Document:

ex4_2.htm

    
      

    

    Exhibit
      4.2

    

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE
      SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED AND ASSIGNED (I)
      IN
      THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS
      OR
      (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
      IS
      NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS
      SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE
      FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
      ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
      SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
      TERMS OF THIS NOTE, INCLUDING SECTION 3(c) HEREOF.  THE PRINCIPAL
      AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE
      FACE HEREOF PURSUANT TO SECTION 3(c) HEREOF.

    

    FORM
      OF AMENDED AND RESTATED SENIOR SECURED NOTE

    

    [__________]

    
      	
              [_______,
                2005]

            	
              $[__________]

            

    

    

    FOR
      VALUE RECEIVED,GASTAR EXPLORATION, LTD., an Alberta
      corporation (the “Company”), hereby promises to pay to the
      order of [__________] or registered assigns (the “Holder”) the
      principal amount of [__________] United States Dollars ($[________]) when due,
      whether upon maturity, acceleration, redemption or otherwise, and to pay
      interest (“Interest”) on the unpaid principal balance hereof on
      each Interest Payment Date (as defined in Section 2(aa)) and upon maturity,
      acceleration or redemption pursuant to the terms hereof, at the Applicable
      Interest Rate (as defined in Section 2(g)).  Interest on this Note
      payable on each Interest Payment Date and upon maturity, or earlier upon
      acceleration or redemption pursuant to the terms hereof, shall accrue from
      the
      Issuance Date and shall be computed on the basis of a 365-day year and actual
      days elapsed.

    

    (1)           Payments
      of Principal.  All payments under this Note shall be made in
      lawful money of the United States of America by wire transfer of immediately
      available funds to such account as the Holder may from time to time designate
      by
      written notice in accordance with the provisions of this
      Note.  Whenever any amount expressed to be due by the terms of this
      Note is due on any day that is not a Business Day (as defined in Section 2(i)),
      the same shall instead be due on the next succeeding day that is a Business
      Day.  Each capitalized term used herein, and not otherwise defined,
      shall have the meaning ascribed thereto in the Securities Purchase Agreement,
      dated as of June 16, 2005, pursuant to which this Note and the Other Notes
      (as defined in Section 2(hh)) were originally issued, as amended by the First
      Amendment to Securities Purchase Agreement dated September 6, 2005, the Consent
      and Omnibus Amendment to Transaction Documents dated January 5, 2006, and the
      Third Amendment to Securities Purchase Agreement dated November [__],
      2007  (as so amended and as such agreement may otherwise be amended
      from time to time as provided in such agreement, the “Securities
      Purchase Agreement”).  This Note and all Other Notes issued
      by the Company pursuant to the Securities Purchase Agreement on the Initial
      Closing Date and any Additional Closing Dates and all notes issued in exchange
      therefor or replacement thereof are collectively referred to in this Note as
      the
“Notes.”  This Note and each of the Other Notes
      originally issued by the Company on the same Closing Date and all notes issued
      in exchange therefor or replacement thereof shall be deemed to be of the same
      “Series.”

    

    (2)           Certain
      Defined Terms.  For purposes of this Note, the following terms
      shall have the following meanings:

    

    (a)           “3-Month
      LIBOR Rate” means the London Interbank Offered Rate of LIBOR with
      respect to a three-month period for deposits of United States Dollars as
      reported by Bloomberg Financial Markets (or any successor thereto,
“Bloomberg”) at approximately 10:00 a.m. (New York time)
      through its “LIBOR Rates” function (accessed by typing “LR” [GO] on a Bloomberg
      terminal, and looking at the row entitled “3 MONTH” and under the column
      entitled “DOLLAR LIBOR”) (or such other page as may replace that page on that
      service, or such other service as may be selected jointly by the Company and
      the
      Majority Holders of the Notes).  If such rate appears on the Bloomberg
      LIBOR Rates page on any date of determination of the 3-Month LIBOR Rate (a
      “LIBOR Determination Date”), the 3-Month LIBOR Rate for such
      date of determination will be such rate.  If on any LIBOR
      Determination Date such rate does not appear on the Bloomberg LIBOR Rates page,
      the Company and the Majority Holders of the Notes will jointly request each
      of
      four major reference banks in the London interbank market, as selected jointly
      by the Company and the Majority Holders of the Notes, to provide the Company
      with its offered quotation for United States dollar deposits for the upcoming
      three-month period, to prime banks in the London interbank market at
      approximately 4:00 p.m., London time on any such LIBOR Determination Date and
      in
      a principal amount that is representative for a single transaction in United
      States Dollars in such market at such time.  If at least two reference
      banks provide the Company with offered quotations, 3-Month LIBOR Rate on such
      LIBOR Determination Date will be the arithmetic mean of all such
      quotations.  If on such LIBOR Determination Date fewer than two of the
      reference banks provide the Company with offered quotations, 3-Month LIBOR
      Rate
      on such LIBOR Determination Date will be the arithmetic mean of the offered
      per
      annum rates that three major banks in New York City selected jointly by the
      Company and the Majority Holders of the Notes quote at approximately 11:00
      A.M.
      in New York City on such LIBOR Determination Date for three-month United States
      dollar loans to leading European banks, in a principal amount that is
      representative for a single transaction in United States dollars in such market
      at such time.  If these New York City quotes are not available, then
      the 3-Month LIBOR Rate determined on such LIBOR Determination Date will continue
      to be 3-Month LIBOR Rate as then currently in effect on such LIBOR Determination
      Date.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    (b)           “15%
      Notes” means the Company’s 15% Senior Unsecured Notes in the aggregate
      principal amount of $15,000,000 and $10,000,000 issued to Ingalls & Snyder
      on June 24, 2004 and October 8, 2004, respectively, in the forms provided to
      each of the Buyers prior to the date of the Securities Purchase
      Agreement.

