Document:

Exhibit 10.5

MAGELLAN
HEALTH SERVICES, INC.

2006 DIRECTOR EQUITY COMPENSATION
PLAN

RESTRICTED STOCK AND STOCK OPTION AWARD AGREEMENT

Reference No. DIR-2006-     
(                    )

As of May 16, 2006

SECTION 1.           GRANT OF RESTRICTED SHARES AND OPTION.

(a)           GRANT. On the terms and conditions
set forth in this Agreement, effective as of the date hereof (the “DATE OF
GRANT”), Magellan Health Services Inc. (the “COMPANY” as further defined below)
grants to the Grantee referred to on the signature page hereof (i) 750
shares (the “RESTRICTED SHARES”) of Ordinary Common Stock, $ 0.01 par value per
share, of the Company (“ORDINARY COMMON STOCK”) and (ii) an option (the “OPTION’)
to purchase, at the exercise price of $      per
share,         shares of Ordinary Common
Stock, subject to adjustment thereto on account of any change in respect of the
outstanding shares of Ordinary Common Stock that may be made as provided by Section 7
below (the “OPTION SHARES”). The option is intended to be a Nonqualified Stock
Option (as defined below). Certificates representing the Restricted Shares
shall be issued to Grantee with the legend and shall be held in the Company’s
custody as provided by the Plan until they become vested as provided herein and
in the Plan; the certificates representing the Restricted Shares may thereafter
be legended as may be required to comply with subsection 3(c) or 4(d).

(b)           2006 DIRECTOR EQUITY COMPENSATION
PLAN AND DEFINED TERMS. The Restricted Shares and this option is granted under
and subject to the terms of the Company’s 2006 Director Equity Compensation
Plan, as amended and supplemented from time to time (the “PLAN”), which is
incorporated herein by this reference. Certain capitalized terms used herein
are defined in Section 9 below but terms used herein, if not defined
herein, shall have the same meaning for purposes hereof as provided by the Plan.
The number of Option Shares stated in subsection 1(a) above and the
exercise price thereof have been determined as of the date hereof as provided by
the Plan.

(c)           SCOPE OF THIS AGREEMENT. This
Agreement shall apply both to the option and to the Option Shares acquired upon
the exercise of the option, as well as the Restricted Shares.

SECTION 2.           RIGHT TO EXERCISE THE OPTION AND
FORFEITURE OF RESTRICTED SHARES.

(a)           EXERCISABILITY OF OPTION. This option
shall be exercisable only to the extent it is vested as provided hereby, only
during the lifetime of Grantee, except as otherwise provided by Section 3,
and only when otherwise exercisable in accordance with the terms hereof and the
Plan. This option, to the extent vested on the date of termination of the
Grantee’s Service with the Company, shall be exercisable for the period
provided by Section 6 below.

(b)           FORFEITURE OF UNVESTED RESTRICTED
SHARES. The Restricted Shares shall not be Transferable until vested in
accordance with subsection 2(c), except 

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as provided by subsection 3(b),and shall be forfeited,
and returned by Grantee, in accordance with the Plan upon termination of
Grantee’s Service unless earlier vested in accordance with subsection 2(c).

(c)           VESTING. The Restricted Shares and
this option as to 100% of the Option Shares shall vest on the first anniversary
of the Date of Grant, provided that the Grantee’s Service has not terminated
prior to such date. Notwithstanding the preceding sentence, the Restricted
Shares and this option as to 100% of the Option Shares shall earlier vest
immediately upon the first to occur of (i) a Change of Control of the
Company, (ii) Grantee’s death or Disability or (iii) Grantee’s
Mandatory Retirement.

(d)           LAPSE OF RESTRICTIONS ON RESTRICTED
SHARES AND OPTION SHARES. Subject to subsections 3(c) and 4(d) below,
upon the vesting of the Restricted Shares, the Grantee shall be free to dispose
of the Restricted Shares in any manner and at any time without restriction. Subject
to subsections 3(c) and 4(d) below, upon the acquisition of Option
Shares pursuant to the exercise of this option upon satisfaction of any vesting
and exercise conditions provided hereby and by the Plan, Grantee shall be free
to dispose of Option Shares so acquired in any manner and at any time without
restriction.

