Holder of the Registrable
        Securities which were not included in the registration shall be treated
        as if there had been no registration effected pursuant to this Section
        1.8 and shall be entitled to the benefit of Section 1.8 with respect to
        the Registrable Securities which were not included as if the
        registration pursuant to Section 1.8 had not been requested; provided,
        that any registration with respect to the Registrable Securities which
        were not included shall not be required to become effective within 180
        days of the effective date of the first registration.

            (b) Subject to the foregoing, the Company shall file a registration
        statement covering the Registrable Securities and other securities so
        requested to be registered as soon as reasonably practicable after
        receipt of the request or requests of the Holder. All expenses incurred
        in connection with a registration requested pursuant to this Section 1.8
        (other than underwriting discounts and commissions), including all
        registration, filing, qualification, printer's fees, accounting fees,
        reasonable fees and disbursements of one legal counsel for the Holder,
        and fees and disbursements of counsel for the Company, shall be borne by
        the Company.

        1.9 Termination of Registration Rights. The Holder shall not be entitled
    to exercise any right provided for in this Section 1 after such time at
    which all Registrable Securities held by the Holder can be sold in any
    three-month period without registration in compliance with Rule 144 of the
    Act.

    2. Miscellaneous.

        2.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY
    THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS RULES.

        2.2 Waivers and Amendments. This Agreement may be terminated and any
    term of this Agreement may be amended or waived (either generally or in a
    particular instance and either retroactively or prospectively) with the
    written consent of the Company and the Holder. Notwithstanding the
    foregoing, additional parties may be added as Holders under this Agreement
    with the written consent of the Company and the Holder. No such amendment or
    waiver shall reduce the aforesaid percentage of the Registrable Securities,
    the holders of which are required to consent to any termination, amendment
    or waiver without the consent of the record holders of all of the
    Registrable Securities. Any termination, amendment or waiver effected in
    accordance with this Section 2.2 shall be binding upon each holder of
    Registrable Securities then outstanding, each future holder of all such
    Registrable Securities and the Company.

        2.3 Successors and Assigns. Except as otherwise expressly provided
    herein, the provisions of this Agreement shall inure to the benefit of, and
    be binding upon, the successors, assigns, heirs, executors and
    administrators of the parties hereto.

        2.4 Entire Agreement. This Agreement constitutes the full and entire
    understanding and agreement between the parties with regard to the subject
    matter hereof.

        2.5 Notices. All notices and other communications required or permitted
    hereunder shall be in writing and may be delivered in person or by
    facsimile, electronic mail,

                                      -8-
<PAGE>

    courier or U.S. mail, in which event it may be mailed by first-class,
    certified or registered, postage prepaid, addressed (a) if to a Holder, at
    the address set forth in the Company's records or, at such other address as
    an Holder shall have furnished to the Company or (b) if to the Company, at
    its address set forth on the signature page of this Agreement, or at such
    other address as the Company shall have furnished to the Holder. All such
    notices and other communications shall be deemed given upon personal
    delivery, upon confirmation of facsimile transfer, upon confirmation of
    electronic mail transmission, upon delivery by courier or three business
    days after deposit in the United States mail.

        2.6 Interpretation. The words "include," "includes" and "including" when
    used herein shall be deemed in each case to be followed by the words
    "without limitation." The titles and subtitles used in this Agreement are
    used for convenience only and are not considered in construing or
    interpreting this Agreement.

        2.7 Severability. If one or more provisions of this Agreement are held
    to be unenforceable under applicable law, such provision shall be excluded
    from this Agreement, and the balance of the Agreement shall be interpreted
    as if such provision were so excluded, and shall be enforceable in
    accordance with its terms.

        2.8 Counterparts. This Agreement may be executed in any number of
    counterparts, each of which shall be an original, but all of which together
    shall constitute one instrument.

        2.9 Specific Performance. The parties hereto agree that it would be
    impossible to measure in money the damages which would accrue to a party
    hereto by reason of a failure to perform any of the obligations under this
    Agreement. Therefore, if any party hereto is forced to institute any action
    or proceeding to enforce the provisions hereof, any person against whom such
    action or proceeding is brought hereby waives the claim or defense that the
    party instituting such action has an adequate remedy at law and such person
    shall not urge in any such action that an adequate remedy at law exists.