    

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

    

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

    

    (e)           “Aggregate
      Notes Balance” means, as of the date of any determination, the
      aggregate outstanding principal amount of all the Notes, together with all
      accrued but unpaid interest thereon.

    

    (f)           “Allocation
      Percentage” means, with respect to each holder of a Note as of the date
      of any determination, a fraction of which the numerator is the aggregate
      principal amount of the Notes purchased by such holder, and of which the
      denominator is the aggregate principal amount of the Notes purchased by all
      holders.

    

    (g)           “Applicable
      Interest Rate” initially shall mean the per annum interest rate equal
      to the sum of (a) the 3-Month LIBOR Rate in effect on the Issuance Date and
      (b)
      six and one-half percent (6.50%); provided, however, that on the first Business
      Day of each calendar quarter commencing after the Issuance Date, beginning
      with
      the calendar quarter commencing October 1, 2007 (each, an “Interest
      Reset Date”), such rate shall be adjusted to the per annum interest
      rate equal to the sum of (x) the 3-Month LIBOR Rate in effect on such date
      and
      (y) six and one-half percent (6.50%).  Each Applicable Interest Rate
      will be applicable as of and after the Interest Reset Date to which it relates
      to, but not including, the next succeeding Interest Reset Date.

    

    (h)           “Bankruptcy
      Law” means Title 11, U.S. Code, the Bankruptcy and Insolvency Act
      (Canada), the Companies’ Creditors Arrangement Act (Canada), the Winding Up and
      Restructuring Act (Canada) or any similar foreign, federal (U.S. or Canadian),
      provincial or state law for the relief of debtors.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    (i)           “Business
      Day” means any day other than Saturday, Sunday or other day on which
      commercial banks in the city of New York are authorized or required by law
      to
      remain closed.

    

    (j)           “Canadian
      Securities Laws” means the securities legislation and regulations of,
      and the instruments, policies, rules, orders, codes, notices and interpretation
      notes of, the securities regulatory authorities (including the Toronto Stock
      Exchange) of any applicable jurisdiction, or jurisdictions collectively, in
      Canada.

    

    (k)           “Capital
      Lease Obligation” means, as to any Person, any obligation that is
      required to be classified and accounted for as a capital lease on a balance
      sheet of such Person prepared in accordance with GAAP, and the amount of such
      obligation shall be the capitalized amount thereof, determined in accordance
      with GAAP.

    

    (l)           “Change
      of Control” means (I) the consolidation, merger, amalgamation or other
      business combination of the Company with or into another Person (other than
      (A)
      a consolidation, merger, amalgamation or other business combination in which
      holders of a majority of the Company’s voting power immediately prior to the
      transaction continue after the transaction to hold, directly or indirectly,
      a
      majority of the combined voting power of the surviving entity or entities
      entitled to vote generally for the election of a majority of the members of
      the
      board of directors (or their equivalent if other than a corporation) of such
      entity or entities, or (B) pursuant to a migratory merger effected solely for
      the purpose of changing the jurisdiction of incorporation of the Company),
      (II)
      the sale or transfer of all or substantially all of the Company’s assets
      (including, for the avoidance of doubt, the sale of all or substantially all
      of
      the assets of the Company’s Subsidiaries in the aggregate) or (III) the
      consummation of a purchase, tender or exchange offer made to and accepted by
      holders of outstanding Common Shares and as a result of which any Person or
      group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act)
      holds
      more than 50% of the outstanding Common Shares, provided, however,
      that neither (x) issuances of Common Shares as part of the “look-back payment”
set forth in Sections 3.3, 3.4 and 4.2 of each of the Texas Non Producing
      Properties Geostar Agreement and the Texas Producing Properties Geostar
      Agreement nor (y) issuances of Common Shares as part of the option to acquire
      existing and future Gippsland Basin mineral licenses granted to the Company
      pursuant to Section 6 of the Letter of Intent dated April 15, 2005, by and
      between the Company and Geostar Corporation (the “Geostar Letter of
      Intent”), shall constitute a Change of Control, so long as none of the
      terms, conditions or provisions of the Texas Non Producing Properties Geostar
      Agreement, the Texas Producing Properties Geostar Agreement or the Geostar
      Letter of Intent (including, in each case, any provisions with respect to
      issuances of Common Shares) are amended or otherwise modified after the date
      of
      the Securities Purchase Agreement in a manner which in any way affects the
      Company’s obligation to issue securities thereunder, including with respect to
      the amount or terms of the securities to be issued, or which otherwise is
      materially adverse to the holders of the Notes.

