Document:

Exhibit
10.2

EXECUTION COPY

PARTICLE DRILLING
TECHNOLOGIES, INC.

REGISTRATION
RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”)
is made as of October 19, 2006 by and among PARTICLE DRILLING
TECHNOLOGIES, INC., a Nevada corporation (the “Company”), and each
investor signatory hereto and listed for convenience only on Schedule I hereto (each such investor, individually, an “Investor”
and, collectively, the “Investors”).

WHEREAS, the Company has agreed to issue and sell to
the Investors, and the Investors have agreed to purchase from the Company, an
aggregate of up to 5,000,000 shares (the “Shares”) of the Company’s
common stock, $0.001 par value per share (including any securities into which
or for which such shares may be exchanged for, or converted into, pursuant to
any stock dividend, stock split, stock combination, recapitalization,
reclassification, reorganization or other similar event, the “Common Stock”),
at a per share price and upon the terms and conditions set forth in the Securities
Purchase Agreement, dated as of the date hereof, between the Company and the
Investors (the “Securities Purchase Agreement”) and Warrants to purchase
Warrant Shares as set forth in the Securities Purchase Agreement; and

WHEREAS, the terms of the Securities Purchase
Agreement provide that it shall be a condition precedent to the closing of the
transactions thereunder, for the Company and the Investors to execute and
deliver this Agreement.

NOW, THEREFORE, in
consideration of the premises and mutual covenants contained herein, the
parties hereto hereby agree as follows:

1.             DEFINITIONS.  The following terms shall have the meanings
provided therefor below or elsewhere in this Agreement as described below:

“Affiliate” means any Person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, a Person, as such terms are used and construed
under Rule 144, and in all cases including, without limitation, any Person that
serves as a general partner and/or investment adviser or in a similar capacity
of a Person.

“Aggregate Purchase Price”
shall have the meaning assigned to such term in the Securities Purchase
Agreement

“Board” means the
board of directors of the Company.

“Business Day” means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday or a day on which banking institutions in the State of New York or the
State of Texas are authorized or required by law or other governmental action
to close.

“Closing Date” has the
meaning set forth in the Securities Purchase Agreement.

“Exchange Act” means
the Securities Exchange Act of 1934, as amended, and all of the rules and
regulations promulgated thereunder.

 

“Person” (whether or
not capitalized) means an individual, partnership, limited liability company,
corporation, association, trust, joint venture, unincorporated organization,
and any government, governmental department or agency or political subdivision
thereof.

“Prospectus” means the
prospectus included in any Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective Registration Statement in reliance
upon Rules 430A, 430B or 430C promulgated under the Securities Act), as amended
or supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Shares covered by such Registration
Statement, and all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference in such
Prospectus.

“Registrable Shares”
means, at the relevant time of reference thereto, the Shares and Warrant Shares
(including any shares of capital stock that may be issued in respect thereof
pursuant to a stock split, stock dividend, recombination, reclassification or
the like), PROVIDED, HOWEVER, that the term “Registrable Shares” shall not
include any of the Shares or Warrant Shares (i) that are actually sold pursuant
to a registration statement that has been declared effective under the
Securities Act by the SEC, (ii) that are actually sold pursuant to Rule 144
under the Securities Act, or (iii) that may be sold pursuant to Rule 144(k)
under the Securities Act.

“Registration Statement”
means the Mandatory Registration Statement (as defined below) and any
additional registration statements contemplated by this Agreement, including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement or Prospectus.

“Rule 144” means Rule
144 promulgated under the Securities Act and any successor or substitute rule,
law or provision.

“SEC” means the
Securities and Exchange Commission.

“Securities Act” means
the Securities Act of 1933, as amended, and all of the rules and regulations
promulgated thereunder.

“Warrant Shares” shall
have the meaning assigned to such term in the Securities Purchase Agreement.

“Warrants”
shall have the meaning assigned to such term in the Securities Purchase
Agreement.

2.             MANDATORY
REGISTRATION STATEMENT.

(a)           As promptly as
possible after the Closing Date, and in any event prior to the earlier of (1)
the 10th calendar day following the date the Company
files its Annual Report on Form 10-K for the fiscal year ended September 30,
2006 and (2) January 15, 2007 (the “Mandatory Filing Date”), the Company
shall prepare and file with the SEC a Registration Statement on Form S-1 or, if
eligible, on Form S-3 for the purpose of registering under the Securities Act
all of the Registrable Shares for resale by, and for the account of, each
Investor as an initial selling stockholder thereunder (the “Mandatory
Registration Statement”).  The
Mandatory Registration Statement shall permit the Investors to offer and sell,
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
any or all of the Registrable Shares. 
The Company agrees to use its commercially reasonable efforts to cause
the Mandatory Registration Statement to be declared effective as soon as
possible but in no event later than

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the date that
is 60 calendar days following the filing date of the Mandatory Registration
Statement (or 90 calendar days following the filing date in the event the staff
of the SEC decides to “review” the Mandatory Registration Statement) (the “Mandatory
Effective Date”) (including filing with the SEC, within five (5) Business
Days of the date that the Company is notified (orally or in writing, whichever
is earlier) by the SEC that the Mandatory Registration Statement will not be “reviewed”
or will not be subject to further review, a request for acceleration of
effectiveness in accordance with Rule 461 promulgated under the Securities Act
(an “Acceleration Request”), which request shall request an effective
date that is within three (3) Business Days of the date of such request).  The Company shall notify each Investor in
writing promptly (and in any event within one (1) Business Day) after the
Company’s submission of an Acceleration Request to the SEC.  The Company shall be required to keep the
Mandatory Registration Statement continuously effective (including through the filing of any required post-effective
amendments) until the earliest to occur of (i) the date after which all of the
Registrable Shares registered thereunder shall have been sold and (ii) the
second (2nd) anniversary of the effective date of the Mandatory
Registration Statement; provided, that
in any case such date shall be extended by the amount of time of any Suspension
Period (as defined below) (the “Effectiveness Period”).  Notwithstanding the foregoing, in no event
shall the Company be required to keep the Mandatory Registration Statement
effective after the date on which the
Investor may sell all Registrable Shares then held by the Investor without
restriction under Rule 144(k) of the Securities Act.  Thereafter, the Company shall be entitled to
withdraw the Mandatory Registration Statement and, upon such withdrawal, the
Investors shall have no further right to offer or sell any of the Registrable
Shares pursuant to the Mandatory Registration Statement (or any prospectus
relating thereto).

(b)           Notwithstanding
anything in this Section 2 to the contrary, if the Company shall furnish to the
Investors a certificate signed by the President or Chief Executive Officer of
the Company stating that the Board has made the good faith determination upon
the advice of counsel (i) that the continued use by the Investors of a
Registration Statement for purposes of effecting offers or sales of Registrable
Shares pursuant thereto would require, under the Securities Act and the rules
and regulations promulgated thereunder, premature disclosure in a Registration
Statement (or the Prospectus relating thereto) of material, nonpublic
information concerning the Company, its business or prospects or any proposed
material transaction involving the Company, (ii) that such premature disclosure
would be materially adverse to the Company, its business or prospects or any
such proposed material transaction and (iii) that it is therefore necessary to
suspend the use by the Investors of, or the filing of, a Registration Statement
(and the Prospectus relating thereto), then the right of the Investors to use a
Registration Statement (and the Prospectus relating thereto) for purposes of
effecting offers or sales of Registrable Shares pursuant thereto or the filing
of any Registration Statement shall be suspended for a period (the “Suspension
Period”) not greater than forty-five (45) consecutive Business Days and not
more than ninety (90) Business Days during any consecutive twelve (12) month
period.  During the Suspension Period,
the Investors shall not offer or sell any Registrable Shares pursuant to or in
reliance upon a Registration Statement (or the Prospectus relating
thereto).  The Company agrees that, as
promptly as possible, but in no event later than one (1) Business Day, after
the consummation, abandonment or public disclosure of the event or transaction
that caused the Company to suspend the use of or delay the filing of a
Registration Statement (and the Prospectus relating thereto) pursuant to this
Section 2(b), the Company will as promptly as possible lift any suspension,
provide the Investors with revised Prospectuses, if required, and will notify
the Investors of their ability to effect offers or sales of Registrable Shares
pursuant to or in reliance upon the Registration Statement.

(c)           It shall be a
condition precedent to the obligations of the Company to register the Registrable
Shares for the account of an Investor pursuant to this Section 2 or Section 3
that such Investor furnish to the Company such information regarding itself,
the Registrable Shares held by it, and the method of disposition of such
securities as shall be reasonably required to effect the registration of such
Investor’s Registrable Shares.