        2.10 Telecopy Execution and Delivery. A facsimile, telecopy or other
    reproduction of this Agreement may be executed by one or more parties
    hereto, and an executed copy of this Agreement may be delivered by one or
    more parties hereto by facsimile or similar electronic transmission device
    pursuant to which the signature of or on behalf of such party can be seen,
    and such execution and delivery shall be considered valid, binding and
    effective for all purposes. At the request of any party hereto, all parties
    hereto agree to execute an original of this Agreement as well as any
    facsimile, telecopy or other reproduction hereof.

        2.11 Attorneys' Fees. In the event that any suit or action is instituted
    to enforce any provision in this Agreement, the prevailing party shall be
    entitled to all costs and expenses of maintaining such suit or action,
    including reasonable attorneys' fees.

        2.12 Construction. This Agreement has been negotiated by the parties
    hereto and their respective legal counsel, and legal or equitable principles
    that might require the construction of this Agreement or any provision of
    this Agreement against the party drafting this Agreement will not apply in
    any construction or interpretation of this Agreement.

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                            [Signature page follows.]

                                      -10-
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    IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year first set forth above.

                                       "Company"

                                       KFx, Inc.

                                       By:
                                          --------------------------------------
                                          Theodore Venners, Chairman and CEO

                                       "Bayou"

                                       Bayou Fund, LLC

                                       By:
                                          --------------------------------------

            SIGNATURE PAGE TO KFX, INC. REGISTRATION RIGHTS AGREEMENT<PAGE>

EXHIBIT 10.3

                                   ADDENDUM TO
                 BLANKET CONTRACT, NO. 142072, DATED MAY 1, 2001
                     PROJECT -- CINERGY NOX COMPLIANCE PLAN

This Addendum ("Addendum") to the Blanket Contract, No. 142072 (the "Contract"),
dated May 1, 2001, by and among Pegasus Technologies, Inc. ("Pegasus") and
Cinergy Services, Inc. ("Cinergy"), is made and entered into as of this 24th day
of July, 2001, by and among Pegasus, Cinergy, and KFx Inc. ("KFx").

                                    RECITALS

WHEREAS, Pegasus is a majority-owned subsidiary of KFx;

WHEREAS, Cinergy and Pegasus entered into the Contract in the effort to reduce
NOx emissions at various Cinergy Operating Units using Pegasus technology and
expert services;

WHEREAS, Pegasus desires for Cinergy to advance (the "Advance") to Pegasus the
amount of $3,500,000.00, against future invoices for Pegasus' services performed
under the Contract; and

WHEREAS, KFx and Pegasus each shall grant to Cinergy certain rights to convert
all or portions of all of the Advance into common stock of either KFx or
Pegasus, upon such terms and conditions as more specifically set forth herein.

NOW, THEREFORE, in consideration of the foregoing, and the mutual promises and
covenants set forth herein, the parties hereto agree as follows:

1. The Advance.

1.1 Upon the execution of this Addendum, Cinergy shall wire the Advance pursuant
to the wire instructions set forth in Section III, Division 3-112 of the
Contract.

1.2 Pegasus agrees not to use all or any portion of the Advance to pay any
intercompany debts that it may owe to KFx as of the date of this Addendum.

2. Covenant to Pay. Pegasus promises to repay Cinergy the Advance, together with
interest in arrears on the unpaid principal balance at an annual rate equal to
seven percent (7%), in the manner provided below. Interest shall begin to accrue
on July 24, 2001, and shall be calculated on the basis of a year of 365 or 366
days, as applicable, and charged for the actual number of days elapsed. Interest
shall be payable in cash, by the 5th business day of each month for the prior
calendar month (the "Interest Due Date"). Interest payments not made by the
Interest Due Date shall accrue interest at a rate of
<PAGE>

prime, as quoted by the head office of Citibank N.A., New York, USA at the close
of banking on the Interest Due Date, or on the first business day thereafter if
such date falls on a non-business day, plus 5%.