    

    (m)           “Common
      Shares” means (A) the Company’s common shares, and (B) any shares in
      capital resulting from a reclassification of such Common Shares.

    

    (n)           “Company
      Alternative Redemption Rate” means (A) at any time during the period
      beginning on and including the first anniversary of the Issuance Date and ending
      on and including the day immediately preceding the third anniversary of the
      Issuance Date, 105%, (B) at any time during the period beginning on and
      including the third anniversary of the Issuance Date and ending on and including
      the day immediately preceding the fourth anniversary of the Issuance Date,
      104%,
      and (C) at any time during the period beginning on and including the fourth
      anniversary of the Issuance Date and ending on and including the day immediately
      preceding the Maturity Date, 103%.

    

    (o)           “Contingent
      Obligation” means, as to any Person, any direct or indirect liability,
      contingent or otherwise, of that Person with respect to any indebtedness, lease,
      dividend or other obligation of another Person if the primary purpose or intent
      of the Person incurring such liability, or the primary effect thereof, is to
      provide assurance to the obligee of such liability that such liability will
      be
      paid or discharged, or that any agreements relating thereto will be complied
      with, or that the holders of such liability will be protected (in whole or
      in
      part) against loss with respect thereto.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    (p)           “Convertible
      Debentures” means the Company’s 9 3/4% Convertible Debentures in the
      aggregate principal amount of $30,000,000 issued on November 15 and 16, 2004,
      in
      the form provided to each of the Buyers prior to the date of the Securities
      Purchase Agreement.

    

    (q)           “Current
      Report” means a current report on Form 8-K under the 1934 Act or an
      equivalent thereof under Canadian Securities Laws.

    

    (r)           “Disposition
      Amount” means the excess net cash proceeds or cash consideration
      required to be offered by the Company to redeem the Principal in accordance
      with
      Section 4(b).

    

    (s)           “Dollars”
      or “$” means United States Dollars.

    

    (t)           “Excluded
      Amount” means the aggregate principal amount as to which notices have
      been given by the Company to holders of Notes for redemption in accordance
      with
      Section 3(a) of each such Note, but which has not been paid prior to such date
      of determination, provided that the Company is in compliance with Section 3(a)
      of each such Note in connection therewith.

    

    (u)           “Excluded
      Taxes” means, with respect to the Holder, or any other recipient of
      payment to be made by or on account of any obligations of the Company or any
      of
      its Subsidiaries under the Notes, the Securities Purchase Agreement or under
      any
      Security Document, income or franchise taxes imposed on (or measured by) its
      net
      income by the United States of America or such other jurisdiction under the
      laws
      of which such recipient is organized or its principal offices are
      located.

    

    (v)           “Geostar
      Agreements” means collectively (A) the Purchase and Sale Agreement
      and Assignment of Interests – Texas Non Producing Properties (the “Texas
      Non Producing Properties Geostar Agreement”), entered into on the date
      of the Securities Purchase Agreement, by and among Geostar Corporation
      (“Geostar”), First Source Texas, Inc. (“FST”),
      First Source Bossier, LLC (“FSB”), First Texas Gas LP
      (“FTG”), the Company, First Texas Development, Inc.
      (“FTD”), Bossier Basin, LLC (“BBLLC”) and
      First Source Gas, LP (“FSG”), (B) the Purchase and Sale
      Agreement and Assignment of Interests – Texas Producing Properties (the
“Texas Producing Properties Geostar Agreement”), entered into
      on the date of the Securities Purchase Agreement, by and among Geostar, FST,
      FSB, FTG, the Company, FTD, BBLLC and FSG, (C) the Purchase and Sale
      Agreement and Assignment of Interests – Wyoming and Montana Non Producing
      Properties, entered into on the date of the Securities Purchase Agreement,
      by
      and among Geostar, First Source Wyoming (“FSW”), Inc., Squaw
      Creek Development, Inc. (“SCD”), the Company, First Sourcenergy
      Wyoming, Inc. (“FSEW”) and Squaw Creek Inc.
      (“SCI”), and (D) the Purchase and Sale Agreement and
      Assignment of Interests – Wyoming and Montana Producing Properties, entered into
      on the date of the Securities Purchase Agreement, by and among Geostar, FSW,
      SCD, the Company, FSEW and SCI, each in the form provided to each of the Buyers
      prior to the execution of the Securities Purchase Agreement.

