Document:

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                                                                    EXHIBIT 10.1

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                               GUARANTY AGREEMENT

                            dated as of July 25, 2005

                                      from

                           THE GUARANTORS NAMED HEREIN

                               for the benefit of

                            THE HOLDERS OF THE NOTES

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                                TABLE OF CONTENTS
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<Caption>

SECTION                                               HEADING                                          PAGE
<S>               <C>                                                                                  <C>
SECTION 1.        GUARANTY...............................................................................1

SECTION 2.        REPRESENTATIONS AND WARRANTIES.........................................................3

SECTION 3.        GUARANTOR'S OBLIGATIONS UNCONDITIONAL..................................................5

SECTION 4.        AFFIRMATIVE COVENANTS.................................................................11

SECTION 5.        NEGATIVE COVENANTS....................................................................12

SECTION 6.        FULL RECOURSE OBLIGATIONS.............................................................13

SECTION 7.        WAIVER................................................................................13

SECTION 8.        WAIVER OF SUBROGATION, REINSTATEMENT..................................................14

SECTION 9.        SUBORDINATION.........................................................................15

SECTION 10.       EFFECT OF BANKRUPTCY PROCEEDINGS, ETC.................................................15

SECTION 11.       TERM OF GUARANTY......................................................................16

SECTION 12.       CONTRIBUTION..........................................................................16

SECTION 13.       PAYMENT OF ADDITIONAL AMOUNTS.........................................................17

SECTION 14.       LIMITATION OF LIABILITY...............................................................18

SECTION 15.       NEGATIVE PLEDGE.......................................................................19

SECTION 16.       SUPPLEMENTAL AGREEMENT................................................................19

SECTION 17.       DEFINITIONS AND TERMS GENERALLY.......................................................19

SECTION 18.       NOTICES...............................................................................20

SECTION 19.       AMENDMENTS, ETC.......................................................................21

SECTION 20.       SUBMISSION TO JURISDICTION, CONSENT TO JURISDICTION; SERVICE OF PROCESS...............21
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<S>               <C>                                                                                   <C>
SECTION 21.       WAIVER OF JURY TRIAL..................................................................22

SECTION 22.       SURVIVAL..............................................................................22

SECTION 23.       SEVERABILITY..........................................................................23

SECTION 24.       SUCCESSORS AND ASSIGNS................................................................23

SECTION 25.       TABLE OF CONTENTS; HEADINGS...........................................................23

SECTION 26.       COUNTERPARTS..........................................................................23

SECTION 27.       GOVERNING LAW.........................................................................23

SECTION 28.       COVENANT COMPLIANCE...................................................................23

SECTION 29.       APPOINTMENT OF PROCESS AGENT..........................................................24

SECTION 30.       CONVERSION OF JUDGMENT CURRENCY.......................................................24
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         GUARANTY AGREEMENT, dated as of July 25, 2005 (the "Guaranty"), from
         each of:

                  (i) Ninotsminda Oil Company Limited, a company incorporated
         and existing in the Republic of Cyprus, CanArgo (Nazvrevi) Limited, a
         company incorporated and existing in Island of Guernsey, CanArgo Norio
         Limited, a company incorporated and existing in the Republic of Cyprus,
         CanArgo Samgori Limited, a company incorporated and existing in Island
         of Guernsey, CanArgo Limited, a company incorporated and existing in
         Island of Guernsey, Tethys Petroleum Investments Limited, a company
         incorporated and existing in Island of Guernsey, and CanArgo Limited, a
         company incorporated and existing in Ontario, Canada; and

                  (ii) such New Material Subsidiaries as shall become parties
         hereto in accordance with Section 16 hereof (each such New Material
         Subsidiary and those listed in clause (i), a "Guarantor" and
         collectively the "Guarantors"),

for the ratable benefit of the holders from time to time of the Notes (as
defined below) (the "holders"). Capitalized terms used herein are defined in
Section 17 hereof or in the Note Purchase Agreement referred to below.

         WHEREAS, CanArgo Energy Corporation, a Delaware corporation (the
"Company") will authorize the issue and sale of US$25,000,000.00 aggregate
principal amount of its Senior Secured Notes due July 25, 2009, (the "Notes")
pursuant to the Note Purchase Agreement, dated as of the date hereof (as
amended, modified or supplemented from time to time, the "Note Purchase
Agreement") among the Company and the Purchasers named therein.

         WHEREAS, each of the Guarantors is a direct or indirect Subsidiary of
the Company.

         WHEREAS, the Company has agreed that all of its Material Subsidiaries
will guarantee the Company's obligations under the Notes as described in the
Notes and the Note Purchase Agreement.

         WHEREAS, each Guarantor acknowledges that it will derive substantial
benefits from the issuance of the Notes.

         NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confirmed and to induce the holders to purchase the Notes, each
of the Guarantors, intending to be legally bound, hereby agrees for the benefit
of the holders, as follows:

SECTION 1. GUARANTY.

         Each Guarantor with all other Guarantors, hereby absolutely,
unconditionally and irrevocably, jointly and severally guarantees, as a primary
obligor and not merely as a surety, to each holder of the Notes and its
successors and assigns, the full and punctual payment and performance when due,
whether at stated maturity, by acceleration or otherwise, of the principal

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at the applicable Redemption Price and interest on (including, without
limitation, interest, whether or not an allowable claim, accruing after the date
of filing of any petition in bankruptcy, or the commencement of any bankruptcy,
insolvency or similar proceeding relating to the Company) the Notes and all
other amounts under the Note Purchase Agreement and all other obligations,
agreements and covenants of the Company now or hereafter existing under the
Notes, the Note Purchase Agreement or any of the other Loan Documents, whether
for principal, at the applicable Redemption Price, interest (including interest
accruing or becoming owing both prior to and subsequent to the commencement of
any proceeding against or with respect to the Company under any chapter of the
Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Section 101 et seq., (the
"Bankruptcy Code")), indemnification payments, damages payable under the Loan
Documents, expenses (including reasonable attorneys' fees and expenses) or
otherwise, and all reasonable costs and expenses, if any, actually incurred by
any holder in connection with enforcing any rights under this Guaranty (all such
obligations being the "Guaranteed Obligations"), and agrees to pay any and all
reasonable expenses incurred by each holder in enforcing this Guaranty; provided
that, notwithstanding anything contained herein, in the Note or in the Note
Purchase Agreement to the contrary, the maximum liability of each Guarantor
hereunder and under the Notes and the Note Purchase Agreement shall in no event
exceed such Guarantor's Maximum Guaranteed Amount, and provided further, each
Guarantor shall be unconditionally required to pay all amounts demanded of it
hereunder prior to any determination of such Maximum Guaranteed Amount and the
recipient of such payment, if so required by a final non-appealable order of a
court of competent jurisdiction, shall then be liable for the refund of any
amounts received in excess of such Guarantor's Maximum Guaranteed Amount. If any
such rebate or refund is ever required, all other Guarantors (and the Company)
shall be fully liable for the repayment thereof to the maximum extent allowed by
applicable law. This Guaranty is an absolute, unconditional, present and
continuing guaranty of payment and not a guaranty of collectibility and is in no
way conditioned upon any attempt to collect from the Company, another Guarantor
or any other action, occurrence or circumstance whatsoever. Each Guarantor
agrees that the Guaranteed Obligations may at any time and from to time exceed
the Maximum Guaranteed Amount of such Guarantor without impairing this Guaranty
or affecting the rights and remedies of the holders of the Notes hereunder.

         Notwithstanding any stay, injunction or other prohibition preventing
such action against the Company, if for any reason whatsoever the Company shall
fail or be unable duly, punctually and fully to perform and (in the case of the
payment of Guaranteed Obligations) pay such amounts as and when the same shall
become due and (in the case of the payment of Guaranteed Obligations) payable or
to perform or comply with any other Guaranteed Obligation, whether or not such
failure or inability shall constitute an "Event of Default" under the Note
Purchase Agreement or the Notes, each Guarantor will forthwith (in the case of
the payment of Guaranteed Obligations) pay or cause to be paid such amounts to
the holders, in lawful money of the United States of America, at the place
specified in the Note Purchase Agreement, or perform or comply with such
Guaranteed Obligations or cause such Guaranteed Obligations to be performed or
complied with (in the case of the payment of Guaranteed Obligations), together
with interest (in the amounts and to the extent required under such Notes and
the Note Purchase Agreement) on any amount due and owing. Each Guarantor shall
be entitled to assume that any person stated in this Guaranty as being entitled
to make a demand and receive payment hereunder is so entitled

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and, in connection therewith, to rely on written communications received from
such persons as being genuine and having been duly authorized by all necessary
legal action.

         All payments of principal at the applicable the Redemption Price, and
interest on the Notes by a Guarantor hereunder shall be paid ratably (based on
the outstanding principal amount of the Notes) to each holder and all payments
of fees, expenses and other amounts shall be paid to the holder that incurred
such fees, expenses and other amounts, subject to any limitations set forth in
the Loan Documents.

SECTION 2. REPRESENTATIONS AND WARRANTIES.

         Each Guarantor hereby represents and warrants as follows:

                  (a) All representations and warranties contained in the Note
         Purchase Agreement that relate to such Guarantor that are not qualified
         by materiality are true and correct in all Material respects and all
         representations and warranties contained in the Note Purchase Agreement
         that relate to such Guarantor that are qualified by materiality are
         true and correct.

                  (b) Such Guarantor acknowledges that, any default in the due
         observance or performance by such Guarantor of any covenant, condition
         or agreement contained herein shall constitute an Event of Default. The
         Guarantors shall have an opportunity to cure a default under Section 4
         or Sections 5.1, or 5.5 for a period of 30 days after the earlier of
         (i) a Responsible Officer obtaining Knowledge of such default and (ii)
         the Guarantor receiving written notice of such default from any holder
         of a Note.

                  (c) There are no conditions precedent to the effectiveness of
         this Guaranty that have not been satisfied or expressly waived.

                  (d) Such Guarantor has, independently and without reliance
         upon any holder of the Notes and based on such documents and
         information as it has deemed appropriate, made its own credit analysis
         and decision to enter into this Guaranty. Such Guarantor has
         investigated fully the benefits and advantages which will be derived by
         it from execution of this Guaranty, and the Board of Directors (or
         other similar governing body) of such Guarantor has decided that a
         direct and/or an indirect benefit will accrue to such Guarantor by
         reason of the execution of this Guaranty.

                  (e) (i) This Guaranty is not given with actual intent to
         hinder, delay or defraud any Person to which such Guarantor is or will
         become, on or after the date hereof, indebted; (ii) such Guarantor has
         received at least a reasonably equivalent value in exchange for the
         giving of this Guaranty; (iii) such Guarantor is not engaged in a
         business or transaction, nor is about to engage in a business or
         transaction, for which any property remaining with such Guarantor
         constitutes an unreasonably small amount of capital; and (v) such
         Guarantor does not intend to incur debts that will be beyond such
         Guarantor's ability to pay as such debts mature.

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                  (f) Each Guarantor is a corporation or other legal entity duly
         incorporated, formed or organized and validly existing under the laws
         of its country, state or province of organization, and has the full
         corporate or other power, authority and legal right under the laws of
         its jurisdiction of organization or formation to conduct its business
         as presently conducted and to execute, deliver and perform its
         obligations under this Guaranty.

                  (g) The execution, delivery and performance of this Guaranty
         have been duly authorized by all necessary corporate or other action on
         the part of each Guarantor, and does not require any consent or
         approval of, or the giving of notice to, or the taking of any other
         action in respect of, any stockholder or trustee or holder of any
         indebtedness or obligations of such Guarantor. This Guaranty
         constitutes a legal, valid and binding obligation of each Guarantor,
         enforceable against such Guarantor in accordance with its terms, except
         that such enforceability is subject to any limitations arising from
         bankruptcy, insolvency, liquidation, moratorium, reorganization and
         other similar laws of general application relating to or affecting the
         rights of creditors or pledgees and to general principles of equity
         (regardless of whether such enforceability is considered in a
         proceeding in equity or at law).

                  (h) The execution, delivery and performance of this Guaranty
         does not and will not conflict with or result in any violation of or
         default under any provision of the Certificate or Articles (as the case
         may be) of Incorporation, by-laws, Memorandum and Articles of
         Association or other constitutional documents, of any Guarantor, or any
         indenture, mortgage, deed of trust, instrument, law, rule or regulation
         binding on any Guarantor or to which a Guarantor is a party, except
         such as could not be reasonably expected to result in a Material
         Adverse Effect.

                  (i) The execution, delivery and performance of this Guaranty
         does not and will not result in violation of any judgment or order
         applicable to any Guarantor or result in the creation or imposition of
         any Lien not permitted by Section 5.3 hereof on any of the properties
         or revenues of any Guarantor pursuant to any requirement of applicable
         law or any indenture, mortgage, deed of trust or other instrument to
         which such Guarantor is a party, except such as could not be reasonably
         expected to result in a Material Adverse Effect.

                  (j) The execution, delivery and performance of this Guaranty
         does not and will not conflict with and does not and, to the Knowledge
         of the Guarantor, will not require any consent, approval or
         authorization of, or registration or filing with, any governmental
         authority or agency of the United States, Canada, Island of Guernsey or
         the Republic of Cyprus or any state, province or territory thereof,
         except such as are contemplated by the Note Purchase Agreement or the
         failure so to file or obtain such consents, approvals or authorizations
         could not reasonably be expected to result in a Material Adverse
         Effect.

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                  (k) Except as may be limited by applicable law or proceedings
         in bankruptcy each Guarantor's obligations under this Guaranty are at
         least pari passu in right of payment with all other unsecured claims
         against the general creditors of such Guarantor.

                  (l) Each Guarantor has validly and irrevocably submitted to
         the jurisdiction of the Supreme Court of the State of New York, New
         York County, and the United States District Court for the Southern
         District of New York.

                  (m) The choice of the laws of the State of New York to govern
         this Guaranty is valid and binding.

                  (n) The execution, delivery and performance by each Guarantor
         of this Guaranty will not render such Guarantor insolvent, nor is it
         being made in contemplation of such Guarantor's insolvency, and the
         Guarantor does not have an unreasonably small capital.

                  (o) There are no pending or, to the Knowledge of any
         Guarantor, threatened actions or proceedings against or affecting such
         Guarantor or any of its properties by or before any court or
         administrative agency or arbiter that would materially adversely affect
         the ability of such Guarantor to perform its obligations hereunder or
         call into question the validity or enforceability of this Guaranty in
         any material respect.

                  (p) No Guarantor is in breach of or default under or with
         respect to any instrument, document or agreement binding upon such
         Guarantor which breach or default is reasonably likely to have a
         Material Adverse Effect or result in the creation of a Lien on any
         property of such Guarantor other than Liens permitted under Section
         5.3. Each Guarantor is in compliance with all applicable requirements
         of law except such non-compliance as would not have a Material Adverse
         Effect.

SECTION 3. GUARANTOR'S OBLIGATIONS UNCONDITIONAL.