3. Repayment Alternatives. Cinergy, at its sole and exclusive discretion, except
as provided in Section 5 below, may determine the manner that the Advance shall
be repaid from one or a combination of more than one of the following
alternatives:

3.1 Conversion Right. On the basis of the representations, warranties and
agreements contained herein, and subject to the terms and conditions hereof, KFx
and Pegasus grant Cinergy the right to, on or after July 24, 2001, convert
("Conversion Rights"), the principal balance then remaining of the Advance, in
increments of $500,000.00 (Subject to Section 5), into fully paid and
nonassessible shares of common stock of: (i) Pegasus, at an initial conversion
price of $2.10 per share ("Pegasus Conversion Price"), or (ii) KFx, at a
conversion price of $3.65 per share ("KFx Conversion Price"). In the event that
Pegasus issues shares of common stock, or securities exercisable, or
exchangeable for, or convertible into, shares of common stock ("Convertible
Securities"), at any time within 12 months after Closing (defined in Section 9)
for total consideration (including, in the case of Convertible Securities, any
consideration to be paid upon exercise, conversion or exchange of those
Convertible Securities) of less than the Pegasus Conversion Price per share of
common stock, the Pegasus Conversion Price will be adjusted to that lower per
share conversion price, provided that, there shall be no adjustment to the
Pegasus Conversion Price if Pegasus issues shares of common stock or Convertible
Securities pursuant to any agreement entered into prior to the date of the
Addendum or pursuant to the exercise, exchange or conversion of Convertible
Securities outstanding on the date of the Addendum.

3.1.1 Antidilution Protection; Subdivisions or Combinations. In case the
outstanding shares of common stock of KFx or Pegasus shall be subdivided into a
greater number of shares of common stock, the KFx Conversion Price or the
Pegasus Conversion Price, as the case may be, in effect on the day following the
day upon which the subdivision becomes effective shall be proportionately
reduced, and, conversely in case outstanding shares of common stock of KFx or
Pegasus shall each be combined into a smaller number of shares of common stock,
the KFx Conversion Price or the Pegasus Conversion Price, as the case may be, in
effect on the day following the day upon which the subdivision becomes effective
shall be proportionately increased, such reduction or increase, as the case may
be, to become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination occurs.

3.1.2 Antidilution Protection; Reorganization, Reclassification or
Consolidation. In case of any capital reorganization of KFx or Pegasus, or of
any
<PAGE>

reclassification of shares (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of
subdivision or combination), or in case of the consolidation of KFx or Pegasus
with or the merger of KFx or Pegasus into any other person (other than a
consolidation or merger in which KFx or Pegasus, respectively, is the continuing
corporation) or of the sale of the assets of KFx or Pegasus as, or substantially
as, an entirety to any other corporation, the Conversion Rights shall, after
such reorganization, reclassification, consolidation, merger or sale, be
exercisable for the kind and amount of shares of stock and other securities and
property (including cash) receivable upon reclassification, change, combination,
consolidation, merger, sale or conveyance by a holder of the number of shares of
common stock of KFx or Pegasus, as the case may be, deliverable upon full
conversion of the Conversion Rights immediately prior to such reorganization,
reclassification, consolidation, merger or sale.

3.1.3 Additional Rights & Restrictions. Notwithstanding the foregoing, Cinergy,
as a condition precedent to exercise of the Conversion Rights in respect of
Pegasus shares of common stock, shall be required to execute a counterpart of
the Pegasus Amended and Restated Stockholder and Voting Agreement (the "Pegasus
Stockholder Agreement"), dated as of January 31, 2001, as amended, with such
reasonable modifications as the parties may mutually agree upon and as otherwise
may be required to conform the Pegasus Stockholder Agreement to the terms of
this Addendum. Cinergy acknowledges that it has received a copy of the Pegasus
Stockholder Agreement.

3.2 Application of Invoices under the Contract. Cinergy may elect to apply
invoices submitted on or after April 1, 2002 for Pegasus' current and future
services under the Contract against the outstanding balance of the Advance. If
this election is not made, the invoices shall be paid pursuant to the terms set
forth in Section III of the Contract. Cinergy shall be required to make the
foregoing election by providing written notice to Pegasus within ten (10)
calendar days before the commencement of each calendar month. However, Cinergy
must apply such invoices against the outstanding balance of the Advance to the
extent the outstanding balance of the Advance exceeds the amount remaining of
the authorized but uninvoiced services to be performed, including contingent
performance payments contemplated under the Contract.