    

    (w)           “Governmental
      Authority” means the government of the United States of America, the
      government of Canada or the government of any other nation, or any political
      subdivision thereof, whether state, provincial or local, or any agency,
      authority, instrumentality, regulatory body, court, central bank or other entity
      exercising executive, legislative, judicial, taxing, regulatory or
      administration powers or functions of or pertaining to government over the
      Company or any of its Subsidiaries, or any of their respective properties,
      assets or undertakings.

    
      
        
        

      

      
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    (x)           
      “Indebtedness” of any Person means, without duplication (A) all
      indebtedness for borrowed money, (B) all obligations issued, undertaken or
      assumed as the deferred purchase price of property or services (other than
      unsecured account trade payables that are (i) entered into or incurred in the
      ordinary course of the Company’s and its Subsidiaries’ business, (ii) on terms
      that require full payment within 90 days and (iii) not unpaid in excess of
      90
      days from receipt of invoice or are being contested in good faith and as to
      which such reserve as is required by GAAP has been made (except to the extent
      that at any one time an aggregate amount among the Company and its Subsidiaries
      of not more than $1,000,000 in trade accounts payable is unpaid in excess of
      90
      days from the receipt of invoice), (C) all reimbursement or payment obligations
      with respect to letters of credit, surety bonds and other similar instruments,
      (D) all obligations evidenced by notes, bonds, debentures, redeemable capital
      stock or similar instruments, including obligations so evidenced incurred in
      connection with the acquisition of property, assets or businesses, (E) all
      indebtedness created or arising under any conditional sale or other title
      retention agreement, or incurred as financing, in either case with respect
      to
      any property or assets acquired with the proceeds of such indebtedness (even
      though the rights and remedies of the seller or bank under such agreement in
      the
      event of default are limited to repossession or sale of such property), (F)
      all
      Capital Lease Obligations, (G) all indebtedness referred to in clauses (A)
      through (F) above secured by (or for which the holder of such Indebtedness
      has
      an existing right, contingent or otherwise, to be secured by) any mortgage,
      Lien, pledge, charge, security interest or other encumbrance upon or in any
      property or assets (including accounts and contract rights) owned by any Person,
      even though the Person that owns such assets or property has not assumed or
      become liable for the payment of such indebtedness, and (H) all Contingent
      Obligations in respect of indebtedness or obligations of others of the kinds
      referred to in clauses (A) through (G) above.

    

    (y)           “Indemnified
      Taxes” means Taxes other than Excluded Taxes.

    

    (z)           “Interest
      Amount” means, with respect to any Principal as of the date of any
      determination, all accrued and unpaid Interest (including any Default Interest
      as defined in Section 6) on such Principal through and including such date
      of
      determination.

    

    (aa)           “Interest
      Payment Date” means the first Business Day of each calendar quarter,
      beginning with the calendar quarter that commences on July 1, 2005 through
      and
      including the last calendar quarter that commences prior to the Maturity
      Date.

    

    (bb)           “Issuance
      Date” means the original date of issuance of this Note pursuant to the
      Securities Purchase Agreement, regardless of any exchange or replacement
      hereof.

    

    (cc)           "Key
      Statistics by Area" means each of the following of the Company and its
      Subsidiaries on a consolidated basis: (a) the oil and gas production (in MMcfe
      and MMcfe/d), (b) the capital expenditures (excluding inventory), (c) the gross
      number of wells drilled and (d) the net wells of the Company and its
      Subsidiaries.

    

    (dd)           “Lien”
      means, with respect to any asset, any mortgage, lien, pledge, hypothecation,
      charge, security interest, encumbrance or adverse claim of any kind and
      any restrictive covenant, condition, restriction or exception of any kind
      that has the practical effect of creating a mortgage, lien, pledge,
      hypothecation, charge, security interest, encumbrance or adverse
      claim of any kind (including any of the foregoing created by, arising under
      or evidenced by any conditional sale or other title retention agreement, the
      interest of a lessor with respect to a Capital Lease Obligation, or any
      financing lease having substantially the same economic effect as any of the
      foregoing).

    

    (ee)           “Majority
      Holders” means the holders of the Notes representing at least
      two-thirds (2/3) of the aggregate principal amount of the Notes then
      outstanding.

    
      
        
        

      

      
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    (ff)           “Maturity
      Date” means the date that is the earlier of (a) September 20, 2010 or
      (b) the date on which the payment of all outstanding Principal and other amounts
      due under this Note shall be due (whether by acceleration or
      otherwise).

    

    (gg)           “Net
      Debt Amount” means, as of the date of any determination, the result of
      (A) the aggregate outstanding principal amount of the Notes, minus (B) the
      Excluded Amount, and minus (C) the Company’s and its Subsidiaries aggregate (I)
      cash, (II) certificates of deposit or time deposits, having in each case a
      tenor
      of not more than six (6) months, issued by any United States commercial bank
      or
      any branch or agency of a non-United States bank licensed to conduct business
      in
      the United States having combined capital and surplus of not less than
      $250,000,000, and (III) money market funds, provided that substantially all
      of
      the assets of such funds consist of securities of the type described in clauses
      (I) or (II) immediately above, all as determined in accordance with United
      States generally accepted accounting principles (“GAAP”)
      applied on a consistent basis, as most recently Publicly Disclosed.