         (a) This Guaranty shall constitute a guarantee of payment, performance
and compliance and not of collection, and each Guarantor specifically agrees
that it shall not be necessary, and that such Guarantor shall not be entitled to
require, before or as a condition of enforcing the liability of such Guarantor
under this Guaranty or requiring payment or performance of the Guaranteed
Obligations by any Guarantor hereunder, or at any time thereafter, that any
holder: (a) file suit or proceed to obtain or assert a claim for personal
judgment against the Company or any other Person that may be liable for or with
respect to any Guaranteed Obligation; (b) make any other effort to obtain
payment or performance of any Guaranteed Obligation from the Company or any
other Person that may be liable for or with respect to such Guaranteed
Obligation, except for the making of the demands, when appropriate, described in
Section 1; (c) foreclose against, or seek to realize upon security now or
hereafter existing for such Guaranteed Obligations; (d) exercise or assert any
other right or remedy to which such holder is or may be entitled in connection
with any Guaranteed Obligation or any security or other guaranty therefor; or
(e) assert or file any claim against the assets of the Company or any other
Person liable for any Guaranteed Obligation. Each Guarantor agrees that

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this Guaranty shall be continuing, and that the Guaranteed Obligations will be
paid and performed in accordance with their terms and the terms of this
Guaranty, and are the primary, absolute and unconditional obligations of such
Guarantor, irrespective of the value, genuineness, validity, legality,
regularity or enforceability or lack thereof of any part of the Guaranteed
Obligations or any agreement or instrument relating to the Guaranteed
Obligations or this Guaranty, or the existence of any indemnities with respect
to the existence of any other guarantee of or security for any of the Guaranteed
Obligations, or any substitution, release or exchange of any other guarantee of
or security for any of the Guaranteed Obligations, and, to the fullest extent
permitted by applicable law, irrespective of any other circumstance whatsoever
that might otherwise constitute a legal or equitable discharge or defense of a
surety or guarantor (other than the defense of payment), it being the intent of
this Section 3 that the obligations of each Guarantor hereunder shall be
irrevocable, primary, absolute and unconditional under any and all
circumstances.

         (b) Each Guarantor hereby expressly waives notice of acceptance of and
reliance upon this Guaranty, diligence, presentment, demand of payment or
performance, protest and all other notices whatsoever, any requirement that any
holder of the Notes exhaust any right, power or remedy or proceed against the
Company or against any other Person under any other guarantee of, or security
for, or any other agreement, regarding any of the Guaranteed Obligations. Each
Guarantor further agrees that the occurrence of any event or other circumstance
that might otherwise vary the risk of the Company or such Guarantor or
constitute a defense (legal or equitable) available to, or a discharge of, or a
counterclaim or right of set-off by, the Company or such Guarantor (other than
the full and indefeasible due payment and performance of the Guaranteed
Obligations), shall not affect the liability of the Guarantor hereunder.

         (c) The obligations of each Guarantor under this Guaranty are not
subject to any counterclaim, set-off, deduction, diminution, abatement,
recoupment, suspension, deferment or defense based upon any claim such Guarantor
or any other Person may have against the Company, any holder or any other
Person, and shall remain in full force and effect without regard to, and shall
not be released, discharged or in any way affected by, any circumstances or
condition whatsoever (whether or not such Guarantor or the Company shall have
any Knowledge or notice thereof), including:

                  (i) any renewal, extension, modification, increase, decrease,
         alteration or rearrangement of all or any part of the Guaranteed
         Obligations or any instrument executed in connection therewith, or any
         contract or understanding with the Company, the holder, or any of them,
         or any other Person, pertaining to the Guaranteed Obligations;

                  (ii) any adjustment, indulgence, forbearance or compromise
         that might be granted or given by any holder to the Company or any
         other Person liable on the Guaranteed Obligations, or the failure of
         any holder to assert any claim or demand or to exercise any right or
         remedy against the Company or any other Person under the provisions of
         the Note Purchase Agreement, the Notes, the other Loan Documents or
         otherwise; or any rescission, waiver, amendment or modification of, or
         any release from

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         any of the terms or provisions of, the Note Purchase Agreement, the
         Notes, any other Loan Documents, any guarantee or any other agreement;

                  (iii) the insolvency, bankruptcy arrangement, adjustment,
         composition, liquidation, disability, dissolution or lack of power of
         the Company or any other Person at any time liable for the payment of
         all or part of the Guaranteed Obligations; or any dissolution of the
         Company or any other such Person, or any change, restructuring or
         termination of the structure or existence of the Company or any other
         such Person, or any sale, lease or transfer of any or all of the assets
         of the Company or any other such Person, or any change in the
         shareholders, partners, or members of the Company or any other such
         Person; or any default, failure or delay, willful or otherwise, in the
         performance of the Guaranteed Obligations;

                  (iv) the invalidity, illegality or unenforceability of all or
         any part of the Guaranteed Obligations, or any document or agreement
         executed in connection with the Guaranteed Obligations, for any reason
         whatsoever, including the fact that the Guaranteed Obligations, or any
         part thereof, exceed the amount permitted by law, the act of creating
         the Guaranteed Obligations or any part is ultra vires, the officers or
         representatives executing the documents or otherwise creating the
         Guaranteed Obligations acted in excess of their authority, the
         Guaranteed Obligations violate applicable usury laws, the Company or
         any other Person has valid defenses, claims or offsets (whether at law,
         in equity or by agreement) which render the Guaranteed Obligations
         wholly or partially uncollectible from the Company or any other Person,
         the creation, performance or repayment of the Guaranteed Obligations
         (or the execution, delivery and performance of any document or
         instrument representing part of the Guaranteed Obligations or executed
         in connection with the Guaranteed Obligations or given to secure the
         repayment of the Guaranteed Obligations) is illegal, uncollectible,
         legally impossible or unenforceable, or the documents or instruments
         pertaining to the Guaranteed Obligations have been forged or otherwise
         are irregular or not genuine or authentic;

                  (v) any full or partial release of the liability of the
         Company on the Guaranteed Obligations or any part thereof, of any
         co-guarantors, or of any other Person now or hereafter liable, whether
         directly or indirectly, jointly, severally, or jointly and severally,
         to pay, perform, guarantee or assure the payment of the Guaranteed
         Obligations or any part thereof, it being recognized, acknowledged and
         agreed by each Guarantor that such Guarantor may be required to pay the
         Guaranteed Obligations in full without assistance or support of any
         other Person, and such Guarantor has not been induced to enter into
         this Guaranty on the basis of a contemplation, belief, understanding or
         agreement that any parties other than the Company and the other
         Guarantors will be liable to perform the Guaranteed Obligations, or
         that the holder will look to other parties to perform the Guaranteed
         Obligations;

                  (vi) the taking or accepting of any other security, collateral
         or guaranty, or other assurance of payment, for all or any part of the
         Guaranteed Obligations;

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                 (vii) any release, surrender, exchange, subordination,
         deterioration, waste, loss or impairment (including negligent,
         unreasonable or unjustifiable impairment) of any collateral, property
         or security, at any time existing in connection with, or assuring or
         securing payment of, all or any part of the Guaranteed Obligations;

                (viii) the failure of any holder or any other Person to exercise
         diligence or reasonable care in the preservation, protection,
         enforcement, sale or other handling or treatment of all or any part of
         such collateral, property or security;

                  (ix) the fact that any collateral, security, security interest
         or lien contemplated or intended to be given, created or granted as
         security for the repayment of the Guaranteed Obligations shall not be
         properly perfected or created, or shall prove to be unenforceable or
         subordinate to any other security interest or lien, it being recognized
         and agreed by each Guarantor that such Guarantor is not entering into
         this Guaranty in reliance on, or in contemplation of the benefits of,
         the validity, enforceability, collectibility or value of any of the
         collateral;

                  (x) any payment by the Company to any holder being held to
         constitute a preference under any Fraudulent Conveyance Law (as
         hereinafter defined), or for any reason the holder being required to
         refund such payment or pay such amount to the Company or someone else;

                  (xi) any other action taken or omitted to be taken with
         respect to the Guaranteed Obligations, or the security and collateral
         therefor, whether or not such action or omission prejudices such
         Guarantor or increases the likelihood that such Guarantor will be
         required to pay the Guaranteed Obligations pursuant to the terms
         hereof, it being the unambiguous and unequivocal intention of such
         Guarantor that it shall be obligated to pay the Guaranteed Obligations
         when due, notwithstanding any occurrence, circumstance, event, action
         or omission whatsoever, whether or not contemplated, and whether or not
         otherwise or particularly described herein, except for the full and
         final payment and satisfaction of the Guaranteed Obligations in cash;

                  (xii) the fact that all or any of the Guaranteed Obligations
         cease to exist by operation of law, including by way of a discharge,
         limitation or tolling thereof under applicable bankruptcy laws;

                  (xiii) any other circumstance (including any statute of
         limitations) that might in any manner or to any extent otherwise
         constitute a defense (other than the defense of payment) available to,
         vary the risk of, or operate as a discharge of, the Company or any
         Person as a matter of law or equity;

                  (xiv) any change in the ownership of any shares of capital
         stock of the Company, or any change in the relationship between the
         Company and such Guarantor or any termination of any such relationship;

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                  (xv) any default, failure or delay, willful or otherwise, in
         the performance by the Company, any Guarantor or any other Person of
         any obligations of any kind or character whatsoever under the Note
         Purchase Agreement, the Notes, the other Loan Documents or any other
         agreement;

                  (xvi) any merger or consolidation of the Company or any
         Guarantor or any other Person into or with any other Person or any
         sale, lease, transfer or other disposition of any of the assets of the
         Company, any Guarantor or any other Person to any other Person, or any
         change in the ownership of any shares or Equity Interests of the
         Company, any Guarantor or any other Person;

                  (xvii) in respect of the Company, any Guarantor or any other
         Person, any change of circumstances, whether or not foreseen or
         foreseeable, whether or not imputable to the Company, any Guarantor or
         any other Person, or other impossibility of performance through fire,
         explosion, accident, labor disturbance, floods, droughts, embargoes,
         wars (whether or not declared), civil commotion, acts of God or the
         public enemy, delays or failure of suppliers or carriers, inability to
         obtain materials, action of any national, federal, provincial or state
         regulatory body or agency, change of law or any other causes affecting
         performance, or any other force majeure, whether or not beyond the
         control of the Company, any Guarantor or any other Person and whether
         or not of the kind hereinbefore specified; or

                  (xvii) any other occurrence, circumstance, or event
         whatsoever, whether similar or dissimilar to the foregoing, whether
         foreseen or unforeseen, other and any circumstance which might
         otherwise constitute a legal or equitable defense or discharge of the
         liabilities of a guarantor or surety or which might otherwise limit
         recourse against such Guarantor (other than the defense of payment);

provided that the specific enumeration of the above-mentioned acts, failures or
omissions shall not be deemed to exclude any other acts, failures or omissions,
though not specifically mentioned above, it being the purpose and intent of this
Guaranty and the parties hereto that the obligations of each Guarantor shall be
absolute and unconditional and shall not be discharged, impaired or varied
except by the payment and performance of all obligations of the Company under
the Note Purchase Agreement, the Notes and the other Loan Documents in
accordance with their respective terms as each may be amended or modified from
time to time. Without limiting the foregoing, it is understood that repeated and
successive demands may be made and recoveries may be had hereunder as and when,
from time to time, the Company or any Guarantor shall default under or in
respect of the terms of the Notes, the Note Purchase Agreement and the other
Loan Documents and that notwithstanding recovery hereunder for or in respect of
any given default or defaults by the Company or any Guarantor thereunder, this
Guaranty shall remain in full force and effect and shall apply to each and every
subsequent default so long as any Guaranteed Obligations remain outstanding. All
waivers herein contained shall be without prejudice to the holder at its option
to proceed against the Company, any Guarantor or other Person, whether by
separate action or by joinder.

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         (d) Each Guarantor hereby consents and agrees that any holder from time
to time, with or without any further notice to or assent from any other
Guarantor may, without in any manner affecting the liability of any Guarantor
under this Guaranty, and upon such terms and conditions as any such holder may
deem advisable consistent with the provisions of the Loan Documents:

                  (i) extend in whole or in part (by renewal or otherwise),
         modify, change, compromise, release or extend the duration of the time
         for the performance or payment of any debt, liability or obligation of
         the Company or any Guarantor or of any other Person secondarily or
         otherwise liable for any debt, liability or obligations of the Company
         on the Note Purchase Agreement, the Notes or the other Loan Documents
         or waive any Default or Event of Default with respect thereto, or
         waive, modify, amend or change any provision of any other agreement or
         waive this Guaranty; or

                  (ii) sell, release, surrender, modify, impair, exchange or
         substitute any and all property, of any nature and from whomsoever
         received, held by, or for the benefit of, any such holder as direct or
         indirect security for the payment or performance of any debt, liability
         or obligation of the Company, any Guarantor or of any other Person
         secondarily or otherwise liable for any debt, liability or obligation
         of the Company on the Note Purchase Agreement, the Notes or the other
         Loan Documents.

Each Guarantor hereby ratifies and confirms any such extension, renewal, change,
sale, release, waiver, surrender, exchange, modification, amendment, impairment,
substitution and that the same shall be binding upon it, and hereby waives, to
the fullest extent permitted by law, any and all defenses, counterclaims or
offsets which it might or could have by reason thereof, it being understood that
such Guarantor shall at all times be bound by this Guaranty and remain liable
hereunder.

         (e) All rights of any holder may be transferred or assigned at any time
in accordance with the Note Purchase Agreement and the Notes and shall be
considered to be transferred or assigned at any time or from time to time upon
the transfer of such Notes in accordance with the Note Purchase Agreement
without the consent of or notice to any Guarantor under this Guaranty.

         (f) No holder shall be under any obligation: (i) to marshal any assets
in favor of the Guarantors or in payment of any or all of the liabilities of the
Company or any Guarantor under or in respect of the Notes or the obligations of
the Company and the Guarantors under the Note Purchase Agreement or other Loan
Documents or (ii) to pursue any other remedy that the Guarantors may or may not
be able to pursue themselves and that may lighten the Guarantors' burden, any
right to which each Guarantor hereby expressly waives.

         (g) Each Guarantor in existence under the laws of the Island of
Guernsey, hereby waives any present or future right it may now or at any time in
the future have in respect of its obligations or liabilities under this
Agreement pursuant to either or both of the droit de discussion and the droit de
division.

                                       10
<PAGE>

SECTION 4. AFFIRMATIVE COVENANTS.

         Each Guarantor covenants on its own behalf and on behalf of the other
Guarantors and the Company that so long as any of the Notes are outstanding:

         Section 4.1. Compliance with Law. Each Guarantor will comply with all
applicable laws, ordinances or governmental rules or regulations to which it is
subject, including, without limitation, applicable Environmental Laws, in all
respects, and will obtain and maintain in effect all licenses, certificates,
permits, franchises and other governmental authorizations necessary to the
ownership of their respective properties or to the conduct of their respective
businesses, in each case except to the extent that non-compliance with such
laws, ordinances or governmental rules or regulations or failures to obtain or
maintain in effect such licenses, certificates, permits, franchises and other
governmental authorizations could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

         Section 4.2. Insurance. Each Guarantor will maintain with insurers
which on the date the policy commences are financially sound and reputable,
insurance with respect to their respective Material properties and businesses
against such casualties and contingencies, of such types, on such terms and in
such amounts (including deductibles, co-insurance and self-insurance, if
adequate reserves are maintained with respect thereto) as is customary in the
case of entities of established reputations engaged in the same or a similar
business and similarly situated.