SECTION 3.           TRANSFER OF RESTRICTED SHARES AND THE
OPTION.

(a)           TRANSFERS GENERALLY PROHIBITED. Except
in the case of a Transfer permitted by subsection 3(b) below, this option,
when exercisable in accordance with Section 2, shall be exercisable only
by the Grantee, provided that any exercise of this option shall be subject to
subsections 3(c) and 4(d) below. Except as otherwise provided in
subsection 3(b) below, neither this option nor any rights and privileges
conferred by this option shall be sold or otherwise Transferred by Granteee (or
any permitted Transferee). Except as otherwise provided in subsection 3(b) below,
until vested in accordance with Section 2, the Restricted Shares shall not
be sold or otherwise Transferred, provided that, even though vested, any sale
or other Transfer of Restricted Shares shall be subject to subsections 3(c) and
4(d) below.

(b)           CERTAIN TRANSFERS PERMITTED. Notwithstanding
the foregoing provisions of this Section 3, the Restricted Shares, even
though not vested, and this option, whether or not vested, may be Transferred in
the event of the Grantee’s death, by will or the laws of descent and
distribution or by a written beneficiary designation accepted by the Company
upon authorization of the Board of Directors, and as otherwise permitted under
the Plan; provided, however, that in any such case the Restricted
Shares and the option so Transferred shall remain subject in the hands of the
transferee to the restrictions on Transfer provided hereby and all other terms
hereof.

(c)           FIDUCIARY AND SECURITIES LAW
RESTRICTIONS. As a director of the Company, Grantee may be subject to
restrictions on his or her ability to sell or otherwise Transfer Restricted
Shares and Option Shares by reason of being a fiduciary for the Company or by
reason of federal or state securities laws and/or the policies regarding
transactions in securities of 

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the Company from time to time adopted by the Company
and applicable to Grantee in connection therewith. Nothing contained herein
shall relieve Grantee of any restriction on sale or other Transfer of
Restricted Shares or Option Shares provided thereby and any other restrictions
on sale or other Transfer of Restricted Shares and Option Shares provided
herein (including in the Plan) shall be in addition to and not in lieu of any
other restrictions provided thereby.

SECTION 4.           EXERCISE PROCEDURES.

(a)           NOTICE OF EXERCISE. The Grantee (or
the Grantee’s personal representative or permitted Transferee) may exercise the
option by giving written notice to the Company specifying the election to
exercise the option, the number of Option Shares for which it is being
exercised and the form of payment. Exhibit A is an example of a “Notice of
Exercise.”  The Notice of Exercise shall
be signed by the person exercising the option. In the event that the option is
being exercised by the Grantee’s personal representative or permitted
transferee, the notice shall be accompanied by proof (satisfactory to the
Company) of the representative’s right to exercise the option. The Grantee or
the Grantee’s representative or permitted transferee shall deliver to the
Company, at the time of giving the notice, payment in a form permissible under Section 5
below for the full amount of the Purchase Price.

(b)           ISSUANCE OF COMMON STOCK. Subject to subsection
4(d) below, after receiving a proper notice of exercise and payment for
the Option Shares for which the option was exercised, the Company shall cause
to be issued a certificate or certificates for the Option Shares as to which
this option has been exercised, registered in the name of the person exercising
the option (or, at the direction of the Grantee, in the names of such person
and his or her spouse as community property or as joint tenants with right of
survivorship or as tenants in the entirety).

(c)           WITHHOLDING REQUIREMENTS. The Company
may withhold any tax (or other governmental obligation) as a result of the
exercise of the option, as a condition to the exercise of the option, and the
Grantee shall make arrangements satisfactory to the Company to enable it to
satisfy all such withholding requirements. The Grantee shall also make
arrangements satisfactory to the Company to enable it to satisfy any
withholding requirements that may arise in connection with the vesting or
disposition of Option Shares purchased by exercising of the option.