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(d)           If (i) the Mandatory
Registration Statement is not filed on or prior to the Mandatory Filing Date,
or (ii) the Mandatory Registration Statement filed or required to be filed
hereunder is not declared effective by the Commission by the Mandatory
Effective Date (any such failure or breach being referred to as an “Event”, and
for purposes of clause (i) or (ii) the date on which such Event occurs,
referred to as “Event Date”), then on each such Event Date and on each monthly
anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company shall
pay to each Investor an amount in cash, as liquidated damages and not as a
penalty, equal to 1% of the aggregate purchase price paid by such Investor
pursuant to the Securities Purchase Agreement for any Registrable Shares then
held by such Investor assuming for such purposes that such calculation is based
on a fully converted basis.  The parties
agree that (1) in no event will the Company be liable for liquidated damages
under this Agreement in excess of 1% of the Aggregate Purchase Price of the Investors
in any 30-day period and (2) the maximum aggregate liquidated damages payable
to an Investor under this Agreement shall be twelve percent (12%) of the Aggregate
Purchase Price paid by such Investor pursuant to the Securities Purchase Agreement.  If the Company fails to pay any partial
liquidated damages pursuant to this Section in full within seven days after the
date payable, the Company will pay interest thereon at a rate of 18% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to the Investor, accruing daily from the date such partial liquidated damages
are due until such amounts, plus all such interest thereon, are paid in full.  The liquidated damages pursuant to the terms
hereof shall apply on a daily pro-rata basis for any portion of a month prior
to the cure of an Event.  Notwithstanding
anything in this agreement to the contrary, the Investors’ sole remedy at law
for the failure of the Company to file a Mandatory Registration Statement and cause
such Mandatory Registration Statement to become effective in accordance with
Section 2(a) hereof shall be the liquidated damages described in this Section
2(d).

3.             “PIGGYBACK REGISTRATION”.

(a)           If at any time
during the Effectiveness Period any Registrable Shares are not able to be
resold pursuant to an effective Registration Statement, and the Company
proposes to register any of its Common Stock under the Securities Act, whether
as a result of an offering for its own account or the account of others (but
excluding any registrations to be effected on Forms S-4 or S-8 or other
applicable successor Forms), on a Registration Statement that is to be filed
prior to the expiration of the Effectiveness Period, the Company shall, each
such time, give to the Investors twenty (20) days’ prior written notice of its
intent to do so, and such notice shall describe the proposed registration and
shall offer such Investors the opportunity to include in such Registration
Statement such number of Registrable Shares as each such Investor may
request.  Upon the written request of any
Investor given to the Company within fifteen (15) days after the receipt of any
such notice by the Company, the Company shall include in such Registration
Statement all or part of the Registrable Shares of such Investor, to the extent
requested to be registered, subject to Section 3(b).

(b)           If a registration
pursuant to Section 3 hereof involves an underwritten offering and the managing
underwriter shall advise the Company that, in its opinion, the number of shares
of Common Stock requested by the Investors to be included in such registration
is likely to affect materially and adversely the success of the offering or the
price that would be received for any shares of Common Stock offered in such offering,
then, notwithstanding anything in this Section 3 to the contrary, the Company
shall only be required to include in such registration, to the extent of the
number of shares of Common Stock which the Company is so advised can be sold in
such offering, (i) first, the number of shares of Common Stock requested to be
included in such registration for the account of any stockholder that has
registration rights pursuant to the Registration Rights Agreement between
Particle Drilling Technologies, Inc., a Delaware corporation, and the
stockholders listed on Schedule II hereto, (ii) second, the number of
shares of Common Stock requested to be included in such registration for the
account of any stockholder that has registration rights pursuant to the Registration
Rights Agreement dated February 

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9, 2005, between
the Company and the stockholders listed on Schedule III hereto, (iii)
third, the number of shares of Common Stock requested to be included in such
registration for the account of the Investors, pro rata among the Investors on
the basis of the number of shares of Common Stock that each of them has
requested to be included in such registration, (iv) fourth, the number of
shares of Common Stock requested to be included in such registration for the
account of any other stockholders of the Company, pro rata among such
stockholders on the basis of the number of shares of Common Stock that each of
them has requested to be included in such registration and (v) fifth, any
shares of Common Stock proposed to be included in such registration for the
account of the Company.

(c)           In connection with
any offering involving an underwriting of shares, the Company shall not be
required under this Section 3 or otherwise to include the Registrable Shares of
any Investor therein unless such Investor accepts and agrees to the terms of
the underwriting, which shall be reasonable and customary, as agreed upon
between the Company and the underwriters selected by the Company (which
underwriters shall be reasonably acceptable to holders of a majority of the
then outstanding Registrable Shares).

4.             OBLIGATIONS OF THE COMPANY.  In connection with the Company’s registration
obligations hereunder, the Company shall:

(a)           as expeditiously as
practicable (i) furnish to each Investor copies of all documents filed with the
SEC in connection with such registration at least two (2) business days prior
to their being filed with the SEC (and provide the Investors with a reasonable
opportunity to review and comment on such documents), (ii) use its reasonable best
efforts to cause its officers and directors, counsel and certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of such Investor, to conduct a reasonable investigation
within the meaning of the Securities Act, and (iii) notify the Investors of any
stop order issued or threatened by the SEC and use reasonable best efforts to
prevent the entry of such stop order or to remove it if entered.

(b)           as expeditiously as
practicable (i) prepare and file with the SEC such amendments and supplements,
including post-effective amendments, to each Registration Statement and the
Prospectus used in connection therewith as may be necessary to comply with the
Securities Act and to keep the Registration Statement continuously effective as
required herein, and prepare and file with the SEC such additional Registration
Statements or amendments or supplements, including post-effective amendments,
as necessary to register for resale under the Securities Act all of the
Registrable Shares (including naming any permitted transferees of Registrable
Shares as selling stockholders in such Registration Statement); (ii) cause any
related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424;
(iii) respond as promptly as possible to any comments received from the SEC
with respect to each Registration Statement or any amendment thereto, or any
document filed with the SEC that would suspend the effectiveness of the
Registration Statement, and, if requested by an Investor, as promptly as
reasonably possible provide such Investor with true and complete copies of all
correspondence from and to the SEC relating to the Registration Statement (other
than those portions of any correspondence containing material nonpublic
information); and (iv) comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Shares covered
by such Registration Statement as so amended or in such Prospectus as so
supplemented.

(c)           Notify the Investors
as promptly as reasonably possible:

(i)            when the SEC
notifies the Company whether there will be a “review” of a Registration
Statement and whenever the SEC comments in writing on such Registration
Statement; and

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(ii)           when a Registration
Statement, or any post-effective amendment or supplement thereto, has become
effective, and after the effectiveness thereof: (A) of any request by the SEC
or any other federal or state governmental authority for amendments or
supplements to the Registration Statement or Prospectus or for additional
information; (B) of the issuance by the SEC or any state securities commission
of any stop order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Shares or the initiation of any
proceedings for that purpose; (C) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Shares for sale in any
jurisdiction, or the initiation or threatening of any proceeding for such
purpose; and (D) of any pending proceeding against the Company under Section 8A
of the Securities Act in connection with the offering of the Registrable Shares.  Without limitation of any remedies to which
the Investors may be entitled under this Agreement or otherwise, if any of the
events described in Section 4(c)(ii)(A), 4(c)(ii)(B), 4(c)(ii)(C), and
4(c)(ii)(D) occur, the Company shall use commercially reasonable efforts to
respond to and correct the event.

(d)           Promptly notify the
Investors of the happening of any event as a result of which the Prospectus
included in or relating to a Registration Statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading or the occurrence of any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and, thereafter, the Company will as promptly as possible prepare (and, when
completed, promptly give written notice to each Investor) a supplement or
amendment to such Prospectus so that, as thereafter delivered to the purchasers
of such Registrable Shares, such Prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the statements
therein not misleading; provided that upon receipt of such notification from
the Company, the Investors will not offer or sell Registrable Shares pursuant
to such Prospectus until the Company has notified the Investors that it has
prepared a supplement or amendment to such Prospectus and delivered copies of
such supplement or amendment to the Investors (it being understood and agreed
by the Company that the foregoing proviso shall in no way diminish or otherwise
impair the Company’s obligation to as promptly as possible prepare a Prospectus
amendment or supplement as above provided in this Section 4(d) and deliver
copies of same as provided in Section 4(h) hereof), and it being further
understood that, in the case of the Mandatory Registration Statement, any such
period during which the Investors are restricted from offering or selling
Registrable Shares shall constitute a Suspension Period.

(e)           Upon the occurrence
of any event described in Section 4(d) hereof, as promptly as possible, prepare
a supplement or amendment, including a post-effective amendment, to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, and
file any other required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading.

(f)            Use commercially
reasonable efforts to avoid the issuance of or, if issued, obtain the
withdrawal of, (i) any order suspending the effectiveness of any Registration
Statement or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Shares for sale in any jurisdiction,
as promptly as possible (it being understood that, in the case of the Mandatory
Registration Statement, any period during which the effectiveness of the
Mandatory Registration Statement or the qualification of any Registrable Shares
is suspended shall constitute a Suspension Period).

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(g)           Promptly furnish to an
Investor, upon receipt of a written request and without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, and all
exhibits to the extent requested by such Investor in such request (including
those previously furnished or incorporated by reference).

(h)           As promptly as
possible furnish to each selling Investor, without charge, such number of
copies of a Prospectus, including a preliminary Prospectus, if applicable, in
conformity with the requirements of the Securities Act, and such other
documents (including, without limitation, Prospectus amendments and
supplements) as each such selling Investor may reasonably request in order to
facilitate the disposition of the Registrable Shares covered by such Prospectus
and any amendment or supplement thereto. 
The Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Investors in connection
with the offering and sale of the Registrable Shares covered by such Prospectus
and any amendment or supplement thereto to the extent permitted by federal and
state securities laws and regulations.