         Section 4.3. Maintenance of Properties. Each Guarantor will maintain
and keep, or cause to be maintained and kept, its respective Properties
constituting Material tangible personal property in good repair, working order
and condition (other than ordinary wear and tear), so that the business carried
on in connection therewith may be conducted in the ordinary course at all times,
provided that this Section 4.3 shall not prevent such Guarantor from
discontinuing the operation and the maintenance of any of its Properties if such
discontinuance is desirable in the conduct of its business and such Guarantor
has concluded that such discontinuance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

         Section 4.4. Payment of Taxes and Claims. Each Guarantor will file all
tax returns required to be filed by such Guarantor in any jurisdiction and to
pay and discharge all taxes shown to be properly due and payable on such returns
and all other taxes, assessments, governmental charges, or levies imposed on
such Guarantor or any of its properties, assets, income or franchises, to the
extent such taxes and assessments have become properly due and payable and
before they have become delinquent, and all claims for which sums have become
due and payable that have become a Lien on properties or assets of such
Guarantor, provided that no Guarantor need pay any such tax or assessment or
claims if (i) the amount, applicability or validity thereof is contested by such
Guarantor on a timely basis in good faith and in appropriate proceedings, and
the Guarantor has established adequate reserves therefor in accordance with
appropriate GAAP on the books of such Guarantor or (ii) the nonpayment of all
such taxes and assessments and claims in the aggregate could not reasonably be
expected to have a Material Adverse Effect.

                                       11
<PAGE>

         Section 4.5. Corporate Existence, etc. Each Guarantor will at all times
preserve and keep in full force and effect its corporate or other company
existence. Subject to Sections 5.2 and 5.8, each Guarantor will at all times
preserve and keep in full force and effect its corporate or other company
existence (unless merged into the Company or another Guarantor) and all of its
rights and franchises unless, in the good faith judgment of such Guarantor, the
termination of or failure to preserve and keep in full force and effect such
corporate or other company existence, right or franchise could not, individually
or in the aggregate, have a Material Adverse Effect; provided that the foregoing
shall not prohibit any merger, consolidation, liquidation or dissolution
permitted under Section 5.2.

         Section 4.6. Additional Subsidiaries. All Material Subsidiaries of any
Guarantor formed or acquired after the date of the Closing shall execute a
Supplemental Agreement substantially in the form of Exhibit A attached hereto.

         Section 4.7. Additional Security. Upon the reasonable request of the
Required Holders, each Guarantor shall promptly provide any additional security
as requested by the Required Holders, including, without limitation, any
additional pledges, charges, collateral assignments, security agreements and/or
any other encumbrance or lien in favor of the holders of the Notes. In addition,
upon the reasonable request of the Required Holders, each Guarantor shall also
provide any requested legal opinions relating to such security and certificates
of the Guarantor certifying true and correct copies of any authorizing
resolutions relating to such security. Each Guarantor acknowledges and agrees
that it is the intent of the Parties to cause the Notes to be secured by all
Material assets of the CanArgo Group Members.

SECTION 5. NEGATIVE COVENANTS.

         Each Guarantor covenants, on its own behalf and on behalf of all the
other Guarantors and the Company that so long as any of the Notes are
outstanding and unless approved in writing by the Required Holders:

         Section 5.1. Transactions with Affiliates. Except for transactions
disclosed in the Note Purchase Agreement, no Guarantor will enter into directly
or indirectly any transaction or group of related transactions (including
without limitation the purchase, lease, sale or exchange of Material properties
of any kind or the rendering of any service) with any Affiliate (other than the
Company or another Guarantor), except in the ordinary course and pursuant to the
reasonable requirements of the Company's or such Guarantor's business and upon
fair and reasonable terms no less favorable to such Guarantor than would be
obtainable in a comparable arm's-length transaction with a Person not an
Affiliate.

         Section 5.2. Merger, Consolidation, etc. Each Guarantor will not
consolidate with or merge with any other corporation or company or convey,
transfer or lease substantially all of its assets in a single transaction or
series of transactions to any Person (except that such Guarantor may (x)
consolidate with or merge with, or convey, transfer or lease substantially all
of its assets in a single transaction or series of transactions to, another
Guarantor or the Company and (y) convey, transfer or lease all of its assets in
compliance with the provisions of Section 5.8, provided immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing).

                                       12
<PAGE>

         Section 5.3. Liens. Each Guarantor will not directly or indirectly
create, incur, assume or permit to exist (upon the happening of a contingency or
otherwise) any Lien on or with respect to any property or asset (including,
without limitation, any document or instrument in respect of goods or accounts
receivable) of such Guarantor, whether now owned or held or hereafter acquired,
or any income or profits therefrom, or assign or otherwise convey any right to
receive income or profits, except Liens permitted pursuant to the terms of
Section 11.3 of the Note Purchase Agreement.

         Section 5.4. Indebtedness. No Guarantor will, at any time without the
consent of the Required Holders, issue any secured or unsecured Indebtedness,
other than such Indebtedness permitted to be issued pursuant to Section 11.9 of
the Note Purchase Agreement.

         Section 5.5. Line of Business. No Guarantor will engage to any
substantial extent in any business other than the businesses in which such
Guarantor is engaged on the date of this Guaranty and businesses reasonably
related thereto or in furtherance thereof.

         Section 5.6. Restricted Payments. No Guarantor will declare or make,
any Restricted Payments (as defined hereunder), except (a) such Guarantor may
declare and pay (x) dividends with respect to its equity interests payable
solely in additional shares of its equity interests or Indebtedness and (y)
interest and principal on Indebtedness owed to the Company or another Guarantor,
in either case which does not contravene the provisions of this Agreement and
(b) such Guarantor may make Distributions pursuant to and in accordance with
stock incentive plans or other benefit plans for management or employees of such
Guarantor.

         Section 5.7. Sale-and-Leasebacks. No Guarantor will enter into any
Sale-and-Leaseback Transaction.

         Section 5.8. Sale of Assets, etc.

                      (1) Sale of Assets, etc. No Guarantor will make any
              Transfer other than Transfers permitted by Section 11.8(1) of the
              Note Purchase Agreement.

                      (2) Disposal of Ownership of a Guarantor. No Guarantor
              will sell or otherwise dispose of any shares of stock in any other
              Guarantor, nor will any Guarantor issue, sell or otherwise dispose
              of any shares of its own stock except as permitted pursuant to
              Section 11.8(2) of the Note Purchase Agreement.

SECTION 6. FULL RECOURSE OBLIGATIONS.

         Subject to the limitations of Section 14, the obligations of each
Guarantor set forth herein constitute the full recourse obligations of such
Guarantor enforceable against it to the full extent of all its assets and
properties.

SECTION 7. WAIVER.

         Each Guarantor unconditionally waives, to the extent permitted by
applicable law:

                                       13
<PAGE>

                  (a) notice of any of the matters referred to in Sections 4 or
         5 (other than notices specifically required by the terms of this
         Agreement or the Note Purchase Agreement);

                  (b) notice to such Guarantor of the incurrence of any of the
         Guaranteed Obligations, notice to such Guarantor of any breach or
         default by the Company or such Guarantor with respect to any of the
         Guaranteed Obligations or any other notice that may be required, by
         statute, rule of law or otherwise, to preserve any rights of the holder
         against such Guarantor;

                  (c) presentment to the Company or such Guarantor or of payment
         from the Company or such Guarantor with respect to any Note or other
         Guaranteed Obligation or protest for nonpayment or dishonor;

                  (d) any right to the enforcement, assertion, exercise or
         exhaustion by the holder of any right, power, privilege or remedy
         conferred in any Note, the Note Purchase Agreement, any other Loan
         Document or otherwise;

                  (e) any requirement of diligence on the part of any holder;

                  (f) any requirement to mitigate the damages resulting from any
         default under the Notes, the Note Purchase Agreement or any other Loan
         Document;

                  (g) any notice of any sale, transfer or other disposition of
         any right, title to or interest in any Note or other Guaranteed
         Obligation by the holder, assignee or participant thereof, or in the
         Note Purchase Agreement;

                  (h) any release of any Guarantor from its obligations
         hereunder resulting from any loss by it of its rights of subrogation
         hereunder; and

                  (i) any other circumstance whatsoever which might otherwise
         constitute a legal or equitable discharge, release or defense of a
         guarantor or surety or which might otherwise limit recourse against
         such Guarantor.

SECTION 8. WAIVER OF SUBROGATION; REINSTATEMENT.

         Notwithstanding any payment or payments made by any Guarantor
hereunder, or any application by the holder of any security or of any credits or
claims, no Guarantor will assert or exercise any rights of the holder or of such
Guarantor against the Company or another Guarantor to recover the amount of any
payment made by such Guarantor to the holders of any Notes by way of any claim,
remedy or subrogation, reimbursement, exoneration, contribution, indemnity,
participation or otherwise arising by contract, by statute, under common law or
otherwise, and such Guarantor shall not have any right of recourse to or any
claim against assets or property of the Company or any other Guarantor, in each
case unless and until the Guaranteed Obligations have been paid in full. Until
such time (but not thereafter), each Guarantor hereby expressly waives any right
to exercise any claim, right or remedy which such Guarantor may now have or

                                       14
<PAGE>

hereafter acquire against the Company or any other Guarantor that arises under
the Notes, the Note Purchase Agreement, the other Loan Documents or from the
performance by any Guarantor of the guaranty hereunder including any claim,
remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification or participation in any claim, right or remedy of the holder
against the Company or any Guarantor, or any security that the holder now has or
hereafter acquires, whether or not such claim, right or remedy arises in equity,
under contract, by statute, under common law or otherwise. If any amount shall
be paid to a Guarantor by the Company or another Guarantor after payment in full
of the Guaranteed Obligations and all or any portion of the Guaranteed
Obligations shall thereafter be reinstated in whole or in part and the holder is
required to repay any sums received by any of them in payment of the Guaranteed
Obligations other than by reason of such holder's fraud, gross negligence or
willful misconduct (as determined by a final non-appealable order of a court of
competent jurisdiction) this Guaranty shall be automatically reinstated and such
amount shall be held in trust for the benefit of the holders and shall forthwith
be paid to the holder to be credited and applied to the Guaranteed Obligations,
whether matured or unmatured. Until after expiration of all applicable statutes
of limitations the provisions of this Section shall survive the termination of
this Guaranty, and any satisfaction and discharge of the Company or any other
Guarantor by virtue of any payment, court order or any Federal or state law.

SECTION 9. SUBORDINATION.

         If any Guarantor becomes the holder of any Indebtedness payable by the
Company or another Guarantor, each Guarantor hereby subordinates all
Indebtedness owing to it from the Company or such other Guarantor to all
Indebtedness of the Company to the holders of the Notes until payment or
performance in full of the Guaranteed Obligations, and agrees that during the
continuance of any Event of Default it shall not accept any payment on the same
until payment in full of the Guaranteed Obligations and shall in no circumstance
whatsoever attempt to set-off or reduce any obligations hereunder because of
such Indebtedness. If any amount shall nevertheless be paid in violation of the
foregoing to a Guarantor by the Company or another Guarantor prior to payment in
full of the Guaranteed Obligations, such amount shall be held in trust for the
benefit of the holder and shall forthwith be paid to the holder to be credited
and applied to the Guaranteed Obligations, whether matured or unmatured.

SECTION 10. EFFECT OF BANKRUPTCY PROCEEDINGS, ETC.

         (a) If after receipt of any payment of, or proceeds of any security
applied (or intended to be applied) to the payment of all or any part of, the
Guaranteed Obligations, any holder is for any reason compelled to surrender or
voluntarily surrenders (under circumstances in which it believes it could
reasonably be expected to be so compelled if it did not voluntarily surrender),
such payment or proceeds to any Person (i) because such payment or application
of proceeds is or may be avoided, invalidated, declared fraudulent, set aside,
determined to be void or voidable as a preference, fraudulent conveyance,
fraudulent transfer, impermissible set-off or a diversion of trust funds or (ii)
for any other similar reason, including, without limitation, (x) any judgment,
decree or order of any court or administrative body having jurisdiction over any
holder or any of their respective properties or (y) any settlement or compromise
of any such claim effected by any holder with any such claimant (including the
Company) other than as a result of, in connection

                                       15
<PAGE>

with or attributable to any fraud, gross negligence, willful misconduct (as
determined by a final non-appealable order of a court of competent
jurisdiction), then the Guaranteed Obligations or part thereof intended to be
satisfied shall be reinstated and continue, and this Guaranty shall continue in
full force as if such payment or proceeds had not been received, notwithstanding
any revocation thereof or the cancellation of any Note or any other instrument
evidencing any Guaranteed Obligations or otherwise, and the Guarantors, jointly
and severally, shall be liable to pay the holder, and hereby do indemnify the
holder and hold it harmless for, the amount of such payment or proceeds so
surrendered and all expenses (including reasonable attorneys' fees, court costs
and expenses attributable thereto) actually incurred by any holder in defense of
any claim made against any of them that any payment or proceeds received by any
holder in respect of all or part of the Guaranteed Obligations must be
surrendered. Until after the expiration of all applicable statutes of
limitations, the provisions of this paragraph shall survive the termination of
this Guaranty, and any satisfaction and discharge of the Company by virtue of
any payment, court order or United States, Canadian, Republic of Cyprus, Island
of Guernsey or other federal, provincial, territorial or state law.

         (b) If an event permitting the acceleration of the maturity of any of
the Guaranteed Obligations shall at any time have occurred and be continuing,
and such acceleration shall at such time be prevented by reason of the pendency
against the Company or any other Person of any case or proceeding contemplated
by Section 10(a) hereof, then, for the purpose of defining the obligation of any
Guarantor under this Guaranty, the maturity of the principal amount of the
Guaranteed Obligations shall be deemed to have been accelerated with the same
effect as if an acceleration had occurred in accordance with the terms of such
Guaranteed Obligations, and such Guarantor shall forthwith pay such principal
amount, all accrued and unpaid interest thereon, and all other Guaranteed
Obligations, due or that would have become due but for such case or proceeding,
without further notice or demand.

SECTION 11. TERM OF GUARANTY.

         This Guaranty and all guarantees, covenants and agreements of each
Guarantor contained herein shall continue in full force and effect and shall not
be discharged until such time as all of the principal of and interest on the
Notes, the other Guaranteed Obligations and other independent payment
obligations of such Guarantor under this Guaranty shall be indefeasibly paid in
cash and performed in full, and all of the agreements of each of the other
Guarantors hereunder shall be duly paid in cash and performed in full.

SECTION 12. CONTRIBUTION.

         In order to provide for just and equitable contribution among the
Guarantors, each Guarantor agrees that, to the extent any Guarantor makes any
payment hereunder on any date which, when added to all preceding payments made
by such Guarantor hereunder, would result in the aggregate payments by such
Guarantor hereunder exceeding its proportionate share of all payments then or
theretofore made by all Guarantors hereunder, such Guarantor shall have a right
of contribution against each other Guarantor whose aggregate payments then or
theretofore made hereunder are less than its proportionate share of all payments
by all Guarantors then or theretofore made hereunder, in an amount such that,
after giving effect to any such contribution

                                       16
<PAGE>

rights, each Guarantor will have paid only its proportionate share of all
payments by all Guarantors then or theretofore made hereunder.