(d)           SECURITIES LAW RESTRICTIONS ON
EXERCISE. Unless a registration statement under the Securities Act permitting
the issuance and delivery of the Restricted Shares and the sale and delivery of
Option Shares upon exercise of this option is in effect at time for such
delivery, the Company shall not be required to issue and deliver Restricted
Shares or Option Shares as provided hereby, except as provided in this
subsection. The Company shall use its commercially reasonable efforts to
register under the Securities Act the Restricted Shares and sufficient Option
Shares to permit the sale and delivery to Grantee of all Restricted Shares and
all Option Shares that may be acquired by Grantee upon the exercise of the option;
provided, however, that the Company shall only be so required to register the
Restricted Shares and the Option Shares on Form S-8 under the
Securities Act (or any successor form). Notwithstanding the foregoing, the
Company shall, if Grantee has given the Company at least 90 days’ notice
requesting the Company to register the Restricted Shares and/or the Option
Shares that may then be acquired by Grantee upon exercise of the option in
accordance with the foregoing provisions of this subsection and the Company has
failed to do so, issue Restricted Shares or Option Shares to Grantee upon
exercise of the option without registration thereof under the Securities Act if
(i) Grantee represents, effective on the date of such issuance, in writing
in a form acceptable to the Company (A) that such Restricted Shares and/or
Option Shares are being acquired for investment 

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and not with a present view to distribution, (B) Grantee
understands that the Restricted Shares and Option Shares have not been
registered under the Securities Act and cannot be sold or otherwise Transferred
unless a registration statement under the Securities Act is in effect with
respect thereto or the Company has received an opinion of counsel, satisfactory
to it, to the effect that such registration is not required, (C) that
Grantee has, alone or together with any qualified advisor, such knowledge and
experience in financial and business matters as is necessary to evaluate the
risks of an investment in the Restricted Shares and/or the Option Shares, is
acquiring the Restricted Shares and/or Option Shares based on an independent
evaluation of the long-term prospects of an investment in the Restricted Shares
and/or Option Shares and has been furnished with such financial and other
information regarding the Company as the Grantee has requested for purposes of
making such evaluation, and (D) Grantee is able to bear the economic risk
of an investment in the Restricted Shares and/or Option Shares subject to such
restrictions on Transfer and (ii) if the Company determines that under the
circumstances issuing the Restricted Shares and/or Option Shares pursuant to
such exercise of the option is lawful; provided, however, that the Company may require, as a condition of
such issuance of Restricted Shares and/or Option Shares, that Grantee execute
and deliver to it such other certificates, agreements and other instruments as
in the judgment of the Company, upon advice of counsel, are necessary or
appropriate to assure that the Restricted Shares and/or Option Shares are
issued to Grantee in accordance with the Securities Act and any other
applicable securities law and may require that any certificates representing
Restricted Shares and/or Option Shares so issued bear any restrictive legend
appropriate for such purpose. In addition, even if a registration statement
under the Securities Act permitting the sale and delivery of Restricted Shares
and/or Option Shares upon exercise of the option is in effect at the date of
exercise, the Company may suspend the issuance of Restricted Shares and/or
Option Shares pursuant to the exercise of all options issued under the Plan for
such period of time as in the judgment of the Company, upon advice of counsel,
is necessary in order for the Company to come into compliance with all the
reporting requirements applicable to the Company pursuant to Section 13(a) of
the Exchange Act or to otherwise avoid in connection with the issuance of the
Restricted Shares and/or Option Shares under such registration statement a
violation of Sections 10, 11 or 12 of the Securities Act. If the Company
suspends the issuance of Restricted Shares and/or Option Shares pursuant to the
exercise of options issued under the Plan, the Company shall give prompt
written notice thereof to the Grantee (but the failure of the Company to give
such notice shall not prevent the Company from suspending the issuance of
Restricted Shares and/or Option Shares as permitted hereby) and, at such time
as such period of suspension ends, shall give prompt written notice thereof to
Grantee.

SECTION 5.           PAYMENT FOR OPTION SHARES.

(a)           CASH OR CHECK. All or part of the
Purchase Price may be paid in cash or by good check.