(i)            Use commercially
reasonable efforts to register and qualify (or obtain an exemption from such
registration and qualification) the Registrable Shares under such other
securities or blue sky laws of the states of residence of each Investor and
such other U.S. jurisdictions as each Investor shall reasonably request, to
keep such registration or qualification (or exemption therefrom) effective
during the periods each Registration Statement is effective, and do any and all
other acts or things which may be reasonably necessary or advisable to enable
each Investor to consummate the public sale or other disposition of Registrable
Shares in such jurisdictions, provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions where it is not then qualified or subject to process.

(j)            Cooperate with the
Investors to facilitate the timely preparation and delivery of certificates
representing the Registrable Shares to be delivered to a transferee pursuant to
a Registration Statement, which certificates shall be free, to the extent
permitted by the Securities Purchase Agreement and applicable law, of all
restrictive legends, and to enable such Registrable Shares to be in such
denominations and registered in such names as such Investors may request.

(k)           Cooperate with any
reasonable due diligence investigation undertaken by the Investors, any
managing underwriter participating in any disposition pursuant to a
Registration Statement, Investors’ counsel and any attorney, accountant or
other agent retained by Investors or any managing underwriter, in connection
with the sale of the Registrable Shares, including, without limitation, making
available any documents and information; provided, however, that the Company
will not deliver or make available to any Investor material, nonpublic
information unless such Investor specifically requests and consents in advance
in writing to receive such material, nonpublic information and, if requested by
the Company, such Investor agrees in writing to treat such information as
confidential.

(l)            At the request of a
permitted transferee of an Investor to include such transferee as a selling
stockholder, the Company shall amend any Registration Statement to include such
transferee as a selling stockholder in such Registration Statement.

(m)          Comply with all
applicable rules and regulations of the SEC in all material respects.

(n)           Make available for
inspection by each
Investor, any underwriter participating in any disposition pursuant to
any registration hereunder, and any attorney, accountant or other agent
retained by such Investor or any
such underwriter (collectively, the “Inspectors”),
all financial and other 

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records,
pertinent corporate documents and properties of the Company and any of its
subsidiaries (collectively, the “Records”) as shall be reasonably
necessary to enable them to exercise their due diligence responsibility, and
cause the officers, directors and employees of the Company to supply all
information reasonably requested by any such Inspector in connection with any
registration hereunder, provided, however,
that (i) in connection with any such inspection, any such Inspectors shall
cooperate to the extent reasonably practicable to minimize any disruption to
the operation by the Company of its business and shall comply with all Company
site safety rules, (ii) records and information obtained hereunder shall
be used by such Inspectors only to exercise their due diligence responsibility
and (iii) Records or information furnished or made available hereunder shall be
kept confidential and shall not be disclosed by such Investor, underwriter or
Inspectors unless (A) the disclosing party advises the other party that
the disclosure of such Records or information is necessary to avoid or correct
a misstatement or omission in a Registration Statement or is otherwise required
by law, (B) the release of such Records or information is ordered pursuant
to a subpoena or other order from a court or governmental authority of
competent jurisdiction, or (C) such Records or information otherwise become
generally available to the public other than through disclosure by such
Investor, underwriter or Inspector in breach hereof or by any Person in breach
of any other confidentiality arrangement.

(o)           Use all reasonable
efforts to furnish to each Investor and to the managing underwriter, if any, a
signed counterpart, addressed to such Investor and the managing underwriter, if
any, of (i) an opinion or opinions of counsel to the Company and
(ii) a comfort letter or comfort letters from the Company’s independent
public accountants pursuant to Statement
on Auditing Standards No. 72, each in customary form and covering such
matters of the type customarily covered by opinions or comfort letters, as the
case may be, as each such Investor and the managing underwriter, if any, reasonably requests.

(p)           In connection with
any registration hereunder, provide officers’ certificates and other customary
closing documents.

(q)           Cooperate with each
seller of Registrable Shares, Investor and any underwriter in the disposition of
such Registrable Shares and cooperate with underwriters’ counsel, if any, in connection with any filings required
to be made with the National Association of Securities Dealers, Inc.

(r)            With respect to an
underwritten offering of Registrable Shares, use its reasonable best efforts to
cause all such Registrable Shares to be listed on each securities exchange on
which similar securities issued by the Company are then listed.

(s)           File electronically
on EDGAR the Registration Statement and all amendments and supplements thereto.

5.             EXPENSES OF REGISTRATION.  The Company shall pay for all expenses
incurred in connection with a registration pursuant to this Agreement and
compliance with Section 4 of this Agreement, including without limitation (i)
all registration, filing and qualification fees and expenses (including without
limitation those related to filings with the SEC, the National Association of
Securities Dealers, Inc. or any national securities exchange upon which the
Company’s securities are listed and in connection with applicable state
securities or blue sky laws), (ii) all printing expenses, (iii) all messenger,
telephone and delivery expenses incurred by the Company, (iv) all reasonable
fees and disbursements of counsel for the Company and one (1) Investors’
counsel, and (v) all reasonable fees and expenses of all other Persons retained
by the Company in connection with the consummation of the transactions
contemplated by this Agreement; provided, however, that in no event shall the
Company be responsible for any underwriting discounts or commissions incurred
by the Investors in connection with the sale the Registrable Shares.

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6.             DELAY OF REGISTRATION. 
Subject to Section 11(d) hereof, the Investors and the Company (other
than with respect to Section 4(d) hereof) shall not take any action to
restrain, enjoin or otherwise delay any registration as the result of any
controversy which might arise with respect to the interpretation or
implementation of this Agreement.

7.             INDEMNIFICATION. 
In the event that any Registrable Shares of the Investors are included
in a Registration Statement pursuant to this Agreement:

(a)           To the fullest
extent permitted by law, the Company will indemnify and hold harmless each
Investor and each officer, director, fiduciary, employee, member, agent,
investment advisor, (or other equity holder), general partner and limited
partner (and affiliates thereof) of such Investor, each broker, underwriter or
other Person acting on behalf of such Investor and each Person, if any, who
controls such Investor within the meaning of the Securities Act, against any
expenses, losses, claims, damages, actions or liabilities, joint or several
(the “Losses”), to which they may become subject under the Securities
Act or otherwise, insofar as such Losses (or actions in respect thereof) arise
out of or relate to any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, or arise out of or relate to the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
any violation by the Company of the Securities Act or state securities or blue
sky laws applicable to the Company; and, subject to the provisions of Section
7(c) hereof, the Company will reimburse on demand such Investor, such broker or
other Person acting on behalf of such Investor and such officer, director,
fiduciary, agent, investment advisor, employee, member (or other equity
holder), general partner, limited partner, affiliate or controlling Person for
any legal or other expenses reasonably incurred by any of them in connection
with investigating or defending any such Loss; provided, however, that the
indemnity agreement contained in this Section 7(a) shall not apply to amounts
paid in settlement of any such Losses if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld,
conditioned or delayed), nor shall the Company be liable in any such case for
any such Loss to the extent that (i) it solely arises out of or is based upon
an untrue statement of any material fact contained in the Registration
Statement or omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, in
reliance upon and in conformity with written information furnished by such
Investor expressly for use in connection with such Registration Statement or
(ii) it arises from the offer or sale of Registrable Shares during any
Suspension Period, if notice thereof was given to such Investor (unless such
sale was committed to prior to the receipt of such notice).

(b)           To the fullest
extent permitted by law, each Investor, severally (as to itself) and not
jointly, will indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the Registration Statement, each Person,
if any, who controls the Company within the meaning of the Securities Act, and
all other Investors against any Losses to which the Company or any such
director, officer or controlling Person or other Investor may become subject
to, under the Securities Act or otherwise, insofar as such Losses (or actions
in respect thereto) solely arise out of or are based upon any untrue statement
of any material fact contained in the Registration Statement, or solely arise
out of or relate to the omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
in each case to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement in reliance upon and in conformity with written information furnished
by such Investor expressly for use in connection with such Registration
Statement; and, subject to the provisions of Section 7(c) hereof, such Investor
will reimburse on demand any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling Person, or other Investor in
connection with investigating or defending any such Losses, provided, however,
that the maximum aggregate amount of liability of such 

 9
 

 

Investor under
this Section 7 shall be limited to the proceeds (net of underwriting discounts
and commissions, if any) actually received by such Investor from the sale of
Registrable Shares covered by such Registration Statement; and provided,
further, however, that the indemnity agreement contained in this Section 7(b)
or 7(e) shall not apply to amounts paid in settlement of any such Losses if
such settlement is effected without the consent of such Investor against which
the request for indemnity is being made (which consent shall not be
unreasonably withheld, conditioned or delayed).

(c)           As promptly as
possible after receipt by an indemnified party under this Section 7 of notice
of the threat, assertion or commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party under this Section 7, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right to
participate in and, to the extent the indemnifying party desires, jointly with
any other indemnifying party similarly noticed, to assume at its expense the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that, the failure to notify an indemnifying party promptly of the threat,
assertion or commencement of any such action shall not relieve such
indemnifying party of any liability to the indemnified party under this Section
7 except (and only) to the extent that it shall be finally determined by a
court of competent jurisdiction (which determination is not subject to appeal
or further review) that such failure shall have proximately and materially
adversely prejudiced the indemnifying party.