    

    (hh)           “Other
      Notes” means all of the senior secured notes, other than this Note,
      that have been issued by the Company pursuant to the Securities Purchase
      Agreement and all notes issued in exchange therefor or replacement
      thereof.

    

    (ii)           "Par
      Redemption Rate" means (A) at any time during the period beginning on
      and including May 18, 2007 and ending on and including May 17, 2008, 102.5%,
      (B)
      at any time during the period beginning on and including May 18, 2008 and ending
      on and including May 17, 2009, 102%, and (C) at any time thereafter,
      101.75%.

    

    (jj)           “Periodic
      Report” means a quarterly report on Form 10-Q, or an annual report on
      Form 10-K under the 1934 Act, or the equivalent thereof under Canadian
      Securities Laws.

    

    (kk)           “Permitted
      Lien” means (a) Liens created by the Security Documents; (b) Liens
      existing on the date of this Agreement not otherwise described in any other
      clause of this definition and set forth on Schedule 3(bb) to the
      Securities Purchase Agreement; (c) Liens for Taxes or other governmental charges
      not at the time due and payable, or (if foreclosure, distraint sale or other
      similar proceeding shall not have been initiated) which are being contested
      in
      good faith by appropriate proceedings diligently prosecuted, so long as
      foreclosure, distraint, sale or other similar proceedings have not been
      initiated, and in each case for which the Company and its Subsidiaries maintain
      adequate reserves in accordance with GAAP; (d) Liens arising in the ordinary
      course of business in favor of carriers, warehousemen, mechanics and
      materialmen, or other similar Liens imposed by law, which remain payable without
      penalty or which are being contested in good faith by appropriate proceedings
      diligently prosecuted, which proceedings have the effect of preventing the
      forfeiture or sale of the property subject thereto, and in each case for which
      the Company and its Subsidiaries maintain adequate reserves in accordance with
      GAAP; (e) Liens arising in the ordinary course of business in connection with
      worker’s compensation, unemployment compensation and other types of social
      security (excluding Liens arising under ERISA) or Liens consisting of cash
      collateral securing the Company’s or any of its Subsidiaries’ performance of
      surety bonds, bids, performance bonds and similar obligations (exclusive of
      obligations for the payment of borrowed money) permitted pursuant to clause
      (a)(IV) of Section 8 and, in each case, for which the Company and its
      Subsidiaries maintain adequate reserves in accordance with GAAP; (f)
      attachments, appeal bonds (and cash collateral securing such bonds), judgments
      and other similar Liens, for sums not exceeding $2,500,000 in the aggregate
      for
      the Company and its Subsidiaries, arising in connection with court proceedings,
      provided that the execution or other enforcement of such Liens is effectively
      stayed; (g) easements, rights of way, restrictions, minor defects or
      irregularities in title and other similar Liens arising in the ordinary course
      of business and not materially detracting from the value of the property subject
      thereto and not interfering in any material respect with the ordinary conduct
      of
      the business of the Company or any Subsidiary; (h) Liens consisting of cash
      collateral securing the Company’s and its Subsidiaries’ reimbursement
      obligations under letters of credit and lines of credit permitted by clause
      (a)(VI) of Section 8 and under letters of credit permitted by clause (a)(VII)
      of
      Section 8, provided that the aggregate amount of cash
      collateral securing such Indebtedness does not exceed the undrawn face amount
      of
      all such letters of credit or lines of credit outstanding at any one time;
      and
      (i) Liens on equipment subject to Capital Lease Obligations permitted to be
      incurred pursuant to clause (a)(V) of Section 8, to the extent
      such Liens secure such Capital Lease Obligations; (j) contractual Liens in
      favor
      of operators and non-operators under joint operating agreements, or similar
      contractual arrangements that are functionally equivalent to joint operating
      agreements, arising in the ordinary course of the business of the Company or
      any
      Subsidiary to secure amounts owing thereunder, which amounts are not yet due
      or
      are being contested in good faith by appropriate proceedings diligently
      prosecuted, and for which the Company and its Subsidiaries maintain adequate
      reserves in accordance with GAAP, provided that such Liens do not materially
      impair the use of any Real Property or other assets covered by such Liens for
      the purposes for which such Real Property or other assets are used by the
      Company or its Subsidiaries or materially impair the value of any Real Property
      or other assets subject thereto, and provided, further, that the obligations
      secured by such Liens do not constitute obligations for borrowed money; (k)
      contractual Liens that arise in the ordinary course of business under production
      sales agreements and other agreements customary in the oil and gas business
      for
      processing, producing, and selling Hydrocarbons securing obligations to deliver
      already-extracted Hydrocarbons, provided that such Liens do not secure
      obligations to deliver Hydrocarbons at some future date without receiving full
      payment therefor within 90 days of delivery, which obligations are not yet
      due
      or are being contested in good faith by appropriate proceedings diligently
      prosecuted, and for which the Company and its Subsidiaries maintain adequate
      reserves in accordance with GAAP, provided that such Liens do not materially
      impair the use of any of the Real Property or other assets covered by such
      Liens
      for the purposes for which such Real Property or other assets issued by the
      Company or its Subsidiaries or materially impair the value of the Real Property
      or other assets subject thereto, and provided, further that the obligations
      secured by such Liens do not constitute obligations for borrowed money; (l)
      Liens arising solely by virtue of any statutory or common law provision relating
      to banker’s liens, rights of set-off or similar rights and remedies and
      burdening only deposit accounts or other funds maintained with a creditor
      depository institution, provided that no such deposit account is a dedicated
      cash collateral account or is subject to restrictions against access by the
      depositor in excess of those set forth by regulations promulgated by the Board
      of Governors of the Federal Reserve System and no such deposit account is
      intended by the Company to provide collateral to the depository institution
      and
      (m) Liens (whether arising by law or contract), and including rights of setoff
      and similar rights and remedies, burdening only deposit accounts or other funds
      maintained with a depositary institution and securing only credit card and
      checking facilities and similar obligations, provided that the cash maintained
      in such accounts shall not at any time exceed $100,000.