(b)           ALTERNATIVE METHODS OF PAYMENT. At
the sole discretion of the Board of Directors (or a committee of the Board),
all or any part of the Purchase Price and any applicable withholding
requirements may be paid by one or more of the following alternative methods:

(i)            Surrender
of Stock. Payment may be made by surrendering ownership of Shares that are
already owned by the Grantee free and clear of any restriction or limitation,
unless the Company specifically agrees to accept such Shares subject to a
restriction or limitation. In such cases, such Shares shall be surrendered to
the Company in good form for transfer and shall be valued at their 

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Fair
Market Value on the date of exercise of the option. Without the specific
approval of the Board of Directors, the Grantee shall not be permitted to
surrender ownership of Shares in payment of the Purchase Price (or withholding)
if such action would cause the Company to recognize compensation expense (or
additional compensation expense) with respect to the option for financial
reporting purposes that otherwise would not have occurred.

(ii)           Net
Exercise. Payment may be made by reducing the number of Option Shares otherwise
deliverable upon the exercise of the option by the number of Shares having a
Fair Market Value equal to the amount of the Purchase Price and the withholding
required to be made by the Company in connection with such exercise of the
option.

(iii)          Exercise/Sale.
Payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction (A) to a securities broker approved by the Company
to sell Option Shares (or other Shares owned by Grantee) and to deliver all or
part of the sales proceeds to the Company or (B) to pledge Option Shares
(and/or other Shares owned by Grantee) to a securities broker or lender
approved by the Company as security for a loan, and to deliver all or part of
the loan proceeds to the Company.

Should the Board of
Directors exercise its discretion to permit the Grantee to exercise the option
in whole or in part in accordance with subsection 5(b) above, it shall
have no obligation to permit such alternative exercise with respect to the
remainder of the option or with respect to any other option to purchase Shares
held by the Grantee.

SECTION 6.           TERM AND EXPIRATION. The exercise
period of this option shall expire upon the earlier to occur of (i) ten (10) years
after the Date of Grant or (ii) one year after the
termination of the Grantee’s Service with the Company.

SECTION 7.           ADJUSTMENT OF SHARES.

(a)           ADJUSTMENT GENERALLY. If while this option remains in
effect there shall be any change in the outstanding Shares of the class which
may be purchased upon exercise of this option, through merger, consolidation,
recapitalization, stock dividend or stock split or other like change in the
outstanding Shares, or any spin-off, split-off, dividend in kind or other
extraordinary dividend or other distribution in respect of such outstanding
Shares or other extraordinary change in the capital structure of the Company,
an adjustment shall be made to the terms of this option so that this option
shall thereafter be exercisable, otherwise on the same terms and conditions as
provided by this Agreement and the Plan, for such securities, cash and/or other
property as would have been received in respect of the Shares that would have
been issued upon exercise of this option had this option been exercised in full
immediately prior to such change or distribution (whether or not this option
was then exercisable) or, if and to the extent the Board of Directors
determines that so adjusting the consideration to be received upon exercise of
this option, in whole or in part, is not practicable, the Board of Directors
shall equitably modify the consideration to be received in respect of the
exercise of this option or the Exercise Price or other pertinent terms and
conditions of this option as provided by subsection 7(b) below. Such an
adjustment shall be made successively each time any such change in the
outstanding Shares of the class which may be purchased upon exercise of this
option or extraordinary distribution in respect 

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of such outstanding Shares or extraordinary change in
the capital structure of the Company shall occur.

(b)           MODIFICATION OF OPTION. In the event any change in the
outstanding Shares of the class which may be purchased upon exercise of this
option or extraordinary distribution in respect of such outstanding Shares or
extraordinary change in the capital structure of the Company described in
subsection 7(a) above occurs, or in the event of any change in applicable
laws or any change in circumstances which results in or would result in any substantial
dilution or enlargement of the rights granted to, or available for, Grantee as
a participant in the Plan or which otherwise warrants equitable adjustment to
the terms and conditions of this option because such event or circumstances
interferes with the intended operation of the Plan (including the intended tax
consequences of award of this option) occurs, then the Board of Directors may,
and shall where required by subsection 7(a) above, adjust the number and
kind of Shares and/or other securities and/or cash or other property that may
be issued or delivered upon the exercise of this option and/or adjust the
Exercise Price and/or other terms and conditions of this option as the Board of
Directors in its discretion determines to be equitable in order to prevent
dilution or enlargement of the Grantee’s rights in respect of this option as
such existed before such event. Appropriate adjustments may likewise be made by
the Board of Directors in other terms and conditions of this option to reflect
equitably such changes in circumstances.