(d)           If any indemnified
party shall have reasonably concluded that there may be one or more legal
defenses available to such indemnified party which are different from or
additional to those available to the indemnifying party, or that such claim or
litigation involves or could have an effect upon matters beyond the scope of
the indemnity agreement provided in this Section 7, the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party, and such indemnifying party shall reimburse such indemnified
party and any Person controlling such indemnified party for the fees and
expenses of counsel retained by the indemnified party which are reasonably
related to the matters covered by the indemnity agreement provided in this
Section 7.  Subject to the foregoing, an
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Company.  The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent,
which consent shall not be unreasonably withheld, conditioned or delayed. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending proceeding in respect of which any
indemnified party is a party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such proceeding

(e)           If the
indemnification provided for in this Section 7 from the indemnifying party is
applicable by its terms but unavailable to an indemnified party hereunder in
respect of any Losses, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall, subject to the maximum aggregate liability of
any Investor as set forth in Section 7(b), contribute to the amount paid or
payable by such indemnified party as a result of such Losses in such proportion
as is appropriate to reflect the relative fault of the indemnifying party and indemnified
party in connection with the actions which resulted in such Losses, as well as
any other relevant equitable considerations. 
The relative faults of such indemnifying party and indemnified party
shall be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact, has been made by, or
relates to information supplied by, such indemnifying party or indemnified
party, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such action. 
The amount paid or payable by a party as a result of the Losses referred
to above shall be deemed to include, subject to the limitations set forth in 

 10
 

 

Sections 7(a),
7(b), 7(c) and 7(d), any legal or other fees, charges or expenses reasonably
incurred by such party in connection with any investigation or proceeding.

No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.  The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 7(e) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph.

(f)            The indemnity and
contribution agreements contained in this Section 7 are in addition to any
liability that any indemnifying party may have to any indemnified party.

8.             REPORTS UNDER THE EXCHANGE ACT.  With a view to making available to the
Investors the benefits of Rule 144 and any other rule or regulation of the SEC
that may at any time permit the Investors to sell the Registrable Shares to the
public without registration, the Company agrees to use commercially reasonable
efforts to: (i) make and keep public information available, as those terms are
understood and defined in Rule 144, (ii) file with the SEC in a timely manner
all reports and other documents required to be filed by an issuer of securities
registered under the Securities Act or the Exchange Act; (iii) as long as any
Investor owns any Registrable Shares, to furnish in writing upon an Investor’s
request in writing to the Company a written statement by the Company that it
has complied with the reporting requirements of Rule 144 and of the Securities
Act and the Exchange Act, and to furnish to such Investor a copy of the most
recent annual and quarterly reports of the Company, and such other reports and
documents so filed by the Company as may be reasonably requested in writing to
the Company by the Investor in availing such Investor of any rule or regulation
of the SEC permitting the selling of any such Registrable Shares without
registration, and (iv) undertake any additional actions reasonably necessary to
maintain the availability of a Registration Statement, including any successor
or substitute forms, or the use of Rule 144.

9.             TRANSFER OF REGISTRATION RIGHTS.  Each Investor may assign or transfer any or
all of its rights under this Agreement to any Person to the extent a transfer
of the Registrable Shares is permitted under the Securities Purchase Agreement
with respect to the Registrable Shares, provided such assignee or transferee
agrees in writing to be bound by the provisions hereof that apply to such
assigning or transferring Investor.  Upon
any such, and each successive, assignment or transfer to any permitted assignee
or transferee in accordance with the terms of this Section 9, such permitted
assignee or transferee shall be deemed to be an “Investor” for all purposes of
this Agreement.

10.           ENTIRE AGREEMENT.  This Agreement constitutes and contains the
entire agreement and understanding of the parties with respect to the subject
matter hereof, and it also supersedes any and all prior negotiations,
correspondence, agreements or understandings with respect to the subject matter
hereof.

11.           MISCELLANEOUS.

(a)           This Agreement, and
any right, term or provision contained herein, may not be amended, modified or
terminated, and no right, term or provision may be waived, except with the
written consent of (i) the holders of a majority of the then outstanding
Registrable Shares and (ii) the Company; provided that any amendment or
modification that is materially and disproportionately adverse to any
particular Investor (as compared to all Investors as a group) shall require the
consent of such Investor.

(b)           This Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of New York without regard to any conflicts of laws concepts which would 

 11
 

 

apply the
substantive law of some other jurisdiction. 
This Agreement shall be binding upon the parties hereto and their
respective heirs, personal representatives, successors and permitted assigns
and transferees, provided that the terms and conditions of Section 9 hereof are
satisfied.  Notwithstanding anything in
this Agreement to the contrary, if at any time any Investor (including any
successors or assigns) shall cease to own any Registrable Shares, all of such
Investor’s rights under this Agreement shall immediately terminate.

(c)           Any notices, reports
or other correspondence (hereinafter collectively referred to as “correspondence”)
required or permitted to be given hereunder shall be sent by postage prepaid
first class mail, overnight courier or facsimile transmission, or delivered by
hand to the party to whom such correspondence is required or permitted to be
given hereunder. For purposes of the notifications and distributions of
documents by the Company contemplated by Section 4 of this Agreement, the
Investors expressly agree and consent to the receipt of such notifications and
distributions by electronic mail at the discretion of the Company.  The date of giving any notice shall be the
date of its actual receipt.

All
correspondence to the Company shall be addressed as follows:

Particle Drilling Technologies, Inc.

11757 Katy Freeway, Suite 1300

Houston, Texas 77079

Attn:  Chief Financial Officer

Facsimile: (713) 224-6361

with a copy to:

Vinson & Elkins LLP

First City Tower

1001 Fannin Street, Suite 2300

Houston, Texas 77002-676

Attn:  W. Matthew Strock

Facsimile: (713) 615-5650

All
correspondence to the Investors shall be addressed pursuant to the contact
information set forth on Schedule I attached hereto.

Any entity may
change the address to which correspondence to it is to be addressed by
notification as provided for herein.

(d)           The parties
acknowledge and agree that in the event of any breach of this Agreement,
remedies at law will be inadequate, and each of the parties hereto shall be
entitled to specific performance of the obligations of the other parties hereto
and to such appropriate injunctive relief as may be granted by a court of
competent jurisdiction.  All remedies,
either under this Agreement or by law or otherwise afforded to any of the
parties, shall be cumulative and not alternative.

(e)           This Agreement may
be executed in a number of counterparts. 
All such counterparts together shall constitute one Agreement, and shall
be binding on all the parties hereto notwithstanding that all such parties have
not signed the same counterpart.  The
parties hereto confirm that any facsimile copy of another party’s executed
counterpart of this Agreement (or its signature page thereof) will be deemed to
be an executed original thereof.

 12
 

 

(f)            Except as
contemplated in Section 7 hereof, this Agreement is intended solely for the
benefit of the parties hereto and is not intended to confer any benefits upon,
or create any rights in favor of, any Person (including, without limitation,
any stockholder or debt holder of the Company) other than the parties hereto.

(g)           Neither the Company
nor any of its security holders (other than the Investors in such capacity
pursuant hereto) may include securities of the Company in the Mandatory Registration
Statement other than the Registrable Shares. 
The Company shall not file any other registration statements until all
Registrable Shares are registered pursuant to a Registration Statement that is
declared effective by the Commission, provided that this Section 11(g) shall
not prohibit the Company from filing amendments to registration statements
filed prior to the date of this Agreement.

(h)           If any provision of
this Agreement is invalid, illegal or unenforceable, such provision shall be
ineffective to the extent, but only to the extent of, such invalidity,
illegality or unenforceability, without invalidating the remainder of such
provision or the remaining provisions of this Agreement, unless such a
construction would be unreasonable.

(i)            This Agreement
shall be binding upon, and inure to the benefit of, the parties hereto and
their permitted successors and assigns. 
The Company may not assign this Agreement or its rights and obligations
hereunder without the consent of holders of a majority of the then outstanding
Registrable Shares.

[Signature Pages Follow]

 13

IN WITNESS WHEREOF, the
parties hereto have executed this Registration Rights Agreement as of the date
and year first above written.

	
  

  	
  PARTICLE DRILLING TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JIM B. TERRY

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Jim B. Terry

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
					

 

INVESTORS:

	
  

  	
  NAME OF INVESTOR

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  
	
  Contact Information for Receipt of Notice:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  E-mail Address:

  	
   

  	
   

  
							

 

 

Schedule I

List of Investors

	
  Cadence Master, Ltd.

  
	
  Milfam I, L.P.

  
	
  U.S.A. Fund,
  LLLP

  
	
  The IBS
  Turnaround Fund (QP) (A Limited Partnership)

  
	
  The IBS
  Opportunity Fund (BVI), Ltd.

  
	
  The IBS
  Turnaround Fund, L.P.

  
	
  Greywolf Capital
  Partners II LP

  
	
  Greywolf Capital
  Overseas Fund

  
	
  Karen Singer

  
	
  SF Capital
  Partners Ltd.

  
	
  LB I Group Inc.

  
	
  Millennium
  Partners, L.P.

  
	
  Fort Mason
  Partners, LP

  
	
  Fort Mason
  Master, LP

  
	
  LC Capital
  Master Fund, Ltd.

  
	
  Schottenfeld
  Qualified Associates, LP

  
	
  Phaeton
  International (BVI) Limited

  
	
  Phoenix Partners
  II, L.P.

  
	
  Phoenix Partners
  L.P.