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (ll)           “Permitted
      Subordinated Indebtedness” means any and all Indebtedness, (A) the
      holders of which agree in writing to be subordinate to the Notes on terms and
      conditions acceptable to the Buyers, including with regard to interest payments
      and repayment of principal, (B) which does not mature or otherwise require
      or
      permit redemption or repayment prior to or on the Maturity Date of any Notes
      then outstanding; and (C) which is not secured by any of the assets of the
      Company or any of its Subsidiaries.

    

    (mm)   “Person”
      means an individual, a limited liability company, a partnership, a joint
      venture, a corporation, a trust, an unincorporated organization or a government
      or any department or agency thereof or any other legal entity.

    

    (nn)           
      “Principal” means the outstanding principal amount of this Note
      as of the date of any determination.

    

    (oo)           “Principal
      Market” means the Toronto Stock Exchange; provided,
however, that, if after the Issuance Date the Common Shares
      are listed on
      a U.S. national securities exchange, the NASDAQ National Market or the NASDAQ
      SmallCap Market, the “Principal Market” shall mean such U.S. national securities
      exchange, NASDAQ National Market or the NASDAQ SmallCap Market, as applicable;
      provided, further, that if the Common Shares are not listed on any
      of the Toronto Stock Exchange, a U.S. national securities exchange, the NASDAQ
      National Market or the NASDAQ SmallCap Market, “Principal Market” shall mean the
      principal securities exchange or trading market for the Common
      Shares.

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    (pp)           “Pro
      Rata Disposition Price” means, as of the date of any determination, an
      amount equal to (A) the product of (I) a fraction, of which the numerator is
      the
      outstanding Principal as of such date, and of which the denominator is the
      outstanding principal amount of all Notes as of such date, and (II) the
      Disposition Amount multiplied by (B) the Par Redemption Rate.

    

    (qq)           “Pro
      Rata Reserve Test Failure Amount” means, as of the date of any
      determination, an amount equal to the product of (A) a fraction, of which the
      numerator is the outstanding Principal as of such date, and of which the
      denominator is the outstanding principal amount of all Notes as of such date,
      multiplied by (B) the Reserve Test Failure Amount.

    

    (rr)           “Proved
      PV10 Amount” means, as of the date of any determination, the net
      present value of estimated future revenues to be generated by the Company and
      its Subsidiaries, on a consolidated basis from the production of their proved
      oil and gas reserves (other than reserves within Real Property of the Company
      and its Subsidiaries located in the Powder River Basin in Wyoming and Montana,
      as set forth in Schedule 3(cc) to the Securities Purchase Agreement (the
“Powder River Basin Reserves”) to the extent that the holders
      of the Notes do not have a valid, perfected first priority security interest
      therein) (calculated in accordance with the pricing provisions set forth below
      and otherwise in accordance with SEC guidelines and based on the Company’s most
      recent independent reserve report prepared by Netherland Sewell &
Associates, Inc. or another independent licensed petroleum engineering firm
      approved by the Majority Holders (an “Independent Reserve
      Report”)), net of estimated lease operating expenses, future
      development costs and ad valorem, production and other taxes (excluding federal
      and state income taxes), using price and costs as of such date of determination
      without future escalation and without giving effect to federal or state income
      taxes and non-property related expenses such as general and administrative
      expenses, debt service and depreciation, depletion and amortization, and
      discounted using an annual discount rate of 10%; provided,
however, that (i) at no time shall non-U.S. oil and gas reserves
      (including the oil and gas reserves located in Australia) account for more
      than
      50% of the Proved PV10 Amount, (ii) the Proved PV10 Amount shall mean zero
      unless such Proved PV10 Amount is based upon an Independent Reserve Report
      and
      (iii) the Proved PV10 Amount shall be adjusted by deducting the sum of (1)
      the
      Proved PV10 Amount attributable to proved oil and gas reserves in Texas with
      respect to which the Company or one of its Subsidiaries does not have record
      title as a result of any unresolved litigation or other unresolved dispute
      with
      Geostar or any of its subsidiaries and (2) 50% of the fair market value of
      any
      undeveloped acreage in Texas with respect to which the Company or one of its
      Subsidiaries does not have record title as a result of any unresolved litigation
      or other unresolved dispute with Geostar or any of its
      subsidiaries.