(c)           MODIFICATIONS TO COMPLY WITH SECTION 409A. To the
extent applicable, this Agreement shall be interpreted in accordance with Section 409A
of Code and Department of Treasury regulations and other interpretive guidance
issued thereunder, including without limitation any such regulations or
guidance that may be issued after the Date of Grant. Without limiting the
authority of the Board of Directors under subsection 7(b) above to make
modifications to the option by reason of changes in law or circumstances that
would result in any substantial dilution or enlargement of the rights granted
to, or available for, Grantee as a participant in the Plan or which otherwise
warrants equitable adjustment to the terms and conditions of the option because
such event interferes with the operation of the Plan, and notwithstanding any
provision of the Agreement to the contrary, in the event that the Board of
Directors or an authorized officer of the Company determines that any amounts
will be immediately taxable to Grantee under Section 409A of the Code and
related Department of Treasury guidance (or subject the Grantee to a penalty
tax) in connection with the grant or vesting of the option or any other
provision of this Agreement or the Plan, the Company may (a) adopt such
amendments to this option, including amendments to this Agreement (having
prospective or retroactive effect), that the Board of Directors or authorized
officer determines to be necessary or appropriate to preserve the intended tax
treatment of this option and/or (b) take such other actions as the Board
of Directors or authorized officer determines to be necessary or appropriate to
comply with the requirements of Section 409A of the Code and related
Department of Treasury guidance, including such Department of Treasury guidance
and other interpretive materials as may be issued after the Date of Grant.

SECTION 8.           MISCELLANEOUS PROVISIONS.

(a)           RIGHTS AS A SHAREHOLDER. Neither the
Grantee nor the Grantee’s personal representative or permitted Transferee shall
have any rights as a shareholder with respect to any Option Shares until the
Grantee or his or her personal representative or permitted transferee becomes
entitled to receive such Option Shares by (i) filing a notice of exercise
and (ii) paying the Purchase Price as provided by this Agreement, and any
such right shall also be subject to subsection 4(d) above.

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(b)           NOTIFICATION. Any notification
required by the terms of this Agreement shall be given in writing and shall be
deemed effective upon personal delivery to the President, Treasurer, General
Counsel, Secretary or any Assistant Secretary of the Company or five Business
Days upon deposit with the United States Postal Service, by registered or
certified mail, with postage and fees prepaid addressed to the Company. A
notice shall be addressed to the Company at its principal executive office,
marked to the attention of the Corporate Secretary, and to the Grantee at the
address that he or she most recently provided to the Company.

(c)           ENTIRE AGREEMENT. This Agreement and
the Plan constitute the entire contract between the parties hereto with regard
to the subject matter hereof and supersede any other agreements,
representations or understandings (whether oral or written and whether express
or implied) which relate to the subject matter hereof.

(d)           WAIVER. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other or
subsequent breach or condition whether of like or different nature.

(e)           SUCCESSORS AND ASSIGNS. The
provisions of this Agreement shall inure to the benefit of, and be binding
upon, the Company and its successors and assigns and upon the Grantee, the
Grantee’s personal representatives, heirs, legatees and other permitted
transferees, whether or not any such person shall have become a party to this
Agreement and have agreed in writing to be joined herein and be bound by the
terms hereof.

(f)            CHOICE OF LAW. This Agreement shall
be governed by, and construed in accordance with, the laws of the State of
Delaware, as such laws are applied to contracts entered into and performed in
such State.

SECTION 9.           DEFINITIONS.

(a)           “AGREEMENT” shall mean this
Restricted Shares and Stock Option Agreement.

(b)           “BOARD OF DIRECTORS” shall mean the
Board of Directors of the Company, as constituted from time to time.

(c)           “CODE” shall mean the Internal
Revenue Code of 1986, as amended  and as
the same may be amended from time to time, and the regulations promulgated
thereunder.

(d)           “COMPANY” shall mean Magellan Health
Services, Inc, a Delaware corporation, and any successor thereto.

(e)           “DATE OF GRANT” shall mean May 16,
2006.

(f)            “DISABILITY” shall have the meaning
ascribed thereto in the Plan.

(g)           “EXCHANGE ACT” shall mean the
Securities Exchange Act of 1934, as amended and as the same may be amended from
time to tim,e and any successor statute, and the rules and regulations
promulgated thereunder.