  

 

 

Schedule II

List of Holders of Existing Registration Rights

 

	
  Dalton E. Allen, 2003 Texas Partners, LLC

  
	
  Don C. Anderson, Allene Anderson Trust 

  
	
  Bernard Davis

  
	
  Bernard J. Myerring

  
	
  Bernice M. Starrett

  
	
  Berniece M. Edwards

  
	
  Bert Wallace

  
	
  Blake Pfeffer

  
	
  Bob Comes

  
	
  Bradley Rotter

  
	
  Brandon Sparks

  
	
  Brent V. Kelton

  
	
  Brian Callahan

  
	
  Brook A. Niemi

  
	
  Charles D. Hodge, Charles & Linda Hodge Living
  Trust

  
	
  Charles Blair

  
	
  Cliff Groombridge

  
	
  Constantino Galaxidas

  
	
  David L. Hollinger

  
	
  David Wammer (Nelson Trust)

  
	
  Davis M. McGrew

  
	
  Edward L. Moses

  
	
  Eichi Higashi 

  
	
  Gerry Kamilos

  
	
  Gordan Murray

  
	
  Gregor K. Emmert JR.

  
	
  Gregor K. Emmert SR.

  
	
  Harlan A. Flatjord

  
	
  J.R. Kressin

  
	
  J. Michael Meyer

  
	
  Jack Sioukas, Jack Sioukas Investments

  
	
  James L. Birch

  
	
  James M. Isaacson

  
	
  James R. Henson

  
	
  John Gorman

  
	
  John A. Lund

  
	
  John Paul Dempsey

  
	
  Joseph B. Childrey

  
	
  Julie G. Borden

  
	
  Keith Webb

  
	
  Ken Hendricks

  
	
  Lance Gunderson

  

 

 

 

	
  Larry W. Asbury

  
	
  Lester Hazel

  
	
  Linden Growth Partners

  
	
  Michael L. Johnson

  
	
  Michael Peterson

  
	
  Michael Brown

  
	
  Nelson R. Sharp

  
	
  Nicolas Pommier

  
	
  Parker Smith

  
	
  Paul Gunderson

  
	
  Paul W. Heisey, Jr.

  
	
  Sanford Porter, Porter Family Trust

  
	
  Randall Spohn

  
	
  Bryan Hinze, Red Eagle Oil

  
	
  Richard B. Payne

  
	
  Richard Wayne & Roberts

  
	
  Rocky Reininger

  
	
  Rose M. Spohn

  
	
  Rose Marie Otey

  
	
  Tamarind Global Assets, Ltd.

  
	
  Terry Balo

  
	
  Tom Dekezel

  
	
  Trevor W. & Susan L. Miller, JTWROS

  
	
  Van S. Bohne

  
	
  William M. Morse

  
	
  William P. Knox

  

 

 

 

Schedule III

List of Holders of
Existing Registration Rights

 

	
  Rita Barr

  
	
  Strome Hedgecap Ltd.

  
	
  William C. Montgomery

  
	
  Sound Energy Capital Offshore Fund, Ltd.

  
	
  Southport Energy Plus Offshore Fund, Inc.

  
	
  Southport Energy Plus Partners, L.P.

  
	
  Niskayuna Development LLC

  
	
  Ivy MA Holdings Cayman 8, Ltd.

  
	
  Cadence Offshore, Ltd.

  
	
  Cadence Onshore, LP

  
	
  Ore Hill Hub Fund Ltd. 

  
	
  Phoenix Partners, L.P.

  
	
  Phoenix Partners II, L.P.

  
	
  Phaeton International (BVI) Ltd.

  
	
  Greywolf Capital Partners II LP

  
	
  Greywolf Capital Overseas Fund

  
	
  Milfam I, LP

  
	
  Schottenfeld Qualified Associates, LP

  
	
  LC Capital Master Fund Ltd. 

  
	
  Millennium Partners, L.P.

  
	
  Xerion Partners I LLC

  
	
  Xerion Partners II Master Fund Limited

  
	
  SF Capital Partners Ltd.

  
	
  The IBS Turnaround Fund, L.P.

  
	
  The IBS Turnaround Fund (QP), L.P.

  
	
  The IBS Opportunity Fund, Ltd.

  
	
  Karen SingerExhbit
10.3

NEITHER THIS SECURITY NOR
THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
IN ADDITION, THE TRANSFER HEREOF IS SUBJECT TO VARIOUS AGREEMENTS
CONTAINED IN A SECURITIES PURCHASE AGREEMENT DATED OCTOBER 19, 2006.  A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO
THE HOLDER UPON REQUEST.  THIS SECURITY
AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

PARTICLE
DRILLING TECHNOLOGIES, INC.

COMMON STOCK
PURCHASE WARRANT

Void after October 19,
2011, and subject to earlier termination upon the terms and conditions set
forth herein

This Warrant (the “Warrant”)
entitles Milfam I, LP (including any successors or assigns, the “Holder”), for value received, to purchase from
PARTICLE DRILLING TECHNOLOGIES, INC., a
Nevada corporation (the “Company”), at any
time and from time to time, subject to the terms and conditions set forth
herein, during the period starting from 5:00 a.m. on the Initial Exercise Date
(as defined in Section 1 below) to 5:00 p.m., Eastern time, on the Expiration
Date (as defined in Section 1 below), immediately following which time this
Warrant shall expire and become void, all or any portion of the Warrant Shares
(as defined in Section 1 below) at the Exercise Price (as defined in Section 1
below).  This Warrant is issued subject
to the following terms and conditions:

1.             Definitions  As
used in this Warrant, the following terms shall have the respective meanings
set forth below or elsewhere in this Warrant as referred to below:

“Affiliate”
means, with respect to any Person, any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person.  For the purposes
of this Warrant, “control,” when used with respect to any specified Person
means the power to direct or cause the direction of the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms “controlling” and “controlled”
have meanings correlative to the foregoing.

“business day” (whether such term is
capitalized or not) means any day except Saturday, Sunday 

 1
 

 

and any day which shall
be a federal legal holiday or a day on which banking institutions in the State
of New York or the State of Texas are authorized or required by law or other
governmental action to close.

“Closing Date”
shall have the meaning given to it in the Securities Purchase Agreement.

“Common Stock” means the common stock, $0.001
par value per share, of the Company (including any securities into which or for
which such shares may be exchanged for, or converted into, pursuant to any
stock dividend, stock split, stock combination, recapitalization,
reclassification, reorganization or other similar event).

“Company” has the meaning set forth in the
preamble hereof.

“Effective
Date” shall have the meaning given to it in the Securities Purchase
Agreement.

“Exercise Price”
means initially the Initial Exercise Price, as such amount may be adjusted from
time to time pursuant to Section 3 hereof.

“Expiration Date” means October 19, 2011.

“Fair Market Value” shall mean on any date (i)
if the Common Stock is quoted on Nasdaq or listed on a national securities
exchange, then the last reported sale price per share of Common Stock on Nasdaq
or any national securities exchange in which such Common Stock is quoted or
listed, as the case may be, on such date or, if no such sale price is reported
on such date, such price on the next preceding business day in which such price
was reported, (ii) if the Common
Stock is actively traded over-the-counter, then the last sales price quoted, if
determinable, or, if not determinable, the average of the closing bid and asked
prices quoted on the OTCBB (or similar system) on such date or (iii) if
such Common Stock is not traded, quoted or listed on Nasdaq or any national
securities exchange or the over-the-counter market, then the fair market value
of a share of Common Stock, as determined in good faith by the Board of
Directors of the Company.

“Holder” has the meaning set forth in the
preamble of hereof.

“Initial Exercise Date” means April 22, 2007.

“Initial Exercise Price” means $3.25 per share
of Common Stock.

“OTCBB”
means the OTC Bulletin Board.

“Person” (whether or not capitalized) means an
individual, entity, partnership, limited liability company, corporation,
association, trust, joint venture, unincorporated organization, and any
government, governmental department or agency or political subdivision thereof.

“Registration
Rights Agreement” means that certain Registration Rights Agreement, dated
as of the date hereof, as it may be amended from time to time, by and among the
Company and the Investors (as such term is defined therein).

“SEC” means the United States Securities and
Exchange Commission.

“Securities Purchase Agreement” means that
certain Securities Purchase Agreement, dated as of the date hereof, as it may
be amended from time to time, by and among the Company and the Purchasers (as
such term is defined therein).

 2
 

 

“Shares” means the aggregate of 5,000,000
shares of Common Stock issued pursuant to the Securities Purchase Agreement.

“Warrants” means this Warrant and any other
warrants to purchase Common Stock issued by the Company to the Investors
pursuant to the Securities Purchase Agreement.

“Warrant Shares” means 30,000 shares of Common
Stock, subject to adjustment in accordance with Section 3 below.

2.             Exercise of Warrant. 

2.1           Method of Exercise; Payment.

(a)           Cash Exercise.  Subject to all of the terms and conditions
hereof, this Warrant may be exercised, in whole or in part, with respect to the
Warrant Shares, at any time and from time to time during the period commencing
on the Initial Exercise Date and ending at 5:00 p.m., Eastern Time, on the
Expiration Date, by surrender of this Warrant to the Company at its principal
office, accompanied by a subscription substantially in the form attached
hereto, executed by the Holder and accompanied by (a) wire transfer of
immediately available funds or (b) certified or official bank check payable to
the order of the Company, in each case in the amount obtained by multiplying
(i) the number of Warrant Shares for which the Warrant is being exercised, as
designated in such subscription, by (ii) the Exercise Price.  Thereupon, the Holder shall be entitled to
receive the number of duly authorized, validly issued, fully paid and
nonassessable Warrant Shares determined as provided for herein.