    

    For
      purposes of calculating the Proved PV10 Amount, the fair market value of
      undeveloped acreage in Texas shall be deemed to be $7500 per acre and the net
      present value of the proved oil and gas reserves shall be determined utilizing
      a
      commodity price that is equal to the closing NYMEX 24 month Henry Hub or WTI
      Cushing, as applicable, strip price, in each case as of the last trading day
      of
      the year (in the case of the year-end Independent Reserve Report) or the last
      trading day in June (in the case of the mid-year Independent Reserve Report),
      held flat for months following the 24th month at the average of the monthly
      forward prices included in such 24 month strip, adjusted as follows: for Texas
      gas production, 94.5% of Henry Hub; for Wyoming and Montana gas production,
      75%
      of Henry Hub; for West Virginia gas production, 104% of Henry Hub; for Kansas
      gas production, 100% of Henry Hub; and for oil production, WTI Cushing less
      $2.10 per barrel; or in such other manner as the Company or the Majority Holders
      shall propose in good faith and as shall be reasonably acceptable to the
      Majority Holders or the Company, as the case may be, to account for basis
      differentials, transportation, quality, and other differentials deemed
      appropriate by the Company and acceptable to the Majority Holders.

    

    (ss)           “Public
      Disclosure”, "Publicly Disclosed," or
“Publicly Disclose” means (A) prior to the date on
      which the
      Company commences filing, or is required to commence filing of, Periodic Reports
      and Current Reports pursuant to the 1934 Act, the Company’s public dissemination
      of information through (1) the filing via the System for Electronic Document
      Analysis and Retrieval under the Canadian Securities Laws
      (“SEDAR”) of a Periodic Report or Current Report disclosing
      such information pursuant to requirements of Canadian Securities Laws and (2)
      the issuance of a press release that is widely disseminated in the United States
      (including via at least one of the Dow Jones & Co., Reuters Economic
      Services, Bloomberg Business News, Associated Press, United Press
      International,  Business Wire, Filing Services Canada and CNN Matthews
      wire services), and, in the event that agreements or other documents are filed
      with the corresponding Periodic Report or Current Report, the disclosure in
      the
      press release of the availability of such agreements or other documents through
      SEDAR and instructions as to how to access SEDAR, and (B) on or after the date
      on which the Company commences filing, or is required to commence filing, of
      Periodic Reports and Current Reports pursuant to the 1934 Act, the Company’s
      public dissemination of information through (1) the filing via SEDAR of a
      Periodic Report or Current Report disclosing such information pursuant to the
      requirements of Canadian Securities Laws and (2) the filing via the Electronic
      Data Gathering, Analysis, and Retrieval system of the SEC
      (“EDGAR”) of a Periodic Report or Current Report disclosing
      such information pursuant to the requirements of the 1934 Act.

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (tt)           “Registrable
      Securities” means Shares issued or issuable as set forth in the
      Securities Purchase Agreement, and any shares of capital stock issued or
      issuable with respect to such Shares as a result of any stock split, stock
      dividend, recapitalization, exchange or similar event or otherwise, without
      regard to any limitations on issuance of the Shares.

    

    (uu)           “Registration
      Rights Agreement” means that certain registration rights agreement,
      dated as of June 16, 2005, among the Company and the initial holders of the
      Notes relating to the filing of registration statements covering, among other
      things, the resale of Registrable Securities, as such agreement may be amended
      from time to time as provided in such agreement.

    

    (vv)           “Required
      Proved PV10 Reserve Test Ratio” means, (A) as of any date of
      determination during the period beginning on and including the first anniversary
      of the Initial Closing Date and ending on and including the day immediately
      preceding the second anniversary of the Initial Closing Date, a ratio of 1
      to 1
      and (B) as of any date of determination on or after the second anniversary
      of
      the Initial Closing Date, a ratio of 1.5 to 1.

    

    (ww)   “Reserve
      Test Failure” means that, as of the date of any determination, the
      ratio of the Proved PV10 Amount to the Net Debt Amount as of such date is lower
      than the Required Proved PV10 Reserve Test Ratio.

    

    (xx)           “Reserve
      Test Failure Amount” means, in the event that there is a Reserve Test
      Failure as of the date of any determination, the lowest amount by which, the
      Net
      Debt Amount would have to be reduced in order for there not to be a Reserve
      Test
      Failure (i.e., for the Company to be in compliance as of such date of
      determination with the Required Proved PV10 Reserve Test Ratio).