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(h)           “NONQUALIFIED STOCK OPTION” shall
mean a stock option not described in Section 422(b) or 423(b) of
the Code.

(i)            “GRANTEE” shall mean the person
signing this Agreement as such.

(j)            “PARENT” shall mean a “parent
corporation” as defined in Section 424(e) of the Code.

(k)           “PLAN” shall mean the Magellan Health
Services, Inc. 2006 Director Equity Compensation Plan.

(l)            “PURCHASE PRICE” shall mean the
Exercise Price multiplied by the number of Option Shares with respect to which
this option is being exercised.

(m)          “SECURITIES ACT” shall mean the Securities Act of 1933, as
amended and as the same may be amended from time to time, and any successor
statute, and the rules and regulations promulgated thereunder.

(n)           “SERVICE” shall mean service as a
director of the Company.

(o)           “SHARE” shall mean a share of Ordinary Common Stock of the
Company, as the same may generally be exchanged for or changed into any other
share of capital stock or other security of the Company or any other company in
connection with a transaction referred to in subsection 7(a) above (and in
the event of any such exchange or change, any security resulting from any such
successive exchange or change).

(p)           “SUBSIDIARY” shall mean a “subsidiary
corporation” as defined in Section 424(f) of the Code.

(q)           “TRANSFER” shall mean, with respect
to the Restricted Shares or this option or the Option Share, any sale,
assignment, transfer, alienation, conveyance, gift, bequest by will or under
intestacy laws, pledge, lien encumbrance or other disposition, with or without
consideration, of all or part of such share or option, or of any beneficial
interest therein, now or hereafter owned by the Grantee, including by
execution, attachment, levy or similar process.

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In consideration of the
foregoing and intending to be legally bound hereby, the Company and the Grantee
named below have executed this Agreement as of the date first above written.

	
  

  	
   

  	
  MAGELLAN HEALTH SERVICES, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  
	
  GRANTEE:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Address for
  Notice:

  	
   

  	
   

  	
   

  	
   

  
	
  Social Security
  Number:

  	
   

  	
   

  	
   

  	
   

  

 

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EXHIBIT
A

SAMPLE NOTICE OF EXERCISE

Magellan Health Services, Inc.

[ADDRESS]

Attn:  Corporate Secretary

Re:
Exercise of Option, Option Reference No. DIR-       .

I hereby exercise my stock
option identified above granted under the Magellan Health Services, Inc.
2006 Director Equity Compensation Plan (the “Plan”) and notify you of my desire
to purchase the Option Shares of that have been offered pursuant to the Plan
and related Option Agreement as described below.

Except as otherwise agreed
with the Company as provided by the Option Agreement, I shall pay for the
Option Shares by delivery of a check payable to Magellan Health Services, Inc.
(the “Company”) in the amount described below in full payment for such Option
Shares plus all amounts required to be withheld by the Company under state,
federal or local law as a result of such exercise or shall provide such
documentation as is satisfactory to the Company demonstrating that I am exempt
from any withholding requirement.

This notice of exercise is
delivered this       day of                    ,
20   .

	
  No. Option Shares to be
  Acquired

  	
   

  	
  Exercise Price

  	
   

  	
  Total

  	
   

  
	
  Estimated
  Withholding

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Amount Paid

  	
   

  	
   

  	
   

  

 

	
  

  	
   

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature of Grantee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Grantee’s sName and Mailing Address:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Grantee’s Social Security Number:

  

 

 

 10RELEASE

This Release (this "Agreement") is dated May 22, 2006 by the undersigned (the
"Noteholder") and CT Holdings Enterprises, Inc., a Delaware corporation (the
"Company").

A.   In order to continue the Company's business, the Company has been
attempting to raise badly-needed additional capital for several years. The
Noteholder and the Company entered into a Loan and Security Agreement dated May
26, 2004 (the "Agreement"), pursuant to which CII loaned funds to CT and CT
issued a Secured Convertible Promissory Note dated May 26, 2004, which was
amended and restated as of December 19, 2005 (as amended, the "Note") in the
original principal amount of $271,148 (the "Company Debt"). The Company is in
default in its payment obligations under Company Debt, and the Company does not
have sufficient funds to repay the Company Debt. In the event the Noteholder
attempted to collect on the Company Debt, the Company might face bankruptcy and
the Company's equity holders and creditors would face substantial or total
dilution of their interests, and thus this Agreement is in the best interests of
the Company's stockholders and creditors.