SECTION 13. PAYMENT OF ADDITIONAL AMOUNTS

         (a) All payments made by any Guarantor on or with respect to the Notes,
or with respect to any obligation under this Guaranty, will be made without
withholding or deduction for any taxes imposed by any taxing authority outside
the United States, unless required by law or the interpretation or
administration thereof by the relevant taxing authority. If such Guarantor is
obligated to withhold or deduct any amount on account of such taxes ("Required
Withholding Taxes") from any payment made on or with respect to the notes, such
Guarantor will:

              (i) make such withholding or deduction;

              (ii) remit the full amount deducted or withheld to the relevant
government authority in accordance with the applicable law;

              (iii) pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by the holders (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the holder would have received if such Required Withholding Taxes had not been
withheld or deducted taking into account any tax benefits received by holder by
virtue of the payment of any such Required Withholding Tax;

              (iv) furnish to the holder, within 30 days after the date of the
payment of any taxes is due, an official receipt of the relevant government
authorities for all amounts deducted or withheld, or if such receipts are not
obtainable, other evidence of payment by such Guarantor of those taxes;

              (v) reimburse, indemnify and hold the holder harmless, other than
as described below, for the amount of:

                   (A) any taxes (including interest and penalties) paid or
incurred by any holder (whether by withholding or otherwise) as a result of the
payment of any Additional Amounts made on or with respect thereto, and

                   (B) any taxes imposed with respect to any reimbursement under
the preceding clause or this clause, and

              (vi) at least 15 days prior to each date on which any Additional
Amounts are payable, deliver to the holder an officers' certificate setting
forth the calculation of the Additional Amounts to be paid and such other
information as the holder may reasonably request with respect thereto.

         (b) Notwithstanding the foregoing, each Guarantor will not pay
Additional Amounts in respect of a beneficial owner of a note with respect to a
Required Withholding Tax:

                                       17
<PAGE>

              (i) which is a net income tax (or a franchise tax imposed in lieu
thereof), other than any such tax imposed on or with respect to an Additional
Amount, to which such beneficial owner is subject solely by reason of its being
engaged in trade or business or having a permanent establishment or other fixed
base (as defined in an applicable income tax treaty), otherwise than by the mere
acquisition, holding or disposition of Notes or the receipt of payments
thereunder, or the execution and performance (including enforcement) of the
Guaranty, within the jurisdiction (or any province, territory or other political
subdivision thereof) requiring the payment or withholding of such Required
Withholding Tax; or

              (ii) which would not be imposed but for the failure to satisfy any
certification, identification, qualification, registration or other reporting,
qualification or registration or similar requirements whether imposed by
statute, treaty, regulation or administrative practice; provided, however, that
such Guarantor has delivered a request to the holder to comply with such
requirements reasonably prior to the date by which such compliance is required
by giving the holder reasonably sufficient time to satisfy those requirements;
provided further, that if the holder or beneficial owner is unwilling or legally
unable to satisfy such certification, identification, qualification,
registration or other reporting, qualification or registration or similar
requirements, such unwillingness or legal inability shall constitute a failure
to satisfy such requirements for purposes hereof.

         (c) Any reference in this Guaranty to any amount payable under or with
respect to any Note, or under or with respect to this Guaranty, will be deemed
to include the payment of Additional Amounts to the extent that, in such
context, Additional Amounts are, were or would be payable in respect thereof.
The Guarantor's obligation to make payments of Additional Amounts will survive
any termination of this Agreement or the defeasance of any rights hereunder
until after the expiration of its obligations hereunder as herein provided.

SECTION 14. LIMITATION OF LIABILITY.

         Each Guarantor hereby confirms that it is the intention of such
Guarantor that the guarantee by such Guarantor pursuant to this Guaranty not
constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy
Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act
or any similar applicable United States, Canadian, Island of Guernsey or
Republic of Cyprus, federal, state, provincial or territorial law (all such
statutes and laws are collectively referred to as "Fraudulent Conveyance Laws").
To effectuate the foregoing intention, the obligations of each Guarantor under
this Guaranty shall be limited to the amount as will, after giving effect to all
rights to receive any collections from or payments by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor pursuant to
Section 12 hereof, result in the obligations of such Guarantor under this
Guaranty not constituting such a fraudulent transfer or conveyance. In the event
that the liability of any Guarantor hereunder is limited pursuant to this
Section 14 to an amount that is less than the total amount of the Guaranteed
Obligations, then it is understood and agreed that the portion of the Guaranteed
Obligations for which such Guarantor is liable hereunder shall be the last
portion of the Guaranteed Obligations to be repaid.

                                       18
<PAGE>

SECTION 15. NEGATIVE PLEDGE.

         Except as permitted under Section 5.3, no Guarantor will create any
Lien on its assets to any other Person during the pendency of this Guaranty
unless such Lien is authorized under the other Loan Documents.

SECTION 16. SUPPLEMENTAL AGREEMENT.

         Upon execution and delivery by a New Material Subsidiary of a
Supplemental Agreement substantially in the form of Exhibit A hereto, such New
Material Subsidiary shall become a Guarantor hereunder with the same force and
effect as if originally named as a Guarantor herein. The execution and delivery
of any such instrument shall not require the consent of any other Guarantor
hereunder. The rights and obligations of each Guarantor hereunder shall remain
in full force and effect notwithstanding the addition of any new Guarantor as a
party to this Guaranty.

SECTION 17. DEFINITIONS AND TERMS GENERALLY.

         (a) Unless otherwise defined herein, capitalized terms defined in the
Note Purchase Agreement are used herein as defined therein. In addition, the
following terms shall have the following meanings.

         "Affiliate" means, at any time, and with respect to any Person, any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person. As used in this definition, "Control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. Unless the context otherwise clearly
requires, any reference to an "Affiliate" is a reference to an Affiliate of the
Company.

         "Business Day" means any day other than a Saturday, a Sunday or a day
on which commercial banks in New York City are required or authorized to be
closed.

         "Fraudulent Conveyance Laws" has the meaning specified in Section 14
hereof.

         "Guaranteed Obligations" has the meaning specified in Section 1 hereof.

         "Guarantor" has the meaning specified in the introduction hereto.

         "Guaranty" has the meaning specified in the introduction hereto.

         "holder" has the meaning specified in the introduction hereto.

         "Material Subsidiaries" has the meaning ascribed to it in the Note
Purchase Agreement.

                                       19
<PAGE>

         "Maximum Guaranteed Amount" shall mean, for each Guarantor, the maximum
amount which any Guarantor could pay under this Guaranty without having such
payment set aside as a fraudulent transfer or conveyance or similar action under
Fraudulent Conveyance Law.

         "New Material Subsidiaries" means a direct or indirect Subsidiary of
the Company which has become a Material Subsidiary.

         "Note Purchase Agreement" has the meanings specified in the Recitals
hereto.

         "Notes" has the meanings specified in the Recitals hereto.

         "Restricted Payments" means

         (a) any Distribution in respect of the Company or any Guarantor (other
than on account of capital stock or other equity interests of a Material
Subsidiary of the Company or a Guarantor owned legally and beneficially by the
Company or a Guarantor or Indebtedness (as defined in the Note Purchase
Agreement) authorized under the Loan Documents, including, without limitation,
any Distribution resulting in the acquisition by the Company or a Guarantor of
securities which would constitute treasury stock), and

         (b) any payment, repayment, redemption, retirement, repurchase or other
acquisition, direct or indirect, by the Company or any Guarantor of, on account
of, or in respect of, the principal of any Indebtedness that is pari passu with
the Notes prior to the regularly scheduled maturity date thereof (as in effect
on the date such debt was originally incurred) unless authorized under the Loan
Documents.

For purposes of this Guaranty, the amount of any Restricted Payment made in
property shall be the greater of (x) the Fair Market Value of such property (as
determined in good faith by the board of directors (or equivalent governing
body) of the Person making such Restricted Payment) and (y) the net book value
thereof on the books of such Person, in each case determined as of the date on
which such Restricted Payment is made.

         "United States Dollar" means the lawful currency of the United States
of America.

         (b) Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include,"
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation." All references herein to Articles, Sections, Exhibits and Schedules
shall be deemed references to Articles and Sections of, and Exhibits and
Schedules to, this Guaranty unless the context shall otherwise require.

SECTION 18. NOTICES.

         All notices under the terms and provisions hereof shall be in writing
(with charges prepaid), and shall be delivered or sent by hand, by telecopy, by
express courier service or by registered or certified mail, return receipt
requested, postage prepaid, addressed,

                                       20
<PAGE>

                  (a) if to any holder, at the address set forth in the Note
         Purchase Agreement, or at such other address as any such holder shall
         from time to time designate to the Company,

                  (b) if to a Guarantor, at the address such Guarantor set forth
         on the signature pages hereto or at such other address as such
         Guarantor shall from time to time designate in writing to the holder.

         A notice or communication shall be deemed to have been duly given and
         effective:

                  (a) when delivered (whether or not accepted), if personally
         delivered;

                  (b) ten Business Days after being deposited in the mail,
         postage prepaid, if delivered by first-class mail (whether or not
         accepted);

                  (c) when sent, if sent via facsimile;

                  (d) when delivered if sent by registered or certified mail
         (whether or not accepted); and

                  (e) four Business Days after the day on which the same has
         been delivered to an overnight air courier, with charges prepaid
         (whether or not accepted).

SECTION 19. AMENDMENTS, ETC.

         No amendment, alteration, modification or waiver of any term or
provision of this Guaranty, nor consent to any departure by any Guarantor
therefrom, shall in any event be effective unless the same shall be in writing
and consented to by the Required Holders, provided, however, that any amendment,
alteration, modification or waiver of the terms and conditions contained in
Section 1 hereof shall require consent from each holder, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

SECTION 20. SUBMISSION TO JURISDICTION; CONSENT TO JURISDICTION; SERVICE OF
            PROCESS.

         (a) Each Guarantor irrevocably submits to the nonexclusive in personam
jurisdiction of any New York State or federal court sitting in New York County,
New York over any suit, action or proceeding arising out of or relating to this
Guaranty or the Notes. To the fullest extent it may effectively do so under
applicable law, each Guarantor irrevocably waives and agrees not to assert, by
way of motion, as a defense or otherwise, any claim that it is not subject to
the in personam jurisdiction of any such court, any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or proceeding
brought in any such court and any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.

                                       21
<PAGE>

         (b) Each Guarantor agrees, to the fullest extent it may effectively do
so under applicable law, that a final judgment in any suit, action or proceeding
of the nature referred to in paragraph (a) of this Section 20 brought in any
such court shall be conclusive and binding upon such party, subject to rights of
appeal and may be enforced in the courts of the United States of America or the
State of New York (or any other courts to the jurisdiction of which such party
is or may be subject) by a suit upon such judgment.

         (c) Each Guarantor consents to process being served in any suit, action
or proceeding of the nature referred to in paragraph (a) of this Section 20 by
mailing a copy thereof by registered or certified mail, postage prepaid, return
receipt requested, to the address of each Guarantor specified in Section 18 or
at such other address of which you shall then have been notified pursuant to
said Section or to any agent for service of process appointed pursuant to the
provisions of Section 29. Each Guarantor agrees that such service upon receipt
(i) shall be deemed in every respect effective service of process upon it in any
such suit, action or proceeding and (ii) shall, to the full extent permitted by
law, be taken and held to be valid personal service upon and personal delivery
to such party. Notices hereunder shall be conclusively presumed received as
evidenced by a delivery receipt furnished by the United States Postal Service or
any reputable commercial delivery service.

         (d) Nothing in this Section 20 shall affect the right of any holder of
Notes to serve process in any manner permitted by law, or limit any right that
the holder of any of the Notes may have to bring proceedings against any
Guarantor in the courts of any appropriate jurisdiction or to enforce in any
lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.

         (e) In the event process is served pursuant to Section 20(a), the
holders shall endeavor to provide the applicable Guarantor with a copy of such
process promptly after delivering service of process in accordance with Section
20(a). The Parties agree that any delay or failure to comply with this Section
20(e) shall in no way constitute a defense of the Guarantors and each Guarantor
covenants not to use any such failure as a defense of any kind.

SECTION 21. WAIVER OF JURY TRIAL.

         EACH GUARANTOR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL
OR EQUITABLE ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
GUARANTY, THE NOTE PURCHASE AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT MATTER OF ANY OF THE
FOREGOING.

SECTION 22. SURVIVAL.

         All warranties, representations and covenants made by each Guarantor
herein or in any written certificate or other instrument required to be
delivered by it or on its behalf hereunder or under the Note Purchase Agreement
shall be considered to have been relied upon by the holders

                                       22
<PAGE>

and shall survive the execution and delivery of this Guaranty, regardless of any
investigation made by any holder or on such holder's behalf until after the full
satisfaction of all Guaranteed Obligations. All statements in any such
certificate or other instrument shall constitute warranties and representations
by such Guarantor hereunder.

SECTION 23. SEVERABILITY.

         Any provision of this Guaranty which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, each Guarantor
hereby waives any provision of law that renders any provisions hereof prohibited
or unenforceable in any respect.

SECTION 24. SUCCESSORS AND ASSIGNS.

         The terms of this Guaranty shall be binding upon each Guarantor and its
successors and assigns and shall inure to the benefit of each holder of the
Notes and its respective successors and assigns.

SECTION 25. TABLE OF CONTENTS; HEADINGS.

         The section and paragraph headings in this Guaranty and the table of
contents are for convenience of reference only and shall not modify, define,
expand or limit any of the terms or provisions hereof, and all references herein
to numbered sections, unless otherwise indicated, are to sections in this
Guaranty.

SECTION 26. COUNTERPARTS.

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

SECTION 27. GOVERNING LAW.

         This Guaranty shall in all respects be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.

SECTION 28. COVENANT COMPLIANCE.

         Each Guarantor agrees to comply with each of the covenants contained
herein, in the Notes, in the Note Purchase Agreement and the other Loan
Documents that imposes or purports to impose, by reference to such Guarantor,
express or otherwise, through agreements with the Company, restrictions or
obligations on such Guarantor.

                                       23
<PAGE>

SECTION 29. APPOINTMENT OF PROCESS AGENT.

         Each Guarantor irrevocably hereby designates and appoints Satterlee
Stephens Burke & Burke LLP, at its office at 230 Park Avenue, Suite 1130, New
York, N.Y. 10169, Attention: Peter A Basilevsky Esq., as its authorized agent to
accept and acknowledge on behalf service of each Guarantor of any and all
process which may be served in any such action, suit or proceeding with respect
to any matter as to which it has submitted to jurisdiction as set forth in
Section 19, and agrees that service upon such authorized agent shall be deemed
in every respect service of process upon a Guarantor or its respective
successors or assigns, and, to the extent permitted by applicable law, shall be
taken and held to be valid personal service upon it. Such designation and
appointment shall be irrevocable. Each Guarantor represents and warrants that
Satterlee Stephens Burke & Burke LLP has agreed to act as such agent for the
Company for service of process on behalf of each Guarantor. Each Guarantor will
take all action, including the filing of any and all documents and instruments,
as may be necessary to continue in full force and effect the designation and
appointment as such agent of Satterlee Stephens Burke & Burke LLP or any
successor corporation or such other corporation as shall be satisfactory to the
holder, so that each Guarantor shall at all times have an agent of the Company
for service of process for the above purposes in the County of New York, State
of New York.