3.3 Right to Obligate Repayment. Cinergy shall have the right to require the
repayment of the outstanding balance of the Advance provided that Cinergy
delivers to Pegasus written notice ("Repayment Notice") requiring such repayment
in accordance with this Section 3.3. Cinergy must deliver the Repayment Notice
no later than the 15th calendar day after Pegasus or KFx notifying Cinergy of
the occurrence or proposal of any of the following events, in which case Pegasus
shall be obligated to repay such amount upon Cinergy's demand upon the
occurrence, of: (i) a change of control of KFx or Pegasus, (ii) the sale of all
or substantially all of Pegasus' or KFx's assets, (iii) completion of
<PAGE>

third party financing following the date of this Addendum, for Pegasus totaling,
in aggregate $12,500,000.00, or for Pegasus and KFx combined, totaling in
aggregate, $30,000,000.00; (iv) a termination for cause as set forth in sub
section 102 of Section I of the Contract.

For purposes hereof, "change of control" means: the purchase or other
acquisition by any person, entity or group of persons, within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any comparable successor provisions, of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50
percent or more of either the outstanding shares of common stock or the combined
voting power of Pegasus, or KFx, then outstanding voting securities entitled to
vote generally, or the approval by the stockholders of Pegasus, or KFx, of a
reorganization, merger, or consolidation, in each case, with respect to which
persons who were stockholders of Pegasus, or KFx, immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own more
than 50 percent of the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged or consolidated company's then
outstanding securities.

3.4 Payment to KFx. If Cinergy exercises its Conversion Rights for the shares of
KFx common stock, Pegasus shall, or prior to issuance of those shares of KFx
common stock, pay to KFx an amount equal to the KFx Conversion Price multiplied
by the number of shares of KFx common stock issued to Cinergy.

3.5. Legends. It is understood that each certificate representing all Common
Stock of Pegasus or KFx, as the case may be, issued pursuant to this Addendum
shall, until registered under the Securities Act of 1933, as amended
("Securities Act"), bear a legend in the following form or substantially similar
form (in addition to any legend required under applicable state securities
laws):

               "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
               ACT OF 1933 (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
               SECURITIES LAW AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
               A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION
               THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (A)
               AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (B) AN
               EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
               ACT AND ANY APPLICABLE STATE SECURITIES LAWS."
<PAGE>

4. Registration Rights.

4.1 Availability of Registration Rights.

4.1.1 Notwithstanding anything else in this Section 4, the rights of Cinergy
under this Section 4 shall only be effective (i) in relation to shares of the
common stock of KFx issued upon exercise of the Conversion Rights and shares of
common stock of KFx issued upon exercise of any warrant issued to Cinergy by KFx
("KFx Registrable Securities"), and (ii) in relation to shares of the common
stock of Pegasus issued upon exercise of the Conversion Rights ("Pegasus
Registrable Securities"), provided that, at least six months has elapsed since
the effective date of the first underwritten public offering of common stock of
Pegasus registered on Form S-1 pursuant to the Securities Act, and declared
effective by the Securities and Exchange Commission ("SEC"). (KFX Registrable
Securities and Pegasus Registrable Securities together referred to as the
"Registrable Securities").

4.2 Demand Registration.

4.2.1 Subject to the conditions of this Section 4, if either of Pegasus or KFx
shall receive a written request ("Demand Registration Request") (the recipient
referred to as the "Registrant") from Cinergy that the Registrant file a
registration statement under the Securities Act covering the registration of all
of the Registrable Securities then outstanding, then the Registrant shall,
subject to the limitations of Section 4.2.2, use its best efforts to effect as
soon as practicable (and in any event, in the case of KFx, provided it is
eligible to register the Registrable Securities on Form S-3 under the Securities
Act, within ninety (90) calendar days of the receipt of such request; otherwise
within one hundred twenty (120) calendar days of the receipt of such request)
the registration ("Demand Registration") under the Securities Act of all
Registrable Securities of Cinergy in accordance with Section 4.2.3. If such form
is available for the offering of the Registrable Securities by Cinergy, the
Registrant will register the Registrable Securities on Form S-3 or such other
form under the Securities Act as in effect on the date hereof or any
registration form under the Securities Act subsequently adopted by the SEC that
permits inclusion or incorporation of substantial information by reference to
other documents filed by the Registrant with the SEC.