B.   In order to continue the Company's business and induce the Noteholder to
refrain from collection efforts on the Company Debt owed to the Noteholder, the
Company has agreed with the Noteholder to deliver to the Noteholder the Parago
Inc. and River Logic Inc. securities owned by the Company and pledged to secure
the Company Debt (the "Collateral"), in exchange for the forgiveness of the
Company Debt owed to the Noteholder and the agreement by the Noteholder to
return to the Company the excess, if any, of the proceeds realized from a future
sale of the Collateral over the amounts owed at May 18, 2006 under the Note plus
any costs related to the sale of the shares or collection of the proceeds (the
"Excess Repayment").

C.   In order to facilitate the forgiveness of the Company Debt, the Noteholder
and the Company desire to execute this Agreement and agree to the terms and
conditions hereof.

NOW, THEREFORE, in consideration of the foregoing recitals, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Noteholder and Company hereby agrees as follows:

1.   Approval of Forgiveness of Company Debt and Delivery of Collateral. By the
signature set forth below, the Noteholder and Company hereby approve and agree
to the forgiveness of the Company Debt, the delivery of the Collateral to the
Noteholder, the agreement of the Noteholder to make the Excess Repayment, and
the transactions contemplated hereby.

2.   Noteholder Releases of Claims. The Noteholder, on behalf of itself and its
officers, directors, affiliates, officers, shareholders, employees, transferees,
successors, heirs, devisees and assigns, individually and derivatively (in the
name of the Company) hereby knowingly, voluntarily, irrevocably and
unconditionally, waives and releases the Company, its predecessors, successors,
parents, subsidiaries, divisions, affiliates, assigns, agents, directors,
officers, employees, shareholders, representatives, attorneys, and all persons
acting by, through, under or in concert with any of them (the "Company
Parties"), from or for any and all charges, complaints, claims, liabilities,
obligations, promises, sums of money, agreements, controversies, damages,
actions, suits, rights, demands, sanctions, costs (including attorneys' fees),
losses, debts, and expenses of any nature whatsoever in any way relating to or
arising out of the Company Debt, in law, in equity or otherwise, which the
Noteholder had or have by reason of any fact, matter, cause or thing whatsoever
existing on or prior to the date hereof, and the Noteholder agrees that the
Noteholder will not in the future participate in any lawsuit, action, charge or
claim related thereto. The parties agree that the Noteholder's option to
purchase 51% of the Company's fully diluted shares of common stock pursuant to
the terms of the Note shall remain outstanding for a period ending on the
earlier of May 18, 2011 or the 60th day after a reverse stock split is
implemented.

3.   Company Releases of Claims. The Company, on behalf of itself and the
Company Parties hereby knowingly, voluntarily, irrevocably and unconditionally,
waives and releases the Noteholder, its officers,

<PAGE>
directors, affiliates, shareholders, employees, transferees, successors, heirs,
devisees and assigns, attorneys, and all persons acting by, through, under or in
concert with any of them, from or for any and all charges, complaints, claims,
liabilities, obligations, promises, sums of money, agreements, controversies,
damages, actions, suits, rights, demands, sanctions, costs (including attorneys'
fees), losses, debts, and expenses of any nature whatsoever in any way relating
to or arising out of the Collateral and the transactions contemplated hereby, in
law, in equity or otherwise, which the Company Parties had or have by reason of
any fact, matter, cause or thing whatsoever existing on or prior to the date
hereof, and the Company agrees that the Company and the Company Parties will not
in the future participate in any lawsuit, action, charge or claim related
thereto.

IN WITNESS WHEREOF, the Noteholder and the Company have executed this Agreement
as of the date first set forth above.

NOTEHOLDER

CITN INVESTMENTS, INC.

By:     /s/ STEVEN B. SOLOMON
        Steven B. Solomon, President

CT HOLDINGS ENTERPRISES, INC.

/s/ MARK ROGERS
------------------------
Mark Rogers, Director

                                       2

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