SECTION 30. CONVERSION OF JUDGMENT CURRENCY.

         If, for the purposes of obtaining or enforcing judgment against either
the holder or a Guarantor in any court in any jurisdiction, it becomes necessary
to convert into the currency of the jurisdiction giving such judgment (the
"Judgment Currency") an amount due hereunder in U.S. Dollars, then the date on
which the rate of exchange for conversion is selected by that court is referred
to herein as the "Conversion Date". If there is a change in the rate of exchange
between the Judgment Currency and the U.S. Dollar between the Conversion Date
and the actual receipt by the holder of the amount due hereunder or under such
judgment, the Guarantor shall notwithstanding such judgment, pay all such
additional amounts as may be necessary to ensure that the amount received by the
holder in the Judgment Currency, when converted at the rate of exchange
prevailing on the date of receipt, will equal the amount due in U.S. Dollars.
The Guarantor's liability hereunder constitutes a separate and independent
liability which shall not merge with any judgment or any partial payment or
enforcement of payment of sums due under this Agreement. The term "rate of
exchange", as used in this Section, includes any premiums or costs payable with
the currency conversion then being effected.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                            [SIGNATURE PAGES FOLLOW]

                                       24
<PAGE>

         IN WITNESS WHEREOF, each party hereto has caused this Guaranty to be
duly executed as of the date first above written.

                                         NINOTSMINDA OIL COMPANY LIMITED

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                             Address:

                                             Telecopy:

                                         CANARGO (NAZVREVI) LIMITED

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                             Address:

                                             Telecopy:

                                         CANARGO NORIO LIMITED

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                             Address:

                                             Telecopy:
<PAGE>

                                         CANARGO SAMGORI LIMITED

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                              Address:

                                              Telecopy:

                                         CANARGO LIMITED, a company organized
                                             and existing in Guernsey

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                              Address:

                                              Telecopy:

                                         TETHYS PETROLEUM INVESTMENTS LIMITED

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

                                             Name:
                                                  -----------------------------

                                             Title:
                                                   ----------------------------

                                              Address:

                                              Telecopy:

<PAGE>

                                         CANARGO LTD., a company organized and
                                             existing in Ontario, Canada

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

                                            Name:
                                                 -----------------------------

                                            Title:
                                                  ----------------------------

                                            Address:

                                            Telecopy:

<PAGE>

                                    EXHIBIT A
                         FORM OF SUPPLEMENTAL AGREEMENT

         SUPPLEMENTAL AGREEMENT dated as of ____________, ____ from
______________, a _______ corporation (the "New Material Subsidiary"), for the
benefit of the holder (as defined in the Guaranty referred to below).
Capitalized terms used herein without definition shall have the respective
meanings ascribed thereto in the Guaranty Agreement, dated as of July 25, 2005
(the "Guaranty"), from: Ninotsminda Oil Company Limited, a company incorporated
and existing in the Republic of Cyprus, CanArgo (Nazvrevi) Limited, a company
incorporated and existing in the Island of Guernsey, CanArgo Norio Limited, a
company incorporated and existing in the Republic of Cyprus, CanArgo Samgori
Limited, a company incorporated and existing in the Island of Guernsey, CanArgo
Limited, a company incorporated and existing in the Island of Guernsey, Tethys
Petroleum Investments Limited, a company incorporated and existing in the Island
of Guernsey, and CanArgo Limited, a company incorporated and existing in
Ontario, Canada and such other Affiliates (as defined below) as shall become
parties thereto in accordance therewith, for the benefit of the holder (as such
term is defined in such Guaranty).

         WHEREAS, CanArgo Energy Corporation, a Delaware corporation (the
"Company") has issued US$25,000,000.00 aggregate principal amount of its Senior
Secured Notes, due July 25, 2009, 2009 (the "Notes"), pursuant to Note Purchase
Agreement, dated as of July 25, 2005 (as amended, modified or supplemented from
time to time, the "Note Purchase Agreement") among the Company and the
purchasers named therein.

         WHEREAS, the New Material Subsidiary is a direct or indirect Subsidiary
of the Company.

         WHEREAS, all existing Material Subsidiaries of the Company have entered
into the Guaranty.

         WHEREAS, the Note Purchase Agreement requires that all other Material
Subsidiaries enter into the Guaranty (as a Guarantor).

         WHEREAS, the New Material Subsidiary acknowledges that it will derive
substantial benefits from the issuance of the Notes.

         WHEREAS, the Guaranty specifies that additional Material Subsidiaries
may become Guarantors under such Guaranty by execution and delivery of an
instrument in the form of this Agreement. The undersigned New Material
Subsidiary is executing this Agreement in accordance with the requirements of
the Note Purchase Agreement in order to become a Guarantor under the Guaranty as
consideration for the Notes previously purchased.

         NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confirmed, the New Material Subsidiary Guarantor agrees as
follows:

<PAGE>

         Section 1. Guaranty. In accordance with Section 16 of the Guaranty, the
New Material Subsidiary by its signature hereto shall become a Guarantor under
such Guaranty with the same force and effect as if originally named therein as a
Guarantor (except as otherwise set forth in clause (b) of this Section 1) and
the New Material Subsidiary hereby (a) agrees to all the terms and provisions of
such Guaranty applicable to it as a Guarantor thereunder, (b) represents and
warrants that, except as set forth in Schedule 1 hereto, the representations and
warranties made by it as a Guarantor are true and correct in all Material
respects on and as of the date hereof with the same effect as though made on and
as of the date hereof, except to the extent that such representations and
warranties refer to an earlier date, in which case they were true and correct in
all Material respects as of such earlier date, (c) acknowledges receipt of a
copy of and agrees to be obligated and bound by the terms of such Guaranty, and
(d) agrees that each reference to a "Guarantor" in such Guaranty shall be deemed
to include the New Material Subsidiary.

         Section 2. Enforceability. The New Material Subsidiary hereby
represents and warrants that this Agreement has been duly authorized, executed
and delivered by the New Material Subsidiary and constitutes a legal, valid and
binding obligation of the New Material Subsidiary enforceable against it in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
applicability of creditors' rights generally and by equitable principles of
general applicability (regardless of whether such enforceability is considered
in a proceeding in equity or at law).

         Section 3. Effect on Guaranty. Except as expressly supplemented hereby,
the Guaranty shall continue in full force and effect.

         Section 4. GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.

         Section 5. Savings Clause. To the fullest extent permitted under
applicable law, in the event any one or more of the provisions contained in this
Agreement should be held invalid, illegal or unenforceable in any respect with
respect to the New Material Subsidiary, no party hereto shall be required to
comply with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, and the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired. The parties shall endeavor in good-faith negotiations to replace any
invalid, illegal or unenforceable provisions with valid provisions, the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

         Section 6. Notices. All communications to the New Material Subsidiary
shall be given to it at the address or telecopy number set forth under its
signature hereto.

<PAGE>

         IN WITNESS WHEREOF, the New Material Subsidiary has duly executed this
Agreement as of the day and year first above written.

                                           [NEW MATERIAL SUBSIDIARY]

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

                                              Name:
                                                   -----------------------------

                                              Title:
                                                    ----------------------------

                                              Address:

                                              Telecopy:

<PAGE>

                  EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES

                                      NONE<PAGE>
                                                                    EXHIBIT 10.2

                               SECURITY AGREEMENT

This SECURITY AGREEMENT (this "Agreement") is made and entered into as of July
25, 2005 by and among CANARGO ENERGY CORPORATION, a Delaware corporation (the
"Grantor"), INGALLS & SNYDER VALUE PARTNERS, L.P., and together with the other
Purchasers party hereto and listed in the Schedule 1 attached hereto (in such
capacity, the "Purchasers").

                              W I T N E S S E T H:

WHEREAS, the Grantor and the Purchasers have entered into that certain Note
Purchase Agreement dated as of the date hereof (as amended, restated,
supplemented or otherwise modified from time to time, the "Note Purchase
Agreement"), pursuant to which the Company is issuing on the date hereof
$25,000,000 in aggregate principal amount of its Notes;

WHEREAS, to induce the Purchasers to enter into the Note Purchase Agreement and
to purchase the Notes, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Grantor has agreed
to grant a security interest in the Collateral (as defined below) as security
for the Secured Obligations (as defined below).

WHEREAS, it is a condition precedent to the purchase of the Notes by the
Purchasers thereof that the Grantor shall have granted the security interests
contemplated by this Agreement:

NOW, THEREFORE, to induce the Purchasers to enter into the Note Purchase
Agreement and to purchase the Notes and in consideration of the mutual promises
herein contained and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged and confirmed, the Grantor hereby
agree with the Purchasers as follows:

SECTION 1. Definitions. (a) Each capitalized term used herein but not otherwise
defined herein shall have the meaning assigned such term in the Note Purchase
Agreement or, where not defined in the Note Purchase Agreement, terms that are
defined in the Code shall have the respective meanings given to such terms in
the Code.

     (b) In addition, as used herein, the following terms shall have the
following meanings:

"Accounts" means all accounts of the Grantor, including, without limitation, all
present and future accounts, accounts receivable and other rights of the Grantor
to payment for goods sold or leased or for services rendered (except those
evidenced by instruments or Chattel Paper).

Ny Security Agreement
<PAGE>

"Chattel Paper" means a record or records (whether written or consisting of
information stored in an electronic medium) that evidence both a monetary
obligation and a security interest in or lease of specific goods including any
license of software used in such goods.

"Code" means the Uniform Commercial Code as in effect in the State of New York.

"Collateral" has the meaning assigned to such term in Section 2.

"Collateral Security" means any Encumbrance, security agreement, guarantee,
indemnity, letter of credit or other obligation (however described) provided or
assumed by any person (including the Grantor) in favor of any Purchaser in
relation to the Secured Obligations, whether generally or to a limited extent
only and whether created or entered into before, on or after the date of this
Security Agreement.

"Contract" means any and all contracts, agreements, commitments, understandings,
leases, licenses, franchises, warranties, guaranties, mortgages, notes, bonds,
hedging agreements, joint operating agreements, production sharing agreements or
other instruments or consensual arrangements (whether written or oral and
whether express or implied) under which the Grantor has or may acquire rights or
by which the Grantor or any of its property or assets is or may become bound, as
any of the foregoing may be amended, supplemented or otherwise modified from
time to time.

"Contract Rights" means all of the Grantor's right, title and interest in and to
each Contract, including, without limitation, (i) all rights of the Grantor to
receive moneys due and to become due under or pursuant to the Contracts; (ii)
all rights of the Grantor to receive proceeds of any insurance, indemnity,
warranty or guaranty with respect to any Contract; (iii) all claims of the
Grantor for damages arising out of, or for breach of, or default under, any
Contract; and (iv) the right of the Grantor to terminate any Contract, to
perform thereunder and to compel performance and otherwise exercise all remedies
thereunder.

"Deposit Accounts" means all demand, time, savings, passbook, or similar bank
accounts maintained with any financial institution, together with all moneys and
funds therein and interest earned thereon and all renewals and replacements
therefor and all certificates and instruments, if any, from time to time
representing such Deposit Accounts or any additions thereto.

"Depositary" means any depositary bank holding a Deposit Account opened or
maintained by the Grantor.

"Documents" means a document of title or a receipt issued by the owner of goods
stored under a statute requiring a bond against withdrawal or a license for the
issuance of receipts in the nature of warehouse receipts.

"Encumbrance" means any mortgage, lien, pledge, charge, security interest or
other encumbrance or any interest or title of any vendor, lessor, lender or
other secured party to

                                       2
                                                           NY Security Agreement

<PAGE>

or of such Person under any conditional sale or other title retention agreement
or Capital Lease upon or with respect to any property or asset of any Person.

"Equipment" means all equipment of the Grantor including, without limitation,
all (i) machinery, plant and pipeline, (ii) manufacturing, distribution,
selling, data processing and office equipment, (iii) furniture, furnishings,
appliances, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles,
vessels, trucks, buses and motor vehicles, (iv) all parts thereof and all
accessions, additions, attachments, improvements, substitutions and replacements
thereto, (v) all software or computer programs embedded in such equipment and
supporting information related to such computer programs, (vi) all operating
equipment and other equipment used in connection with the exploration,
production and processing of hydrocarbons; and (vii) other goods of every type
and description in each case, whether now owned or hereafter acquired.

"Event of Default" has the meaning assigned to such term in the Note Purchase
Agreement.

"General Intangibles" means all general intangibles of the Grantor including,
without limitation, all rights, interests, causes of action, claims, commercial
tort claims, and all other intangible property of the Grantor of every kind and
nature (other than Accounts), including, without limitation, all (i) goodwill,
(ii) service marks, trade secrets, copyrights, copyright applications,
trademarks, trademark applications, trade names, patents, patent applications,
and all registrations and applications therefor, together with the good will
related thereto, (iii) all recorded information of any kind imbedded in any kind
of medium, including software, writings, plans, drawings, and specifications,
corporate and business records, customer lists, credit files and advertising
materials, (iv) reversionary interests in pension or profit sharing plans and
reversionary, beneficial and residual interests in trusts, (v) proceeds of
insurance policies, (vi) tax refunds and claims therefor, and (vii) all
licenses, permits and agreements of any kind pursuant to which the Grantor
possesses, or is authorized to possess or use the property (whether tangible or
intangible) of others or others possess, use or are authorized to possess or use
the property (whether tangible or intangible) of the Grantor and the benefit of
all authorizations and concessions granted in any jurisdiction.

"holders of the Notes" means the Purchasers and any holders of the Notes from
time to time.

"Instruments" means any negotiable instrument or other writing that evidences a
right to the payment of a monetary obligation that is in the ordinary cause of
business transferred by delivery with any necessary endorsement or assignment,
including but not limited to checks and promissory notes but excluding
Investment Property, letters of credit, or writings that evidence a right to
payment arising out of use of a credit or charge card or information contained
on or for use with such card.

"Inventory" means all inventory of the Grantor, including without limitation,
all inventory now owned or hereafter acquired by the Grantor (wherever located,
whether in the possession of the Grantor or of a bailee or other Person for
storage, sale, transit,

                                       3
                                                           NY Security Agreement

<PAGE>
processing, use or otherwise and whether consisting of whole goods, spare parts,
components, supplies, materials, or consigned,returned or repossessed goods)
that are held for sale or lease, which are to be furnished (or have been
furnished) under any contract of service or that are raw materials, work in
process or materials used or consumed in the Grantor's businesses. For purposes
of this Agreement, Inventory shall include any and all hydrocarbons extracted by
the Grantor during the ordinary course of the Grantor's business, for so long as
such hydrocarbons remain in the Grantor's possession.

"Investment Property" means all investment property of the Grantor including,
without limitation, all securities, whether certificated or uncertificated,
stocks, bonds, interests in the capital stock of corporations, interests in
partnerships and limited liability companies, mutual fund shares, annuities,
sums owing to Grantor from any securities intermediary, securities entitlements,
securities accounts, commodity contracts, commodity accounts, instruments,
certificates of deposit, equity interests or investments of any kind.

"Letter-of-Credit Rights" means all rights to payment or performance under a
letter of credit (whether or not evidenced by a writing), whether or not the
beneficiary has demanded or is at the time entitled to demand payment or
performance.

"Other Surety" means any person (other than the Grantor) who is a party to any
Collateral Security.