(b)           Cashless Exercise/Conversion.  Subject to all of the terms and conditions
hereof, if by October 19, 2007 the Effective Date shall not have occurred, the
Holder shall have the right to convert this Warrant, in whole or in part, with
respect to the Warrant Shares, at any time and from time to time until 5:00
p.m., Eastern Time, on the earlier to occur of (x) the Effective Date or (y)
the Expiration Date, by surrender of this Warrant to the Company at its
principal office, accompanied by a conversion notice substantially in the form
attached hereto, executed by the Holder. Thereupon, the Holder shall be
entitled to receive a number of duly authorized, validly issued, fully paid and
nonassessable Warrant Shares equal to:

(i)            (A)
(x) the number of Warrant Shares (subject to adjustment as provided in Section
3 hereof) which such Holder would be entitled to receive upon exercise of such
Warrant for the number of Warrant Shares designated in such conversion notice
(without giving effect to any adjustment thereof pursuant to this subsection), multiplied by (y) the Fair Market Value of each such Warrant
Share so receivable upon such exercise

minus

(B) (x) the number of
Warrant Shares (subject to adjustment as provided in Section 3 hereof) which
such Holder would be entitled to receive upon exercise of such Warrant for the
number of Warrant Shares designated in such conversion notice (without giving
effect to any adjustment thereof pursuant to this subsection), multiplied by (y) the Exercise Price

 3
 

 

divided by

(ii)           the Fair
Market Value per Warrant Share.

2.2           Delivery of Stock Certificates on
Exercise.  As soon as practicable after the exercise of
this Warrant, and in any event within three (3) business days thereafter, the
Company, at its expense, and in accordance with applicable securities laws,
will cause to be issued in the name of and delivered to the Holder, or as the
Holder may direct (subject in all cases, to the provisions of Section 8
hereof), a certificate or certificates for the number of Warrant Shares
purchased by the Holder on such exercise, plus, in lieu of any fractional share to which the Holder would otherwise
be entitled, cash equal to such fraction multiplied by the Fair Market Value.

2.3           Shares To Be Fully Paid and
Nonassessable.  All Warrant Shares
issued upon the exercise of this Warrant shall be duly authorized, validly
issued, fully paid and nonassessable, free of all liens, taxes, charges and
other encumbrances or restrictions on sale (other than those set forth herein).

2.4           Issuance of New Warrants; Company
Acknowledgment.  Upon any partial
exercise of this Warrant, the Company, at its expense, will forthwith and, in
any event within three (3) business days, issue and deliver to the Holder a new
warrant or warrants of like tenor, registered in the name of the Holder,
exercisable, in the aggregate, for the balance of the Warrant Shares.  Moreover, the Company shall, at the time of
any exercise of this Warrant, upon the request of the Holder, acknowledge in
writing its continuing obligation to afford to the Holder any rights to which
the Holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant; provided, however, that if the
Holder shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to the Holder any such rights.

2.5           Payment of Taxes and Expenses.  The Company shall pay any recording, filing,
stamp or similar tax which may be payable in respect of any transfer involved
in the issuance of, and the preparation and delivery of certificates (if
applicable) representing, (i) any Warrant Shares purchased upon exercise of
this Warrant and/or (ii) new or replacement warrants in the Holder’s name or
the name of any transferee of all or any portion of this Warrant.

2.6           Cooperation with Filings.  The Company shall assist and cooperate with
any Holder required to make any governmental or regulatory filings or obtain
any governmental or regulatory approvals prior to or in connection with any
exercise of this Warrant (including, without limitation, making any filings
required to be made by the Company).

2.7           Conditions.  Notwithstanding any other provision of this
Warrant, if the exercise of all or any portion of this Warrant is to be made in
connection with a registered public offering, a sale of the Company or any
other transaction or event, such exercise may, at the election of the Holder,
be conditioned upon consummation of such transaction or event in which case
such exercise shall not be deemed effective until the consummation of such
transaction or event.

3.             Adjustment of
Exercise Price and Warrant Shares.  The Exercise Price and
the number of Warrant Shares shall be subject to adjustment from time to time
upon the happening of certain events as described in this Section 3.

3.1           Subdivision or Combination of Stock.  If at any time or from
time to time after the date hereof, the Company shall subdivide (by way of
stock dividend, stock split or otherwise) its outstanding shares of Common
Stock, the Exercise Price in effect immediately prior to such subdivision shall
be reduced proportionately and the number of Warrant Shares (calculated to the
nearest whole share) 

 4
 

 

shall be increased proportionately, and conversely, in
the event the outstanding shares of Common Stock shall be combined (whether by
stock combination, reverse stock split or otherwise) into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination
shall be increased proportionately and the number of Warrant Shares (calculated
to the nearest whole share) shall be decreased proportionately.  The Exercise Price and the number of Warrant
Shares, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described in this Section 3.1.

3.2           Adjustments

(a)           Adjustment for Stock Dividends.
If at any time after the date hereof, the Company shall declare a dividend or
make any other distribution upon any class or series of stock of the Company
payable in shares of Common Stock, the Exercise Price in effect immediately
prior to such declaration or distribution shall be reduced proportionately and
the number of Warrant Shares (calculated to the nearest whole share) shall be
increased proportionately, to reflect the issuance of any shares of Common
Stock, issuable in payment of such dividend or distribution.  The Exercise Price and the number of Warrant
Shares, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described in this Section 3.2.

(b)           Adjustments for Other Dividends
and Distributions.  In the event the
Company at any time or from time to time after the date hereof shall make or
issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Company (other than shares of Common Stock) or in cash or other property,
then and in each such event provision shall be made so that the Holder shall
receive upon exercise hereof, in addition to the number of shares of Common
Stock issuable hereunder, the kind and amount of securities of the Company and/or
cash and other property which the Holder would have been entitled to receive
had this Warrant been exercised into Common Stock on the date of such event and
had the Holder thereafter, during the period from the date of such event to and
including the exercise date, retained any such securities receivable, giving
application to all adjustments called for during such period under this
Section 3 with respect to the rights of the Holder.

3.3           Adjustments for Reclassifications.  If the Common Stock issuable upon the
conversion of this Warrant shall be changed into the same or a different number
of shares of any class(es) or series of stock and/or the right to receive
property, whether by reclassification or otherwise (other than an adjustment
under Sections 3.1 and 3.2 or a merger, consolidation, or sale of assets
provided for under Section 3.4), then and in each such event, the Holder
hereof shall have the right thereafter to convert each Warrant Share into the
kind and amount of shares of stock and other securities and property receivable
upon such reclassification, or other change by holders of the number of shares
of Common Stock into which such Warrant Shares would have been convertible
immediately prior to such reclassification or change, all subject to successive
adjustments thereafter from time to time pursuant to and in accordance with,
the provisions of this Section 3.

3.4           Adjustments for Merger or Consolidation. In the event that, at any time or
from time to time after the date hereof, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other Person, or (c)
sell or transfer all or substantially all of its properties or assets or more
than 50% of the voting capital stock of the Company (whether issued and
outstanding, newly issued, from treasury, or any combination thereof) to any
other person under any plan or arrangement contemplating the consolidation or
merger, sale or transfer, or dissolution of the Company (each, a “Merger
Transaction”), then, in each such case, the Holder, upon the exercise of
this Warrant as provided in Section 2.1 or the conversion of this warrant as
provided in Section 2.2 hereof at any time or from time to time after the
consummation of such reorganization, consolidation, merger or sale or the
effective date of 

 5
 

 

such dissolution, as the case may be, shall receive,
in lieu of the Warrant Shares issuable on such exercise immediately prior to
such consummation or such effective date, as the case may be, the stock and
property (including cash) to which the Holder would have been entitled upon the
consummation of such consolidation or merger, or sale or transfer, or in
connection with such dissolution, as the case may be, if the Holder had so
exercised this Warrant immediately prior thereto (assuming the payment by the
Holder of the Exercise Price therefor as required hereby in a form permitted
hereby, which payment shall be included in the assets of the Company for the
purposes of determining the amount available for distribution), all subject to successive
adjustments thereafter from time to time pursuant to, and in accordance with,
the provisions of this Section 3. The Company shall not effect any such
reorganization, consolidation, merger, sale or transfer unless, prior to the
consummation thereof, the successor entity (if other than the Company)
resulting from the consolidation or merger or the entity purchasing such assets
assumes by written instrument the obligation to deliver to each holder of
Warrants such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire; provided, that
any assumption shall not relieve the Company of its obligations hereunder.

3.5           Continuation of Terms.  Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any such transfer) referred
to in this Section 3, this Warrant shall continue in full force and effect and
the terms hereof shall be applicable to the shares of Common Stock and other
securities and property receivable upon the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such Common Stock or other securities,
including, in the case of any such transfer, the Person acquiring all or
substantially all of the properties or assets or more than 50% of the voting
capital stock of the Company (whether issued and outstanding, newly issued or
from treasury or any combination thereof), whether or not such Person shall
have expressly assumed the terms of this Warrant.

3.6           Minimum Adjustment of Exercise
Price.  If the amount of any
adjustment of the Exercise Price required pursuant to this Section 3 would
be less than one-tenth (1/10) of one percent (1%) of the Exercise Price in
effect at the time such adjustment is otherwise so required to be made, such
amount shall be carried forward and adjustment with respect thereto made at the
time of and together with any subsequent adjustment which, together with such
amount and any other amount or amounts so carried forward, shall aggregate at
least one tenth (1/10) of one percent (1%) of such Exercise Price.