4.2.2 If Cinergy intends to distribute the Registrable Securities covered by its
request by means of an underwriting, it shall so advise the Registrant as a part
of its request made pursuant to Section 4.2.1. The underwriter will be selected
by Cinergy and shall be reasonably acceptable to the Registrant. Cinergy, if
proposing to distribute its securities through such underwriting shall (together
with the Registrant) enter into an underwriting agreement, or similar agreement,
in customary form with the underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of this Section, if the
<PAGE>

underwriter advises Cinergy in writing that marketing factors require a
limitation of the number of shares to be underwritten, Cinergy shall agree to
reduce to the number of Registrable Securities included in the underwriting.

4.2.3 Cinergy may not include any of its Registrable Securities in the
registration statement pursuant to this Section 4 unless it furnishes to the
Registrant in writing, prior to or on the 15th calendar day after receipt of a
request therefore, such information as the Registrant may reasonably request for
use in connection with the registration statement and in any application to be
filed with or under state securities laws. In connection with all such requests
for information from Cinergy, the Registrant shall notify Cinergy of the
requirements set forth in the preceding sentence. Cinergy agrees to furnish
promptly to the Registrant all information required to be disclosed in order to
make information previously furnished to the Registrant by Cinergy not
materially misleading.

4.2.4 Subject to Section 4.2.5, Cinergy shall only be entitled to make one
request to Pegasus or KFx pursuant to Section 4.2 and, notwithstanding anything
else in this Section 4.2, KFx and Pegasus shall only be obligated to take action
to register any Registrable Securities in response to the first request by
Cinergy under Section 4.2.

4.2.5 In the event that the number of Registrable Securities of Cinergy to be
included in an underwriting is reduced, pursuant to Section 4.2.2, by more than
10%, Cinergy shall be entitled to make one further Demand Registration Request
provided that request is no earlier than 180 days after the effective date of
the registration statement relating to the first Demand Registration.

4.3 Piggyback Registration.

4.3.1 If the Registrant shall determine to register any equity securities of the
Registrant for its own account, or for the account of other holders of equity
securities of the Registrant, on any registration form (other than Form S-4 or
S-8 or other successor forms) which permits the inclusion of Registrable
Securities held by Cinergy (a "Piggyback Registration"), the Registrant will
promptly give Cinergy written notice thereof and, shall include in such
registration all Registrable Securities requested to be included therein
pursuant to the written request of Cinergy received prior to or on the 15th
calendar day after delivery of the Registrant's notice.

4.3.2. If the Piggyback Registration relates to an underwritten public offering,
the Registrant shall so advise Cinergy as part of the written notice given
pursuant to Section 4.3.1. In such event, the right of Cinergy to participate in
such registration shall be conditioned upon its participation in such
underwriting in accordance with the terms and conditions thereof. The Registrant
shall have the right to select the managing underwriter(s) for any
<PAGE>

underwritten Piggyback Registration. If Cinergy proposes to distribute its
Registrable Securities through such underwriting, Cinergy shall (together with
the Registrant) enter into an underwriting agreement customary in form and
substance. Notwithstanding any other provision of this Section 4, if the
underwriter advises Cinergy in writing that marketing factors require a
limitation of the number of shares to be underwritten, Cinergy shall agree to
reduce to the number of Registrable Securities included in the underwriting.

4.4 Obligations of the Registrant. Whenever required under this Section 4 to
effect the registration of any Registrable Securities, the Registrant shall use
its best efforts to:

4.4.1 Prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become effective, and, upon the request of Cinergy, use its best
efforts to keep such registration statement effective for a period of up to
ninety (90) calendar days or any less period of time in the event the
distribution described in the registration statement has been completed;
provided, however, that (i) such 90-day period shall be extended for a period of
time equal to the period Cinergy refrains from selling any securities included
in such registration at the request of an underwriter of common stock (or other
securities) of the Registrant and (ii) in the case of any registration statement
on Form S-3 which are intended to be offered on a continuous or delayed basis,
such 90-day period shall be extended, if necessary, to keep the registration
statement effective for the shorter of (x) two years from the filing of the
registration statement, (y) the expiration of the holding period applicable to
the Registrable Securities held by holders that are not affiliates of the
Registrant under Rule 144(k) under the Securities Act, or (iii) until all such
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment which (A) includes any prospectus required by Section
10(a)(3) of the Securities Act or (B) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (A) and (B) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement.