"Proceeds" means any and all "proceeds," as that term is defined in the Code,
including, without limitation, any and all proceeds of any of the Collateral
including, without limitation, (i) any and all proceeds and products of the
Collateral, all additions and accessions to the Collateral, and all property
received wholly or partly in trade or exchange for the Collateral, (ii) all
leases of the Collateral and rents, revenues, issues, profits, and proceeds
arising in connection with the sale, lease, license, encumbrance, collection or
any other temporary or permanent disposition of the Collateral or any interest
therein, (iii) any and all proceeds of any insurance, indemnity, warranty,
guaranty or other Collateral Security payable to the Grantor from time to time
with respect to any of the Collateral, (iv) any and all payments (in any form
whatsoever) made or due and payable to the Grantor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental authority
(or any Person acting under color of governmental authority), (v) any and all
other amounts from time to time paid or payable under or in connection with any
of the Collateral, (vi) all Deposit Accounts containing such proceeds and (vii)
money.

"Records" means all of the Grantor's books of accounts, ledgers, computer
software, computer printouts and other computerized records and cabinets in
which there are reflected or maintained the Accounts, Inventory, Equipment,
General Intangibles, Deposit Accounts, Letter-of-Credit Rights, Chattel Paper,
Contracts, Documents and Instruments or Investment Property in which the holders
of the Notes have a security interest pursuant to this Security Agreement, and
all supporting evidence and documents

                                       4
                                                           NY Security Agreement

<PAGE>

relating to such security in the form of written applications, credit
information, account cards, payment records, correspondence, delivery and
installation certificates, invoice copies, delivery receipts, notes and other
evidences of indebtedness, insurance certificates and the like.

"Secured Obligations" means all Indebtedness and other monetary obligations of
the Grantor under or in respect of (i) the Loan Documents, whether for principal
at the applicable Redemption Price, interest (including, without limitation,
interest that accrues after the filing of a petition initiating any action or
proceeding under the U.S. Federal Bankruptcy Code or any other bankruptcy,
insolvency or similar law or statute protecting creditors in effect in any
jurisdiction, or is an allowed claim in any such action or proceeding), fees, ,
indemnifications, liabilities, expenses or otherwise, and in each case as
amended, supplemented, modified, extended, restated or renewed, in whole or in
part, from time to time, and without limitation as to amount, terms, conditions,
covenants and other provisions; and (ii) to the extent permitted under the Note
Purchase Agreement, any instrument or other agreement governing Indebtedness or
other monetary obligations of the Grantor incurred to refinance, refund or
replace, in whole or in part, any of the Indebtedness or other monetary
obligations referred to in clause (i) above, together with any related notes,
guarantees, collateral documents, instruments and agreements executed from time
to time in connection therewith.

"Supporting Obligation" means any Letter-of-Credit Right or secondary obligation
that supports the payment or performance of an Account, Chattel Paper, Contract,
Document, General Intangible, Instrument or Investment Property of the Grantor.

"Tangible Personal Property Location" has the meaning specified in Section 5.8.

         (c)      Interpretation; Rules of Construction.  Unless the context
otherwise clearly requires:

         (i)      the definitions of terms herein shall apply equally to the
singular and plural forms of the terms defined;

         (ii)     whenever the context may require, any pronoun shall include
the corresponding masculine, feminine and neuter forms;

         (iii)    the words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation";

         (iv)     the word "will" shall be construed to have the same meaning
and effect as the word "shall";

         (v) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented,
restated or otherwise modified (subject to any restrictions on such amendments,
supplements or modifications set forth herein);

                                       5
                                                           NY Security Agreement

<PAGE>

         (vi)     any reference herein to any Person shall be construed to
include such Person's successors and assigns;

         (vii) the words "herein", "hereof" and "hereunder", and words of
similar import, shall be construed to refer to this Security Agreement in its
entirety and not to any particular provision hereof; and

         (viii) all references herein to Sections, Annexes and Exhibits shall be
construed to refer to Sections, Annexes and Exhibits to this Agreement.

SECTION 2. Grant of Security Interest. As collateral security for the prompt
payment in full in cash when due of the Secured Obligations, the Grantor hereby
assigns and pledges to the holders of the Notes a first priority continuing
security interest in, all of its right, title and interest, now owned or at any
time hereafter acquired in and to the following (collectively, the
"Collateral"): (i) all Accounts; (ii) all Inventory; (iii) all Equipment; (iv)
all General Intangibles; (vi) all Chattel Paper; (viii) all Instruments; (viii)
all Deposit Accounts; (ix) all Letter-of-Credit Rights; (x) all Investment
Property; (xi) all Records; (xii) all Proceeds; (xiii) all Supporting
Obligations and (xiv) all Contract Rights.

SECTION 3. Secured Obligations. This Agreement and the grant of a security
interest in the Collateral secure the prompt and complete payment and
performance when due (whether at stated maturity, by acceleration, upon
redemption or otherwise) of all Secured Obligations now or hereafter existing.
Without limiting the generality of the foregoing, this Agreement and the grant
of a security interest in the Collateral hereunder secure, to the fullest extent
permitted by applicable law, the payment of all amounts that constitute part of
the Secured Obligations and that would be owed by the Grantor to the holders
under the Notes or the other Loan Documents but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Grantor.

SECTION 4.  Representations and Warranties.  As of the date hereof and unless
otherwise expressed below, the Grantor hereby represents and warrants as
follows:

         4.1 The execution and delivery by the Grantor, and the performance by
the Grantor of its obligations under this Agreement will not contravene any
provision of applicable law or the Charter Documents of the Grantor or any
material agreement or other material instrument binding upon the Grantor or any
judgment, order or decree of any Governmental Authority having jurisdiction over
the Grantor, or result in the creation or imposition of any Lien on any assets
of the Grantor, except for the security interests granted under this Agreement
or the other Loan Documents.

         4.2 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, no consent of any other Person and no approval,
authorization or order of, action by or qualification with, any Governmental
Authority or other third Person is required (i) for the execution, delivery or
performance by the Grantor of its obligations under this

                                       6
                                                           NY Security Agreement

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Agreement which has not been obtained or (ii) for the grant by the Grantor of
the security interests created by this Agreement. Subject to compliance with the
U.S. Federal Assignment of Claims Act and any comparable law, statute, rule or
regulation of any other jurisdiction applicable thereto, no consent of any other
Person and no approval, authorization or order of, action by or qualification
with, any Governmental Authority or other third Person is required for the
exercise by the holders of the rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement.

         4.3 The Grantor is the owner of all of the Collateral, free and clear
of any Lien or other right, title or interest of any Person, other than Liens
permitted pursuant to the terms of Section 11.3 of the Note Purchase Agreement.
No effective financing statement (or similar statements or instrument of
registration under the law of any applicable jurisdiction) is now on file (other
than those filed in favor of the holders of the Notes in connection with this
Security Agreement, the Note Purchase Agreement or any other Loan Document) or
of record in any public office covering or purporting to cover any interest of
any kind in any of the Collateral.

         4.4 This Agreement has been duly authorized, executed and delivered by
the Grantor and constitutes a valid and binding agreement of the Grantor,
enforceable against it in accordance with its terms, except as the
enforceability hereof may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors' rights generally or
by equitable principles of general applicability (regardless of whether
enforcement thereof is sought in a proceeding at law or in equity) and
applicable laws of non-U.S. jurisdictions affecting the enforcement of security
interests in the items of Collateral located in such jurisdictions or subject to
the laws thereof.

         4.5 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, all filings, registrations and recordings
necessary or appropriate to create, preserve, protect and perfect the security
interests granted by the Grantor to the holders of the Notes pursuant to this
Agreement have been accomplished and the security interests granted to the
holders of the Notes pursuant to this Agreement in and to the Collateral
constitute, other than with respect to Liens permitted pursuant to the terms of
Section 11.3 of the Note Purchase Agreement, perfected first-priority security
interests therein (to the extent perfection can be achieved through filing and
to the extent that such security interests and their perfection and priority
status are recognized in the jurisdictions where such Collateral is located or
to whose laws they may be otherwise subject).

         4.6 The Grantor's exact legal name as it appears in its Certificate of
Incorporation is CanArgo Energy Corporation. The Grantor has not, in the past
five years, been incorporated or organized under the laws of any jurisdiction
other than the State of Delaware.

         4.7 The principal executive office of the Grantor is located at Suite
9/10, Borough House, Rue du Pre, Guernsey, GY1 1EF, Channel Islands.

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                                                           NY Security Agreement

<PAGE>

         4.8 The originals of all documents evidencing Contracts, Accounts and
the original books of account and records relating thereto are kept at the
Grantor's chief executive office or its field offices described in Schedule 2.
All Contracts and Accounts of the Grantor are controlled and monitored
(including, without limitation, for general accounting purposes) from such
location. All tangible Collateral (other than Inventory in transit or in public
warehouses as to which the Grantor has delivered appropriate warehouse receipts)
and all books and records related to any Collateral other than Contracts or
Accounts are kept or located at the Grantor's premises located at the locations
described in Schedule 2.

         4.9 No instrument or certificate evidencing any Deposit Account has
been issued to the Grantor by the respective Depositary, other than a
confirmation advice.

         4.10 All factual information with respect to the Collateral and to the
Grantor's Knowledge the account debtors or account parties set forth in any
schedule, certificate or other writing at any time heretofore or hereafter
furnished by or on behalf of the Grantor or any Affiliate of the Grantor to any
holder of a Note, and all other factual information heretofore or hereafter
furnished by or on behalf of the Grantor to the holders of the Notes, is true
and accurate in every Material respect on the date as of which such information
is dated or certified and the Grantor has not omitted and will not omit any
Material fact necessary to prevent such information, in light of the
circumstances, from being false or misleading.

         4.11 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, no authorization or approval or other action
by, and no notice to or filing with, any Governmental Authority or regulatory
body or any other third party with jurisdiction is required for (a) the grant by
the Grantor of the security interest granted hereunder or for the execution,
delivery or performance of this Agreement by the Grantor or (b) the perfection
of the security interest created hereunder (including the first priority nature
of such security interest), except for the filing of financing and continuation
statements under the Code and except to the extent that that the creation,
attachment and perfection of such security interests and their priority status
in the jurisdictions where such Collateral is located or pursuant to whose laws
such Collateral may otherwise be subject requires filing, registration or some
other action be taken in such jurisdiction in order to create, attach or perfect
such security interest.

SECTION 5. Covenants. The Grantor covenants and agrees that, until the date on
which the Secured Obligations have been indefeasibly paid in full, unless waived
in writing by the Required Holders:

         5.1 The Grantor shall not sell, offer to sell, assign, lease, rent,
license, or otherwise transfer or dispose of any Collateral or any interest
therein, except in the ordinary course of business or except as specifically
permitted under the terms of the Note Purchase Agreement.

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                                                           NY Security Agreement

<PAGE>

         5.2 The Grantor shall not (i) create, incur, assume or permit to exist
any Lien, other than Liens permitted pursuant to the terms of Section 11.3 of
the Note Purchase Agreement, on or in respect of any Collateral or any part
thereon or any interest therein. The Grantor shall promptly, at its own expense,
take such action as may be necessary to duly discharge any Lien, other than such
permitted Liens, on or in respect of any Collateral. The Grantor shall not
consign all or any portion of its Inventory to any Person except in the ordinary
course or pursuant to any Basic Documents unless the Required Holders agree in
writing prior to such consignment.

         5.3 Except as may be required under any other Loan Document, the
Grantor shall not execute or authorize to be filed (except in connection with
this Agreement) or registered in any public office any financing statement (or
similar statement or instrument of registration under the law of any
jurisdiction) covering or purporting to cover any interest of any kind in the
Collateral.

         5.4 The Grantor shall not change its name, organizational type,
jurisdiction of organization or organizational identification number without
providing at least 30 days' prior written notice to the holders of the Notes,
which notice shall set forth such new name, organizational type, jurisdiction of
organization or organizational identification number, as applicable, and such
other information in connection therewith as the Required Holders shall
reasonably request.

         5.5 The originals of all documents evidencing Accounts and all of the
books and records relating thereto shall be kept at Grantor's chief executive
office or in a field office identified in Schedule 2. All Accounts of the
Grantor shall be controlled and monitored (including, without limitation, for
general accounting purposes) from such offices. The Grantor shall not establish
a new location for its chief executive office until (i) it has given to the
holders of the Notes not less than 30 days' prior written notice of its
intention so to do, clearly describing such new location and providing such
other information in connection therewith as the Required Holders may reasonably
request, and (ii) it has taken such action with respect to such new location,
reasonably satisfactory to the Required Holders, to cause the security interest
of the holders of the Notes in the Collateral to be at all times fully perfected
and in full force and effect.

         5.6 The Grantor shall not rescind or cancel any indebtedness evidenced
by any Accounts or modify any term thereof or make any adjustment with respect
thereto, or extend or renew the same, or compromise or settle any dispute,
claim, suit or legal proceedings relating thereto, or sell any Accounts or
interest therein, except for rescissions, cancellations, modifications,
adjustments, extensions, renewals, returns, discounts and allowances in the
ordinary course of business or which the Grantor, acting in good faith, deems to
be in the best interests of the Grantor and its business and which could not
reasonably be expected to result in an Event of Default, without the prior
written consent of the Required Holders. The Grantor shall use commercially
reasonable efforts to duly fulfill all obligations on its part to be fulfilled
under or in connection with the Accounts in all Material respects and shall take
no action that could Materially impair the rights of the holders of the Notes in
the Accounts.

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                                                           NY Security Agreement

<PAGE>

         5.7 The Grantor shall use its commercially reasonable endeavors to
collect from the account obligor of each of its Accounts, as and when due
(including, without limitation, Accounts which are delinquent) any and all
amounts owing under or on account of such Accounts, and apply immediately upon
receipt thereof all such amounts so collected to the outstanding balance of such
Accounts.

         5.8 All tangible Collateral (other than Inventory in transit or in
public warehouses or equipment at its site of manufacture or use, in transit or
at a testing facility) and all books and records related to any Collateral other
than Contracts and Accounts will be kept or located at the Grantor's chief
executive offices or the Grantor's premises described in Schedule 2 (each a
"Tangible Personal Property Location"). The Grantor shall not, without the prior
written consent of the Required Holders, remove such Collateral, books or
records from a Tangible Personal Property Location or keep the Collateral at any
other locations except as a result of the testing, manufacture, use, sale,
replacement or other disposition of such Collateral in accordance with this
Agreement or the Note Purchase Agreement. The Grantor shall not establish a new
Tangible Personal Property Location until (i) it has given to the holders of the
Notes not less than 30 days' prior written notice of its intention so to do,
clearly describing such new location and such other information in connection
therewith as the Required Holders may reasonably request, and (ii) with respect
to such new location, it has taken such commercially reasonable action,
reasonably satisfactory to the Required Holders, to cause the security interest
of the holders of the Notes in all Collateral consisting of personal property
other than Accounts to be at all times fully perfected and in full force and
effect.

         5.9 The Grantor shall maintain, preserve and protect all tangible
Collateral in saleable condition and in working order and condition (ordinary
wear and tear excepted), shall not use the Collateral in any manner outside the
ordinary course of its business or in Material violation of any applicable law
or policy of insurance thereon and, as quickly as practicable after the
occurrence of any Material loss or damage to such tangible Collateral, make or
cause to be made all necessary repairs, replacements and other improvements in
connection therewith reasonably necessary or appropriate to restore such
Collateral as reasonably close to the status in which such Collateral existed
prior to any such loss or damage as practicable and promptly furnish the holders
of the Notes with a written notice. The Grantor shall notify the holders of the
Notes of any Material loss or damage of any Collateral.