3.7           Certificate as to Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Exercise Price and number of Warrant Shares pursuant to
this Section 3, this Warrant shall, without any action on the part of the
Holder, be adjusted in accordance with this Section 3, and the Company, at its expense,
promptly shall compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to the Holder a certificate setting forth
such adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based.  The
Company will forthwith send a copy of each such certificate to the Holder in
accordance with Section 9.4 below.

4.             Registration
Rights.  The holders of the Warrant
Shares shall be entitled to the registration rights and other rights applicable
to such shares provided by the Registration Rights Agreement.

5.             Notices of Record Date.  Upon (a) any establishment by the Company
of a record date of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or right or option to acquire securities of the Company, or
any other right, or (b) any capital reorganization, reclassification,
recapitalization, merger or consolidation of the Company with or into any other
Person, any transfer of all or substantially all the assets of the 

 6
 

 

Company, or any voluntary
or involuntary dissolution, liquidation or winding up of the Company, or the
sale, in a single transaction, of a majority of the Company’s voting stock
(whether newly issued, or from treasury, or previously issued and then
outstanding, or any combination thereof), the Company shall mail to the Holder
at least ten (10) business days, or such longer period as may be required by
law, prior to the record date specified therein and at least ten (10) business
days prior to the date specified in clause (ii) or (iii) hereof, a notice
specifying (i) the date established as the record date for the purpose of such
dividend, distribution, option or right and a description of such dividend,
distribution, option or right, (ii) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up, or sale is expected to become effective and (iii) the date, if any,
fixed as to when the holders of record of Common Stock shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up.  Nothing herein shall prohibit the Holder from
exercising this Warrant during the ten (10) business day period commencing on
the date of such notice.

6.             Exchange of Warrant.  Subject
to the provisions of Section 7 hereof (if and to the extent applicable), this
Warrant shall be exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for new warrants of like tenor, each
registered in the name of the Holder or, subject to compliance with applicable
federal and state securities laws, in the name of such other Persons as the
Holder may direct (upon payment by the Holder of any applicable transfer
taxes). Each of such new warrants shall be exercisable for such number of
Warrant Shares as the Holder shall direct, provided that all of such new
warrants shall represent, in the aggregate, the right to purchase the same
number of Warrant Shares and cash, securities or other property, if any, which
may be purchased by the Holder upon exercise of this Warrant at the time of its
surrender.

7.             Transfer Provisions, etc.

7.1           Legends.  Subject to the provisions of Section 6.2 of the Securities Purchase Agreement, each
certificate representing any Warrant Shares issued upon exercise of this
Warrant, and of any shares of Common Stock into which such Warrant Shares may
be converted, shall bear the following legend:

“THIS SECURITY HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  IN ADDITION,
THE TRANSFER HEREOF IS SUBJECT TO VARIOUS AGREEMENTS CONTAINED IN A SECURITIES
PURCHASE AGREEMENT DATED OCTOBER 19, 2006. 
A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER UPON
REQUEST.  THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.”

 7
 

 

7.2           Mechanics
of Transfer.

(a)           Any
transfer of all or any portion of this Warrant (and the Warrant Shares), or of
any interest herein or therein, that is otherwise in compliance with applicable
law and Sections 6.1 and 6.2 of the Securities Purchase Agreement shall be
effected by surrendering this Warrant to the Company at its principal office,
together with a duly executed form of assignment, in the form attached
hereto.  In the event of any such
transfer of this Warrant, subject to compliance with applicable federal and
state securities laws and Sections 6.1 and 6.2 of the Securities Purchase
Agreement, the Company shall issue a new warrant or warrants of like tenor to
the transferee(s), representing, in the aggregate, the right to purchase the
same number of Warrant Shares and cash, securities or other property, if any,
which may be purchased by the Holder upon exercise of this Warrant at the time
of its surrender, in accordance with Section 2 hereof.

(b)           In the event of any transfer of all
or any portion of this Warrant in accordance with Section 7.2(a) above, the
Company shall issue (i) a new warrant of like tenor to the transferee,
representing the right to purchase the number of Warrant Shares, and cash,
securities or other property, if any, which were purchasable by the Holder of
the transferred portion of this Warrant at the time of said transfer, and (ii)
a new warrant of like tenor to the Holder, representing the right to purchase
the number of Warrant Shares, if any, and cash, securities or other property,
if any, purchasable by the Holder of the un-transferred portion of this
Warrant.  Until this Warrant or any
portion thereof is transferred on the books of the Company, the Company may
treat the Holder as the absolute holder of this Warrant and all right, title
and interest therein for all purposes, notwithstanding any notice to the
contrary.

7.3           No Restrictions on Transfer.  Subject to compliance with applicable federal
and state securities laws and Sections 6.1 and 6.2 of the Securities Purchase
Agreement, this Warrant and any portion hereof, the Warrant Shares and the
rights hereunder may be transferred by the Holder in its sole discretion at any
time and to any Person or Persons, including without limitation Affiliates and
affiliated groups of such Holder, without the consent of the Company.

7.4           Warrant Register.  The Company shall keep at its principal
office a register for the registration, and registration of transfers, of the
Warrants.  The name and address of each
Holder of one or more of the Warrants, each transfer thereof and the name and
address of each transferee of one or more of the Warrants shall be registered
in such register.  The Company shall give
to any Holder of a Warrant promptly upon request therefor, a complete and
correct copy of the names and addresses of all registered Holders of the
Warrants.

8.             Lost, Stolen or Destroyed Warrant.  Upon receipt by the Company of evidence
satisfactory to it of loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of a customary
affidavit of the Holder and customary unsecured indemnity agreement, or, in the
case of mutilation, upon surrender of this Warrant, the Company at its expense
will execute and deliver, or will instruct its transfer agent to execute and
deliver, a new Warrant of like tenor and date and representing the same rights
represented by such lost, stolen, destroyed or mutilated warrant and any such
lost, stolen, mutilated or destroyed Warrant thereupon shall become void.

9.             General.

9.1           Authorized Shares, Reservation of Shares for Issuance. 
At all times while this Warrant is outstanding, the Company shall maintain
its corporate authority to issue, and shall have authorized and reserved for
issuance upon exercise of this Warrant, such number of shares of Common Stock,
and any other capital stock or other securities as shall be sufficient to
perform its obligations under 

 8
 

 

this Warrant (after giving
effect to any and all adjustments to the number and kind of Warrant Shares
purchasable upon exercise of this Warrant).

9.2           No Impairment.  The
Company will not, by amendment of its Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issuance or sale of securities, sale or other transfer of any of its assets or
properties, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder hereunder against impairment. Without limiting
the generality of the foregoing, the Company (a) will not increase the par
value of any shares of Common Stock receivable upon the exercise of this
Warrant above the amount payable therefor on such exercise, and (b) will take
all action that may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.

9.3           No Rights as Stockholder.  Except as provided herein (including Sections
3 and 5), the Holder shall not be entitled to vote or to receive dividends or
to be deemed the holder of Common Stock that may at any time be issuable upon
exercise of this Warrant for any purpose whatsoever, nor shall anything
contained herein be construed to confer upon the Holder any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issuance or reclassification of stock, change of par value or change of stock
to no par value, consolidation, merger or conveyance or otherwise), or to
receive notice of meetings (except to the extent otherwise provided in this
Warrant), or to receive dividends or subscription rights, until the Holder
shall have exercised this Warrant and been issued Warrant Shares in accordance
with the provisions hereof and continues to hold Warrant Shares.

9.4           Notices. Any notices, reports or other correspondence (hereinafter
collectively referred to as “correspondence”) required or permitted to be given
hereunder shall be sent by postage prepaid first class mail, overnight courier
or facsimile transmission, or delivered by hand to the party to whom such
correspondence is required or permitted to be given hereunder. The date of
giving any notice shall be the date of its actual receipt.

(a)           All correspondence to the Company shall be addressed
as follows:

Particle
Drilling Technologies, Inc.

11757 Katy Freeway, Suite 1300

Houston, Texas 77079

Attn:  Chief Financial Officer

Facsimile: (713) 224-6361

with a copy to:

Vinson & Elkins LLP

First City Tower

1001 Fannin Street, Suite 2300

Houston, Texas 77002-676

Attn:  W. Matthew Strock

Facsimile: (713) 615-5650

 9
 

 

(b)           All correspondence to the Holder
shall be addressed to the Holder at its address appearing in the books
maintained by the Company.

10.           Amendment
and Waiver.  No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power.  The rights and remedies of the Holder are
cumulative and not exclusive of any rights or remedies which it would otherwise
have. This Warrant is one of a series of Warrants issued by the Company,
all dated the date hereof and of like tenor, except as to the number of shares
of Common Stock subject thereto (collectively, the “Company Warrants”).  Any term of this Warrant may be amended or
waived upon the written consent of the Company and the holders of Company
Warrants representing at least a majority of the number of shares of Common
Stock then subject to outstanding Company Warrants; provided that (i)
any such amendment or waiver must apply to all Company Warrants then
outstanding; (ii) the number of Warrant Shares subject to this Warrant, the
Exercise Price or Expiration Date of this Warrant and the number of shares or
class of stock obtainable upon exercise of this Warrant may not be amended,
(iii) the right to exercise this Warrant may not be waived, without the written
consent of the Holder of this Warrant (it being agreed that an amendment to or
waiver under any of the provisions of Section 3 of this Warrant shall not
be considered an amendment of the number of Warrant Shares or the Exercise
Price) and (iv) any amendment that adversely affects any particular Holder
without a corresponding affect upon all Holders must be approved by the
particular Holder so affected.  The
Company shall promptly give notice to all holders of the Company Warrants of
any amendments effected in accordance with this Section 10.  No special consideration may be given to any
holder as inducement to waive or amend this Warrant unless such consideration
is given equally and ratably to all holders of Company Warrants.