4.4.2 From time to time prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
<PAGE>

4.4.3 Furnish to Cinergy such numbers of copies of a prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;

4.4.4 Use its reasonable commercial efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by Cinergy;

4.4.5 In the event of any underwritten public offering, enter into and perform
its obligations under an underwriting agreement, in usual and customary form
acceptable to the Registrant and its counsel, with the managing underwriter(s)
of such offering (Cinergy shall also enter into and perform its obligations
under such an agreement);

4.4.6 Notify Cinergy when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing;

4.4.7 Cause all such Registrable Securities registered pursuant hereunder to be
listed on each securities exchange or nationally recognized quotation system on
which similar securities issued by the Registrant are then listed; and

4.4.8 Provide a transfer agent and registrar for all Registrable Securities
registered pursuant hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration.

4.5 Furnish Information. It shall be a condition precedent to the obligations of
the Registrant to take any action pursuant to this Section 4 with respect to the
Registrable Securities that Cinergy shall furnish to the Registrant such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall reasonably be
required by the Registrant or the managing underwriters, if any, to effect the
registration of the Cinergy's Registrable Securities.

4.6 Expenses of Registration. All expenses incurred in connection with
registrations, filings or qualifications pursuant to Section 4, including all
registration, filing and qualification fees, printer's fees, accounting fees and
fees and disbursements of counsel for the Registrant and the reasonable fees and
disbursements of one counsel for all selling holders (selected by the Registrant
and reasonably acceptable to Cinergy), shall be borne by the Registrant. The
Registrant, however, shall not be required to pay an underwriter discount,
<PAGE>

commission or similar fees related to the sale of the Registrable Securities or
transfer or similar stamp taxes.

4.7 Termination of Registration Rights. Cinergy shall not be entitled to
exercise any right provided for in this Section 4 after such time at which all
Registrable Securities held by Cinergy can be sold in any three-month period
without registration in compliance with Rule 144 of the Securities Act.

5. Pegasus' Right to Repay. From the execution date hereof, through and
including March 31, 2004, Pegasus shall have the right to repay the Advance, in
whole or in part, but only with the prior consent of Cinergy. On or after April
1, 2004, Pegasus can repay the Advance, in whole or in part, without Cinergy's
consent, but with 60 days prior written notice (the "Notice Period"). During the
Notice Period, Cinergy shall only have the right to exercise the Conversion
Rights in respect of the outstanding balance of the Advance up to the amount
remaining of the authorized but uninvoiced services to be performed under the
Contract notwithstanding the $500,000.00 minimum increment described in Section
3.1.

6. Cinergy's Representations. For purposes of this Section 6, "Securities" shall
mean the Conversion Rights and shares of common stock of Pegasus and KFx issued
upon exercise of the Conversion Rights. Cinergy hereby represents and warrants
to Pegasus and KFx, as of the Closing (as further defined herein), as follows:

6.1 Accredited Investor; Experience; Risk. Cinergy is an "accredited investor"
as such term is defined in Regulation D promulgated under the Securities Act and
has not been organized for the specific purpose of acquiring the Securities.
Cinergy and its representatives have been solely responsible for Cinergy's own
"due diligence" investigations of the Pegasus and KFx, and their management and
business, for its own analysis of the merits and risks of the investment in the
Securities, and for its own analysis of the fairness and desirability of the
terms of the investment in the Securities. Cinergy has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks associated with making the Advance and acquiring the
Securities and of protecting its interests in connection therewith. Cinergy is
able to fend for itself in the transactions contemplated by this Addendum and
has the ability to bear the economic risk of the investment in the Securities,
including complete loss of that investment.

6.2 Investment. Cinergy is acquiring the Securities for investment for its own
account and not with a view to, or for resale in connection with, any
distribution thereof, and it has no present intention of selling or distributing
the securities. Cinergy understands that the Securities have not been registered
under the Securities Act by reason of a specific exemption from the
<PAGE>

registration provisions of the Securities Act which depends upon, among other
things, the bona fide nature of the investment intent as expressed herein.