         5.10 The Grantor shall keep and maintain at its own cost and expense
complete books of record and account in which true and correct entries in
conformity with generally accepted applicable accounting principles and all
Material requirements of law shall be made of all dealings and transactions
related to the Collateral. Without limiting the generality of the foregoing, the
Grantor shall keep and maintain at its own cost and expense reasonably
satisfactory and complete records of each Account for at least three years from
the date on which such Account comes into existence, including, but not limited
to, records of all payments received, all credits granted thereon, all
merchandise returned and all other documentation relating thereto. The Grantor
shall permit officers and designated representatives of the holders of the Notes
to visit and inspect any of the

                                       10
                                                           NY Security Agreement

<PAGE>

properties of the Grantor, during normal business hours, to examine the books of
record and account (whether written or electronic) of the Grantor, and to
discuss the affairs, finances and accounts of the Grantor with the Grantor's
officers, employees and consultants, all at the cost and expense of the holders
of the Notes unless and until an Event of Default has occurred and is continuing
and thereafter all such costs and expenses shall be at Grantor's expense, upon
reasonable advance written notice to the Grantor unless and until an Event of
Default has occurred and is continuing.

         5.11 The Grantor will maintain with insurers which on the date the
policy commences are financially sound and reputable, insurance with respect to
the Collateral against such casualties and contingencies, of such types, on such
terms and in such amounts (including deductibles, co-insurance and
self-insurance, if adequate reserves are maintained with respect thereto) as is
customary in the case of entities of established reputations engaged in the same
or a similar business and similarly situated.

         5.12 In the event that any goods (excluding Hydrocarbons and goods
covered by a document of title) are in the possession of a Person other than the
Grantor, the holders of the Notes or a lessee, the Grantor shall forthwith
notify the holders of the Notes and obtain from such Person an executed
agreement, in form and substance reasonably satisfactory to the Required
Holders, acknowledging that it is holding such goods for the holders of the
Notes' benefit. The Grantor shall ensure that all warehouse receipts or receipts
in the nature of warehouse receipts issued with respect to any of its Inventory
(excluding Hydrocarbons) are non-negotiable.

         5.13 After an Event of Default has occurred and is continuing, upon
acquiring or holding any certificated securities, the Grantor shall immediately
endorse, assign and deliver the same to the securities intermediary, accompanied
by such instruments of transfer or assignment duly executed in blank as the
securities intermediary may from time to time reasonably specify. After an Event
of Default has occurred and is continuing, if any uncertificated securities now
or hereafter acquired by the Grantor are issued to the Grantor or its nominee
directly by the issuer thereof, the Grantor shall promptly notify the holders of
the Notes thereof and, at the Required Holders' reasonable request and option,
pursuant to an agreement in form and substance reasonably satisfactory to the
Required Holders, either (a) cause the issuer to agree to comply with
instructions from the Required Holders as to such securities, without further
consent of the Grantor or such nominee, or (b) arrange for a securities
intermediary to become the custodian of the securities. If any securities,
whether certificated or uncertificated, or other investment property now or
hereafter acquired by the Grantor are held by the Grantor or its nominee through
a securities intermediary or commodity intermediary, the Grantor shall
immediately notify the holders of the Notes thereof and, at the Required
Holders' reasonable request and option, pursuant to an agreement in form and
substance reasonably satisfactory to the Required Holders and the Grantor,
either (i) cause such securities intermediary or commodity intermediary (as the
case may be) to agree to comply with entitlement orders or other instructions
from the Required Holders to such securities intermediary with respect to such
securities or other investment property, after an Event of Default has occurred
and is continuing or, after an Event of Default has

                                       11
                                                           NY Security Agreement

<PAGE>

occurred and is continuing, to apply any value distributed on account of any
commodity contract as directed by the Required Holders to such commodity
intermediary, in each case without further consent of the Grantor or such
nominee, or (ii) after an Event of Default has occurred and is continuing, in
the case of financial assets or other investment property held through a
securities intermediary, arrange for the holders of the Notes to become
entitlement holders with respect to such investment property, with the Grantor
being permitted, after an Event of Default has occurred and is continuing, only
with the consent of the Required Holders, to exercise rights to withdraw or
otherwise deal with such investment property. The provisions of this paragraph
shall not apply to any financial assets credited to a securities account for
which any holder of a Note is the securities intermediary.

         5.14 The Grantor shall not create any Chattel Paper (whether tangible
or electronic) representing a monetary obligation in excess of US$1,000,000
without placing a legend on such Chattel Paper indicating that the holders of
the Notes have a security interest in such Chattel Paper, and all existing
Chattel Paper shall be so legended.

         5.15 In the event that the Grantor is at anytime a beneficiary under a
letter of credit with a face amount in excess of US$1,000,000 now or hereafter
issued in favor of the Grantor, the Grantor shall promptly notify the holders of
the Notes thereof and, at the request of the Required Holders, the Grantor
shall, pursuant to an agreement in form and substance satisfactory to the
Required Holders, arrange for the issuer, confirmer and any other nominated
security agent of such letter of credit to consent to a security interest in the
Proceeds of such letter of credit as collateral security for the Secured
Obligations.

         5.16 In the event that the Grantor shall at any time have a Material
tort claim involving a claimant that is an organization or an individual, where
such claim arose not in the ordinary course in a business context and does not
involve damages based on death or personal injury, the Grantor shall immediately
provide the holders of the Notes with a written summary of such claim and shall
grant to the holders of the Notes a security interest therein and in the
Proceeds thereof in a manner reasonably satisfactory to the Required Holders.

         5.17 The Grantor will not re-incorporate, re-form or re-organize itself
under the law of a different jurisdiction, or change its name as appears on the
public records of its jurisdiction of incorporation, formation or organization,
without giving the holders of the Notes not less than 30 days prior written
notice and, at the request of the Required Holders, promptly taking such
reasonable action as the Required Holders may request to maintain the perfection
of the security interests created by this Agreement.

SECTION 6.  Further Assurances.

         6.1 The Grantor agrees that from time to time, it will, at its own
expense, promptly upon reasonable request by the Required Holders, consistent
with the provisions of this Agreement execute and deliver or cause to be
executed and delivered, or use its commercially reasonable efforts to procure,
all assignments, instruments and

                                       12
                                                           NY Security Agreement

<PAGE>

other documents, all in form and substance reasonably satisfactory to the
Required Holders, deliver any instruments to the holders and take any other
actions that may be necessary or, in the reasonable opinion of the Required
Holders, desirable to perfect, continue the perfection of, or protect the first
priority of the holders' security interest in and to the Collateral, to protect
the Collateral against the rights, claims, or interests of third Persons (other
than any such rights, claims or interests created by or arising through the
holders) or to effect the purposes of this Agreement in a manner consistent
therewith.

         6.2 The Grantor hereby authorizes the Required Holders acting on behalf
of and in their capacity as holders to file any financing or continuation
statements with respect to the Collateral without the signature of Grantor (to
the extent permitted by applicable law); provided, however, that Grantor shall
not be relieved of any of its obligations under Section 6.1 or 6.4 hereof. A
photocopy or other reproduction of this Agreement or any financing statement
covering the Collateral or any part thereof shall be sufficient as a financing
statement where permitted by law. Copies of any such financing or continuation
statements with respect to the Collateral shall be furnished to the Grantor as
soon as practicable after any such filing.

         6.3 The Grantor will furnish to the holders of the Notes from time to
time statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Required Holders
may reasonably request, all in reasonable detail.

         6.4 The Grantor will promptly pay all costs and expenses reasonably
incurred in connection with any of the foregoing within 60 days of receipt of an
invoice therefor. The Grantor also agrees, whether or not requested by the
Required Holders, to take or cause to be taken all commercially reasonable
actions that are necessary to perfect and to continue the perfection of, and to
protect the first priority of, the holders of the Notes' security interest in
and to the Collateral, including the filing of all necessary financing and
continuation statements, and to protect the Collateral against the rights,
claims or interests of third Persons (other than any such rights, claims or
interests created by or arising through the holders).

         6.5 The Grantor hereby irrevocably authorizes the Required Holders on
behalf of and in their capacity as holders at any time and from time to time to
file in any Uniform Commercial Code jurisdiction any initial financing
statements and amendments thereto that (x) indicate the Collateral as being of
an equal or lesser scope or with greater detail, and (y) contain any other
information required by part 5 of Article 9 of the Uniform Commercial Code of
the appropriate jurisdiction for the sufficiency or filing office acceptance of
any financing statement or amendment; provided that the Required Holders shall
have no obligation to perform any of the foregoing actions other than those
expressly provided herein or in the Loan Documents, and; provided, further, that
copies of all such initial financing statements and amendments thereto shall be
furnished to the Grantor promptly after any such filing.

                                       13
                                                           NY Security Agreement

<PAGE>

SECTION 7. Power of Attorney. In addition to all of the powers granted to the
holders of the Notes pursuant to the Loan Documents, the Grantor hereby appoints
and constitutes the Required Holders, as Grantor's attorney-in-fact (with full
power of substitution and delegation), with full authority in the place and
stead of the Grantor and in the name of the Grantor or otherwise, acting in
their reasonable discretion, from and after the occurrence and during the
continuance of an Event of Default, to take any action and to execute any
instrument that the Required Holders may deem necessary or advisable to
accomplish the purposes of this Agreement, provided copies of all such executed
instruments are furnished to the Grantor promptly after their execution, filing
and/or delivery, including, without limitation:

         (a) to ask for, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipt for moneys due and to become due under or in
respect of any of the Collateral,

         (b) to receive, indorse and collect any drafts or other instruments,
documents and chattel paper,

         (c) to file any claims or take any action or institute any proceedings
that the Required Holders may reasonably deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
holders with respect to any of the Collateral, and

         (d) to pay or discharge any taxes or liens levied or placed upon the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same all as determined by the Required Holders in their sole
discretion, it being understood that any such payments made by the holders of
the Notes shall become part of the Secured Obligations, and shall be due and
payable immediately upon demand; provided, however, that the Required Holders
shall have no obligation to perform any of the foregoing actions. The authority
under this Section 9 shall include, without limitation, the authority to endorse
and negotiate any checks or instruments representing proceeds of Collateral in
the name of the Grantor, execute and give receipt for any certificate of
ownership or any document constituting Collateral, transfer title to any item of
Collateral, authorize the filing of any financing statements (to the extent
permitted by applicable law) or any other documents reasonably deemed necessary
or appropriate by the Required Holders to preserve, protect or perfect the
security interest in the Collateral and to file the same, prepare, file and sign
Grantor's name on any notice of Lien, and to take any other actions arising from
or incident to the powers granted to the holders of the Notes in this Agreement.
This power of attorney is coupled with an interest and is irrevocable by the
Grantor.

SECTION 8. Indemnity. The Grantor shall indemnify, hold harmless and defend the
holders of the Notes and each of their respective directors, officers, agents
and employees, from and against any and all claims, actions, obligations,
liabilities, damages and expenses, actually incurred, including, without
limitation, defense costs, investigative fees and costs, and reasonable legal
fees, arising from their execution of or performance

                                       14
                                                           NY Security Agreement

<PAGE>

under this Agreement, except to the extent that such claim, action, obligation,
liability or expense is directly attributable to the bad faith, gross negligence
or willful misconduct of such indemnified person. This indemnification shall
survive the termination of this Agreement until after the expiration of all
applicable statutes of limitation periods.

SECTION 9. Remedies Upon Event of Default. If any Event of Default shall have
occurred and be continuing the holders of the Notes shall have, in addition to
any other rights and remedies provided for in the Note Purchase Agreement or any
other Loan Document, all of the rights and remedies of a secured party under the
Code. Without limiting the generality of the foregoing, upon the occurrence of
an Event of Default, the holders of the Notes shall have in addition to all
other rights and remedies available in any relevant jurisdiction, the rights and
remedies set forth below:

         (a) The Required Holders shall be entitled to take possession of and
prepare the Collateral for sale on behalf of the holders of the Notes until the
Collateral is disposed of, or may propose to retain the Collateral or transfer
the Collateral in satisfaction of the Secured Obligations.

         (b) The Required Holders may require the Grantor to assemble all or any
part of the Collateral and make the Collateral available for possession at any
place or places to be designated by the Required Holders in their reasonable
discretion.

         (c) The Required Holders or their agent shall have the right to enter
upon the premises of the Grantor without any obligation to pay rent to the
Grantor, or any other place or places where the Collateral is located and kept,
or to remove all or any part of the Collateral therefrom to premises maintained
by or on behalf of the Required Holders, or any of their agents, for such time
as the Required Holders may desire, in order to effectively collect or liquidate
the Collateral on behalf of the holders of the Notes.

         (d) Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market, the
Required Holders shall give at least ten days prior written notice to the
Grantor of the time and place of any public sale thereof or of the time after
which any private sale or other intended disposition thereof is to be made. The
Grantor acknowledges and agrees that ten days prior written notice of such sale
or sales shall constitute reasonable notice.

         (e) Any holder of a Note may buy the Collateral or any part thereof at
any public sale, and, if the Collateral is of a type customarily sold on a
recognized market or is of a type which is subject to widely distributed
standard price quotations, any holder of a Note may buy all or any part of such
Collateral at a private sale. The net proceeds realized upon any such
disposition of the Collateral, after deduction for the expenses of retaking,
holding, preparing for sale or lease, selling, leasing and the like, and the
reasonable attorney's fees and legal expenses incurred by such Required Holders
in connection therewith, shall be applied in satisfaction of the Secured
Obligations in such order as the Required Holders in their sole discretion may
elect. The Required Holders

                                       15
                                                           NY Security Agreement

<PAGE>

shall account to the Grantor for any surplus realized on such disposition and
the Grantor shall remain liable for any deficiency.

         (f) With respect to any Deposit Account, securities account or
commodity account, the Required Holders acting on behalf of the holders of the
Notes shall have the right to deliver instructions to the Depositary, securities
intermediary, commodity intermediary or any other financial intermediary or
entity at which such account is maintained, to cease honoring all instructions
or entitlement orders related to such account from the Grantor or its
representatives, to deliver such Collateral to the Required Holders or their
agent for the ratable benefit of the holders of the Notes, and/or to apply any
money, funds or other property or assets deposited or credited to or within such
account as directed by the Required Holders, including, without limitation,
instructions to liquidate any or all property or assets deposited or credited to
or within such account and to pay and release to the holders of the Notes any or
all amounts on deposit, credited to or within such account.

         (g) With respect to any Contract, the Required Holders, acting on
behalf of and for the ratable benefit of the holders of the Notes, shall have
the right, but not the obligation, to exercise any and all rights and remedies
of the Grantor under or in connection with such Contract, including, without
limitation, any and all rights of the Grantor to demand or otherwise require
payment of any amount under, or performance of any provision of, any Contract,
and the Grantor hereby irrevocably designates, makes, constitutes and appoints
such Required Holders (and all other parties designated by the Required Holders)
as the Grantor's true and lawful agents and attorneys-in-fact, with power,
without notice to the Grantor, in the Grantor's or the holders of the Notes'
names to take any of the actions outlined in Section 7(a), (b), (c) and (d). The
Grantor agrees that, upon the occurrence and continuation of an Event of
Default, it shall instruct each other party to each Contract that any and all
payments due or to become due to the Grantor under or in connection with such
Contract shall be made directly to the account indicated by the Required
Holders.