11.           Governing Law.  This
Warrant shall be governed by and construed in accordance with the laws of the
State of New York, as such laws are applied to contracts entered into and
wholly to be performed within the State of New York and without giving effect
to any principles of conflicts or choice of law that would result in the
application of the laws of any other jurisdiction.

12.           Covenants To Bind Successor and
Assigns.  All covenants,
stipulations, promises and agreements in this Warrant contained by or on behalf
of the Company shall bind its successors and assigns, whether so expressed or
not.

13.           Severability. 
In case any one or more of the provisions contained in this Warrant
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby. 
The parties shall endeavor in good faith negotiations to replace the
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.

14.           Construction.  The definitions of this Warrant shall apply
equally to both the singular and the plural forms of the terms defined.
Wherever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The section and paragraph headings used
herein are for convenience of reference only, are not part of this Warrant and
are not to affect the construction of or be taken into consideration in
interpreting this Warrant.

15.           Remedies. The Holder, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Warrant and hereby agrees to waive the defense in any 

 10
 

 

action for specific performance that a remedy at law
would be adequate. In any action or proceeding brought to enforce any provision
of this Warrant or where any provision hereof is validly asserted as a defense,
the successful party to such action or proceeding shall be entitled to recover
reasonable attorneys’ fees in addition to any other available remedy.

[SIGNATURE PAGE
TO FOLLOW]

 11

IN WITNESS WHEREOF, the Company has executed this
Common Stock Purchase Warrant as of the date first written above.

	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  PARTICLE DRILLING TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JIM B. TERRY

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Jim B. Terry

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
					

 

 

NOTICE AND

SUBSCRIPTION

To:                              Particle
Drilling Technologies, Inc.

11757 Katy Freeway, Suite 1300

Houston, Texas 77079

Attn:  Chief Financial Officer

The
undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to exercise thereunder, __________
shares of Common Stock, of PARTICLE DRILLING TECHNOLOGIES, INC., a Nevada
corporation (the “Company”), and tenders
herewith payment of $__________, representing the aggregate purchase price for
such shares based on the price per share provided for in such Warrant. Such
payment is being made in accordance with Section 2.1(a) of the attached
Warrant.

The
undersigned hereby represents and warrants as follows:

(a)           the undersigned is acquiring such
shares of Common Stock for its own account for investment and not for resale or
with a view to distribution thereof in violation of the Securities Act of 1933,
as amended, and the regulations promulgated thereunder (the “Securities Act”);
and

(b)           the undersigned is an “accredited
investor” as defined in Rule 501 of Regulation D promulgated under the
Securities Act and was not organized for the purpose of acquiring the Warrant
or such shares of Common Stock.  The
undersigned’s financial condition is such that it is able to bear the risk of
holding such securities for an indefinite period of time and the risk of loss
of its entire investment.  The
undersigned has sufficient knowledge and experience in investing in companies
similar to the Company so as to be able to evaluate the risks and merits of its
investment in the Company.

Please
issue a certificate or certificates for such shares of Common Stock in the
following name or names and denominations and deliver such certificate or
certificates to the person or persons listed below at their respective address
set forth below:

	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

If
said number of shares of Common Stock shall not be all the shares of Common
Stock issuable upon exercise of the attached Warrant, a new Warrant is to be
issued in the name of the undersigned for the remaining balance of such shares
of Common Stock less any fraction of a share of Common Stock paid in cash
pursuant to Section 2.2 of the attached warrant.

	
  Dated:___________, ____

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Signature

  

 

 

 

The undersigned
Particle Drilling Technologies, Inc. hereby acknowledges receipt of this Notice
and Subscription and authorizes issuance of the shares of Common Stock
described above.

Particle
Drilling Technologies, Inc.

	
  

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

 

FORM OF ASSIGNMENT

(To be executed upon assignment of Warrant)

For value received, __________________________________ hereby sells,
assigns and transfers unto __________________ the attached Warrant [__% of the
attached Warrant], together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________ attorney to
transfer said Warrant [said percentage of said Warrant] on the books of
PARTICLE DRILLING TECHNOLOGIES, INC., a Nevada corporation, with full power of
substitution in the premises.

If not all of the
attached Warrant is to be so transferred, a new Warrant is to be issued in the
name of the undersigned for the balance of said Warrant.

The undersigned
hereby agrees that it will not sell, assign, or transfer the right, title and
interest in and to the Warrant unless applicable federal and state securities
laws have been complied with.

	
  Dated:___________, ____

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Signature

  

 

 

FORM
OF CONVERSION NOTICE

To Particle Drilling
Technologies, Inc.:

The undersigned
registered holder of the attached Warrant hereby irrevocably converts such
Warrants with respect to ________(1) Warrant Shares which such holder would be
entitled to receive upon the exercise hereof, and requests that the
certificates for such shares be issued in the name of, and delivered to
_________________, whose address is as follows:

	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

Such conversion is
being made in accordance with Section 2.1(b) of the attached Warrant.  The undersigned hereby represents and
warrants as follows:

(a)           the
undersigned is acquiring such shares of Common Stock for its own account for
investment and not for resale or with a view to distribution thereof in
violation of the Securities Act; and

(b)           the
undersigned is an “accredited investor” as defined in Rule 501 of Regulation D
promulgated under the Securities Act and was not organized for the purpose of
acquiring the Warrant or such shares of Common Stock.  The undersigned’s financial condition is such
that it is able to bear the risk of holding such securities for an indefinite
period of time and the risk of loss of its entire investment.  The undersigned has sufficient knowledge and
experience in investing in companies similar to the Company so as to be able to
evaluate the risks and merits of its investment in the Company.

	
  Dated:

  	
   

  
	
   

  	
  (Signature must conform in all respects to name of
  holder as specified on the face of Warrant)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Street Address)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (City)

  	
  (State)

  	
  (Zip Code)

  

 

The undersigned Particle Drilling Technologies, Inc. hereby acknowledges receipt of this
Conversion Notice and authorizes issuance of the shares of Common Stock
described above.

(1)             Insert here the number of Warrant
Shares into which the Warrant is convertible (or, in the case of a partial
conversion, the number of Warrant Shares as to which the Warrants evidenced by
this Warrant Certificate are then being converted). In the case of a partial
conversion, a new Warrant Certificate will be issued and delivered,
representing the unconverted portion of the Warrants, to the holder surrendering
this Warrant Certificate.

 

Particle
Drilling Technologies, Inc.

	
  

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

 

Schedule of Substantially Identical Common Stock
Purchase Warrants

Not Filed
with the Securities and Exchange Commission

Pursuant to Instruction 2
of Item 601 of Regulation S-K, the Company has filed only one of the Common
Stock Purchase Warrants issued to the purchasers in connection with the Private
Placement because each of the Common Stock Purchase Warrants are substantially
identical in all material respects except as to the parties thereto and the
number of shares of common stock issuable thereunder.  The following table sets forth the holder of
each of the other Common Stock Purchase Warrants issued by the Company and the
number of shares of common stock that may be purchased by each holder thereof.

	
  Name of Shareholder

  	
   

  	
  Number of Warrant Shares

  
	
  Cadence Master,
  Ltd.

  	
   

  	
  75,000

  
	
  U.S.A. Fund,
  LLLP

  	
   

  	
  60,000

  
	
  The IBS
  Turnaround Fund (QP) (A Limited Partnership)

  	
   

  	
  68,460

  
	
  The IBS
  Opportunity Fund (BVI), Ltd.

  	
   

  	
  14,190

  
	
  The IBS
  Turnaround Fund, L.P.

  	
   

  	
  22,350

  
	
  Greywolf Capital
  Partners II LP

  	
   

  	
  46,500

  
	
  Greywolf Capital
  Overseas Fund

  	
   

  	
  103,500

  
	
  Karen Singer

  	
   

  	
  30,000

  
	
  SF Capital
  Partners Ltd.

  	
   

  	
  120,000

  
	
  LB I Group Inc.

  	
   

  	
  71,100

  
	
  Millennium
  Partners, L.P.

  	
   

  	
  187,500

  
	
  Fort Mason
  Partners, LP

  	
   

  	
  19,421

  
	
  Fort Mason
  Master, LP

  	
   

  	
  299,479

  
	
  LC Capital
  Master Fund, Ltd.

  	
   

  	
  187,500

  
	
  Schottenfeld
  Qualified Associates, LP

  	
   

  	
  75,000

  
	
  Phaeton
  International (BVI) Limited

  	
   

  	
  37,530

  
	
  Phoenix Partners
  II, L.P.

  	
   

  	
  11,070

  
	
  Phoenix Partners
  L.P.

  	
   

  	
  41,400

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00111-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00111-of-00352.parquet"}]]