6.3 Restricted Securities; Rule 144. Cinergy understands that the Securities are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from Pegasus or KFx in a transaction not
involving a public offering and that under such laws and applicable regulations
the Securities may be resold without registration under the Securities Act only
in certain limited circumstances. Cinergy acknowledges that the Securities must
be held indefinitely unless subsequently registered under the Securities Act or
an exemption from such registration is available.

6.4 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, Cinergy further agrees not to make any
disposition of all or any portion of the Securities unless and until either: (a)
there is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement or the provisions of Section 6.3 hereof; or (b)
Cinergy shall have notified Pegasus or KFx, as the case may be, of the proposed
disposition and shall have furnished Pegasus or KFx, as the case may be, with a
detailed statement of the circumstances surrounding the proposed disposition.
If, in the good faith determination of the counsel of Pegasus or KFx, as the
case may be, there is a reasonable basis for the belief that such disposition
would require registration under the Securities Act, Pegasus or KFx, as the case
may be, may require that Cinergy furnish the Pegasus or KFx, as the case may be,
with an opinion of counsel, reasonably satisfactory to Pegasus or KFx, as the
case may be, that such disposition will not require registration under the
Securities Act.

6.5 Companies' Information. Cinergy has had an opportunity to discuss Pegasus'
and KFx's business, management and financial affairs with directors, officers
and management of Pegasus and KFx. Cinergy has also had the opportunity to ask
questions of, and receive answers from, Pegasus and KFx and its and their
management regarding the terms and conditions of this Addendum and, in
particular, the Securities.

7. Authorization.

7.1 Cinergy represents that it has the full right, power and authority to enter
into and perform its obligations under this Addendum, and that this Addendum
when executed and delivered by Cinergy will constitute a valid and binding
obligation of Cinergy, enforceable in accordance with its terms, subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, rules of law governing specific performance, injunctive relief or other
equitable remedies.
<PAGE>

7.2 Pegasus and KFx each represents that it has the full right, power and
authority to enter into and perform its obligations under this Addendum, and
that this Addendum when executed and delivered by Pegasus and KFx will
constitute a valid and binding obligation of each of Pegasus and KFx enforceable
in accordance with its terms, subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors, rules of law
governing specific performance, injunctive relief or other equitable remedies.

8. Conditions Precedent to Closing. Pegasus' and KFx's obligation to consummate
and close the transactions contemplated hereby is subject to satisfaction or
waiver of the following conditions precedent: (i) the issuance and receipt of a
waiver (and delivery of the same to Cinergy), by Kennecott Energy Company
("Kennecott"), a Delaware Corporation, of its pre-emptive right, in respect of
new securities issued by Pegasus, pursuant to that certain Amended and Restated
Stockholder and Voting Agreement, dated as of January 31, 2001, as amended, by
and among Pegasus, KFx, Kennecott, et al.; and (ii) obtaining KFx and Pegasus
board approval (and delivery of the same to Cinergy), and other appropriate
corporate and company approvals of KFx and Pegasus as may be required.

9. Closing. The closing ("Closing") of the transaction contemplated hereby is
scheduled to occur on July 24, 2001, at such time in place and parties shall
agree upon.

10. Capitalized Terms. Capitalized terms not otherwise defined herein shall have
the means ascribed to them in the Contract.

11. Complete Understanding. This Addendum, together with the Contract, is a
complete explicit statement of the matters covered hereunder between the
parties, which supersedes merges all prior proposals, understandings and all
other agreements, oral and written, between the parties relating to the matters
covered hereunder. This Addendum may not be modified or altered except by
written instrument duly executed by both parties.

12. Acknowledgement of Parties. That the parties acknowledge and agree that KFx
was not a party to the Contract and does not become such a party and nothing
herein shall be construed as causing KFx to become a party to that Contract.

13. Governing Law. This Addendum shall be interpreted and construed under the
laws of the state of New York, without reference to its conflicts of law
provisions. If any part of a term and condition in this Addendum is found to be
contrary to the law governing the Addendum by a court of competent jurisdiction,
such term and condition shall in all other respects be and remain legally
effective and binding to the full extent permissible.
<PAGE>

IN WITNESS WHEREOF, the parties have entered into this Addendum on the date
first written above.

Pegasus Technologies, Inc.                  Cinergy Services, Inc.

By:_______________________                  By:_____________________
__________________________                  ________________________

KFx INC.

By:_______________________
__________________________

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