         (h) The remedies of the holders of the Notes hereunder are cumulative
and the exercise of any one or more of the remedies provided for herein, under
the Note Purchase Agreement, any other Loan Document, or under the Code shall
not be construed as a waiver of any of the other remedies of the holders of the
Notes (including the equitable right of set-off), so long as any part of the
Secured Obligations shall remain unsatisfied and the Note Purchase Agreement
remains in effect.

SECTION 10.  Standards for Exercising Remedies.

         To the extent that applicable law imposes duties on the holders of the
Notes (including, without limitation, the Required Holders) to exercise remedies
in a commercially reasonable manner, the Grantor acknowledges and agrees that it
is not commercially unreasonable for the holders of the Notes, except under
circumstances that constitute willful misconduct, bad faith or gross negligence,
(a) to fail to incur expenses reasonably deemed significant by the Required
Holders to prepare Collateral for

                                       16
                                                           NY Security Agreement

<PAGE>

disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (b) to fail to obtain
third party consents for access to Collateral to be disposed of, or to obtain
or, if not required by other law, to fail to obtain governmental or third party
consents for the collection or disposition of Collateral to be collected or
disposed of, (c) to fail to exercise collection remedies against account debtors
or other persons obligated on Collateral or to remove liens or encumbrances on
or any adverse claims against Collateral, (d) to exercise collection remedies
against account debtors and other persons obligated on Collateral specialists,
(e) to advertise dispositions of Collateral through publications or media of
general circulation, whether or not the Collateral is of a specialized nature,
(f) to contact other persons, whether or not in the same business as the
Grantor, for expressions of interest in acquiring all or any portion of the
Collateral, (g) to hire one or more professional auctioneers to assist in the
disposition of Collateral, whether or not the Collateral is of a specialized
nature, (h) to dispose of Collateral by utilizing internet sites that provide
for auction of assets of the types included in the Collateral or that have the
reasonable capability of doing so, or that match buyers and sellers of assets,
(i) to dispose of assets in wholesale rather than retail markets, (j) to
disclaim disposition warranties, (k) to purchase insurance or credit
enhancements to insure the holders of the Notes against risks of loss,
collection or disposition of Collateral or to provide to the holders of the
Notes a guaranteed return from the collection or disposition of Collateral, or
(l) to the extent deemed appropriate by the Required Holders, to obtain the
services of other brokers, investment bankers, consultants and other
professionals to assist the Required Holders in the collection or disposition of
any of the Collateral on behalf and for the ratable benefit of the holders of
the Notes. The Grantor acknowledges that the purpose of this section is to
provide non-exhaustive indications of what actions or omissions by the holders
of the Notes would be commercially reasonable in the holders of the Notes'
exercise of remedies against the Collateral and that other actions or omissions
by the holders of the Notes shall not be deemed commercially unreasonable solely
on account of not being indicated herein. Without limitation upon the foregoing,
nothing contained in this Agreement shall be construed to grant any rights to
the Grantor or to impose any duties on the holders of the Notes that would not
have been granted or imposed by this Agreement or by applicable law in the
absence of this Section 10.

SECTION 11. Expenses. Subject to any limitations set forth in the Loan
Documents, the Grantor will promptly upon demand pay to the holders of the Notes
the amount of any and all reasonable expenses, including, without limitation,
the reasonable fees, expenses and disbursements of counsel, experts and agents
retained by the holders of the Notes, that the holders of the Notes may incur in
connection with (a) the review, negotiation and administration of this
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the holders hereunder or (d) the failure by
the Grantor to perform or observe any of the provisions hereof.

SECTION 12.  Miscellaneous Provisions.

                                       17
                                                           NY Security Agreement

<PAGE>

Section 12.1. Notices. Any notice or other communication given hereunder shall
be sufficiently given if in writing and delivered in the manner provided in
Section 19 of the Note Purchase Agreement addressed:

         (a) If to the Grantor, then as set forth in Section 19 of the Note
Purchase Agreement.

         (b) If to the holders of the Notes, then as set forth in Section 19 of
the Note Purchase Agreement.

All such notices and other communications shall, when mailed, delivered or
telecopied, respectively, be effective when deposited in the mails, delivered or
telecopied, respectively, addressed as aforesaid.

Section 12.2. No Adverse Interpretation of Other Agreements. This Agreement may
not be used to interpret another pledge, security or debt agreement of the
Grantor or any Subsidiary thereof. No such pledge, security or debt agreement
(other than the Loan Documents) may be used to interpret this Agreement.

Section 12.3. Severability. The provisions of this Agreement are severable, and
if any clause or provision shall be held invalid, illegal or unenforceable in
whole or in part in any jurisdiction, then, to the fullest extent permitted by
law, such invalidity or unenforceability shall affect in that jurisdiction only
such clause or provision, or part thereof, and shall not in any manner affect
such clause or provision in any other jurisdiction or any other clause or
provision of this Agreement in any jurisdiction.

Section 12.4. Headings. The headings in this Agreement have been inserted for
convenience of reference only, are not to be considered a part hereof and shall
in no way modify or restrict any of the terms or provisions hereof.

Section 12.5. Counterpart Originals. This Agreement may be signed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same agreement.

Section 12.6. Benefits of Agreement. Nothing in this Agreement, express or
implied, shall give to any Person, other than the parties hereto and any holders
of the Notes and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.

Section 12.7. Amendments, Waivers and Consents. Any amendment or waiver of any
provision of this Agreement and any consent to any departure by the Grantor from
any provision of this Agreement shall be effective only if made or duly given in
compliance with all of the terms and provisions of the Loan Documents, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given, provided that an amendment or supplement
to this Agreement may be entered into by the Grantor without the consent of all
the holders of the Notes, so long as

                                       18
                                                           NY Security Agreement

<PAGE>

such amendment or supplement is reasonably satisfactory in form and substance to
the Grantor and the Required Holders. No amendment or waiver of any provision of
this Agreement, and no consent to any departure by the Grantor herefrom, shall
in any event be effective unless the same shall be made in writing by the
Grantor and the Required Holders. No holder of a Note shall be deemed, by any
act, delay, indulgence, omission or otherwise, to have waived any right or
remedy hereunder or to have acquiesced in any Event of Default or in any breach
of any of the terms and conditions hereof. Failure of any holder of a Note to
exercise, or delay in exercising, any right, power or privilege hereunder shall
not preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by any holder of a Note of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy that such holder would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any rights or remedies provided by law.

Section 12.8. Interpretation of Agreement. To the fullest extent permitted by
applicable law, acceptance of or acquiescence in a course of performance
rendered under this Agreement shall not be relevant to determine the meaning of
this Agreement even though the accepting or acquiescing party had knowledge of
the nature of the performance and opportunity for objection.

Section 12.9.  Continuing Security Interest; Termination.

(a) This Agreement shall create a continuing security interest in and to the
Collateral and shall, unless otherwise provided in this Agreement, remain in
full force and effect until the indefeasible payment in full in cash of the
Secured Obligations. This Agreement shall be binding upon the Grantor, its
transferees, successors and assigns, and shall inure, together with the rights
and remedies of the holders of the Notes hereunder, to the benefit of the
holders of the Notes and their respective successors, transferees and assigns.

(b) This Agreement (other than Grantor's obligations under and to the extent
provided in Sections 8 and 11) shall terminate upon the indefeasible payment in
full in cash of the Secured Obligations. At such time, the holders of the Notes
shall promptly transfer to the Grantor or Grantor's designee all of the
Collateral hereunder that has not been sold, disposed of, retained or applied by
or on behalf of the holders in accordance with the terms of this Agreement and
the Loan Documents and take all other actions that are necessary to release the
security interest created by this Agreement in and to the Collateral, including
the execution and delivery of all termination statements necessary to terminate
any financing or continuation statements filed with respect to the Collateral.

Section 12.10. Survival of Representations and Covenants. All representations,
warranties and covenants of the Grantor contained herein shall survive the
execution and delivery of this Agreement and the termination of this Agreement
until after the indefeasible payment of all Secured Obligations.

                                       19
                                                           NY Security Agreement

<PAGE>

Section 12.11. Waivers. The Grantor, to the fullest extent permitted by
applicable law, waives presentment and demand for payment of any of the
Obligations, protest and notice of dishonor or default with respect to any of
the Obligations, and all other notices to which the Grantor might otherwise be
entitled, except as otherwise expressly provided herein or in the Loan
Documents.

Section 12.12. Final Expression. This Agreement, together with the other Loan
Documents and any other agreement executed in connection herewith or therewith,
is intended by the parties hereto and thereto as a final expression of this
Agreement and is intended as a complete and exclusive statement of the terms and
conditions thereof.

Section 12.13. Rights of Holders of the Notes. No holder of a Note shall have
any independent rights hereunder other than those rights granted to individual
holders of the Notes pursuant to the Loan Documents; provided that nothing in
this subsection shall limit any rights granted to the holders of the Notes under
this Agreement or the other Loan Documents.

Section 12.14. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial;
Waiver of Damages.

         (a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THIS
AGREEMENT AND ALL MATTERS ARISING OUT OF OR RELATING IN ANY WAY WHATSOEVER
(WHETHER IN CONTRACT, TORT OR OTHERWISE) TO THIS AGREEMENT SHALL BE GOVERNED BY,
THE LAW OF THE STATE OF NEW YORK.

         (b) FOR ANY SUIT, ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT,
THE GRANTOR HEREBY AGREES TO SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY
FEDERAL OR STATE COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK, STATE OF NEW YORK.

         (c) THE GRANTOR AGREES THAT THE REQUIRED HOLDERS SHALL, IN THEIR
CAPACITY AS HOLDERS OR IN THE NAME AND ON BEHALF OF ANY HOLDER, HAVE THE RIGHT,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW (AND TO THE EXTENT THE
REQUIRED HOLDERS HAVE RECEIVED INDEMNITY DEEMED SATISFACTORY TO THEM AND HAVE
AGREED TO DO SO), TO PROCEED AGAINST THE GRANTOR OR THE COLLATERAL IN A COURT IN
ANY LOCATION REASONABLY SELECTED IN GOOD FAITH (AND HAVING PERSONAL OR IN REM
JURISDICTION OVER THE GRANTOR OR THE COLLATERAL, AS THE CASE MAY BE) TO ENABLE
THE SECURED PARTIES TO REALIZE ON SUCH COLLATERAL, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER ENTERED IN FAVOR OF THE SECURED PARTIES. THE GRANTOR AGREES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THAT IT WILL NOT ASSERT ANY
COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS IN ANY PROCEEDING

                                       20
                                                           NY Security Agreement

<PAGE>

BROUGHT BY THE SECURED PARTIES TO REALIZE ON SUCH PROPERTY OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE SECURED PARTIES, EXCEPT FOR SUCH
COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF NOT ASSERTED IN ANY SUCH
PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED. THE GRANTOR WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT THEY MAY HAVE
TO THE LOCATION OF THE COURT IN THE CITY OF NEW YORK IN THE BOROUGH OF MANHATTAN
ONCE THE REQUIRED HOLDERS HAVE COMMENCED A PROCEEDING DESCRIBED IN THIS
PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR
BASED ON THE GROUNDS OF FORUM NON CONVENIENS.

         (d) THE GRANTOR AGREES THAT NO HOLDER OF A NOTE (EXCEPT AS OTHERWISE
PROVIDED IN THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS) SHALL HAVE ANY LIABILITY
TO THE GRANTOR (WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES
SUFFERED BY THE GRANTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY
RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY
THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE
SECURED PARTIES CONSTITUTING BAD FAITH, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

SECTION 13. Reinstatement. This Agreement and the Liens created hereunder shall
automatically be reinstated if and to the extent that for any reason any payment
by or on behalf of the Grantor in respect of the Secured Obligations is
rescinded or must otherwise be restored by any holder, whether as a result of
any proceedings in bankruptcy or reorganization or otherwise, and Grantor shall
indemnify the holders on demand for all reasonable costs and expenses
(including, without limitation, reasonable fees and expenses of counsel)
incurred by the holders in connection with such rescission or restoration.

SECTION 14. No Third Party Beneficiaries. Nothing in this Agreement, express or
implied, shall be construed to confer upon any Person (other than the parties
hereto, the holders of the Notes, their respective successors and assigns
permitted hereby and, to the extent expressly contemplated hereby, the
directors, officers, employees and Affiliates of the holders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.

Section 15. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON

                                       21
                                                           NY Security Agreement

<PAGE>

CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

                                       22
                                                           NY Security Agreement

<PAGE>

IN WITNESS WHEREOF, the Grantor and the Purchasers have each caused this
Agreement to be duly executed and delivered as of the date first above written.

                                            CANARGO ENERGY CORPORATION

                                            By:
                                                --------------------------------
                                                Name:
                                                Title:

                                            THE PURCHASERS:

                                            INGALLS & SNYDER VALUE
                                            PARTNERS L.P.

                                            By:
                                                --------------------------------
                                                Thomas O. Bouchar Jr.
                                                General Partner

                                            NIKOLAOS D. MONOYIOS

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

                                            THOMAS L. GIPSON

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

                                            ARTHUR KOENIG

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

                                            THOMAS L. GIPSON IRA

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

                                            EVAN JANOVIC

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

                                       S-1
                                                           NY Security Agreement

<PAGE>

                                            ARTHUR ABLIN

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

                                            FLEDGLING ASSOCIATES, LLC
                                            BY: HARTZ TRADING, INC., MANAGER

                                            ------------------------------------
                                            Edward Stern
                                            President

                                            ADAM JANOVIC

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

                                            NEIL JANOVIC

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

                                            ANTHONY CORSO

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

                                            JOHN GILMER

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

                                            MARTIN SOLOMON

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

                                       S-2
                                                           NY Security Agreement

<PAGE>

                                   SCHEDULE I

THE PURCHASERS:

INGALLS & SNYDER VALUE PARTNERS L.P.

NIKOLAOS D. MONOYIOS

THOMAS L. GIPSON

ARTHUR KOENIG

THOMAS L. GIPSON IRA

EVAN JANOVIC

ARTHUR ABLIN

FLEDGLING ASSOCIATES, LLC

ADAM JANOVIC

NEIL JANOVIC

ANTHONY CORSO

JOHN GILMER

MARTIN SOLOMON

                                                           NY Security Agreement

<PAGE>

                                   SCHEDULE 2

                                  FIELD OFFICES

16 Bordage
St Peter Port
Guernsey
GY1 1BD

150 Buckingham Palace Road
London
SW1W 9TR

69 Tole bi Street, Office 10
Almaty 050000
Kazakhstan

Ninotsminda Re Office, CanArgo Norio Limited Rep Office, CanArgo Samgori Limited
Rep Office and CanArgo (Nazvrevi) Ltd Rep Office - 4-a Freedom Square, Tbilisi
0105, Georgia.

CanArgo Georgia - 70 Kostava Street, Tbilisi 0171, Georgia.

                                                           NY Security Agreement

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