    

    (yy)           "Restatement
      Premium" means an amount equal to the product of (A) 1.5% and (B) the
      Principal of this Note outstanding as of the Maturity Date.

    

    (zz)           “SEC”
      means the United States Securities and Exchange Commission, or any successor
      thereto.

    

    (aaa)   “Security
      Agreement” means that certain security agreement among the Company, its
      Subsidiaries and the initial holders of the Notes relating to the granting
      by
      the Company and the Subsidiaries of a first-priority security interest in
      substantially all of the assets of the Company and its Subsidiaries (other
      than
      assets located in Australia), as such agreement may be amended, amended and
      restated or otherwise modified from time to time.

    

    (bbb)    “Security
      Documents” means the Security Agreement, and any other agreement,
      document or instrument executed concurrently herewith or at any time hereafter
      pursuant to which the Company, any of its Subsidiaries or any other Person
      either (i) guarantees payment or performance of all or any portion of the
      obligations of the Notes or under any other instruments delivered in connection
      with the transactions contemplated thereby and by the Securities Purchase
      Agreement, and/or (ii) provides, as security for all or any portion of such
      obligations, a Lien on any of its assets for the benefit of the Holder of this
      Note and the holders of the Other Notes, as any or all of the same may be
      amended, supplemented, amended and restated or otherwise modified from time
      to
      time.

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (ccc)   “Series
      Allocation Percentage” means, with respect to each holder of Notes of
      the same Series as this Note, a fraction of which the numerator is the aggregate
      principal amount of Notes of such Series purchased by such holder and of which
      the denominator is the aggregate principal amount of Notes of such Series
      purchased by all holders.

    

    (ddd)   “Subordinated
      Notes” means the Company’s 10% subordinated notes due April and
      September 2009 in the aggregate principal amount of $3,250,000, in the form
      provided to each of the Buyers prior to the date of the Securities Purchase
      Agreement.

    

    (eee)   “Taxes”
      means any and all present or future taxes, levies, imposts, duties, deductions,
      charges or withholdings imposed by any Governmental Authority.

    

    (fff)           “Trading
      Day” means any day on which the Common Shares are traded on the
      Principal Market; provided that “Trading Day” shall not include any day on which
      the Common Shares are scheduled to trade, or actually trade, on the Principal
      Market for less than 4.5 hours.

    

    (3)           Company
      Redemption.

    

    (a)           Company
      Alternative Redemption.

    

    (i)           General.  At
      any time after the first anniversary of the Issuance Date, the Company shall
      have the right to redeem some or all of the Principal (a “Company
      Alternative Redemption”) for an amount in cash equal to the product of
      (A) the applicable Company Alternative Redemption Rate and (B) the sum of (1)
      the Principal being redeemed pursuant to this Section 3(a) and (2) the Interest
      Amount with respect to such Principal as of the Company Alternative Redemption
      Date (as defined below) (the “Company Alternative Redemption
      Price”); provided that the Condition to Company Alternative
      Redemption (as set forth in Section 3(a)(iii)) and the conditions of this
      Section 3(a)(i) and Section 3(a)(ii) are satisfied (or waived in writing by
      the
      Holder).  The Company may exercise its right to Company Alternative
      Redemption by delivering to the Holder written notice thereof (the
“Company Alternative Redemption Notice”) at least five (5)
      Business Days prior to the date of consummation of such redemption
      (“Company Alternative Redemption Date”).  The date on
      which the Holder receives the Company Alternative Redemption Notice is referred
      to as the “Company Alternative Redemption Notice
      Date.”  If the Company elects a Company Alternative
      Redemption pursuant to this Section 3(a), then it must simultaneously take
      the
      same action with respect to all of the Other Notes of the same Series as this
      Note.  If the Company elects a Company Alternative Redemption (and
      similar action under Other Notes of the same Series) with respect to less than
      all of the aggregate principal amount of Notes of such Series then outstanding,
      then the Company shall elect to redeem a principal amount (together with the
      related Interest Amount) from each of the holders of Notes of such Series equal
      to the product of (I) the aggregate principal amount of the Notes of such Series
      that the Company has elected to redeem pursuant to this Section 3(a) (or the
      similar provisions of such Other Notes), multiplied by (II) such holder’s Series
      Allocation Percentage (such amount with respect to each holder of the Notes
      is
      referred to as its “Pro Rata Redemption Amount” and with
      respect to the Holder is referred to as the Pro Rata Redemption
      Amount).  In the event that a holder of any of the Notes of such
      Series shall sell or otherwise transfer any of such holder’s Notes, the
      transferee shall be allocated a pro rata portion of such holder’s Series
      Allocation Percentage.  The Company Alternative Redemption Notice
      shall state (i) the date selected by the Company for the Company Alternative
      Redemption Date in accordance with this Section 3(a), (ii) the aggregate
      principal amount of Notes of such Series that the Company has elected to redeem
      from all of the holders of Notes of such Series pursuant to this Section 3(a),
      and (iii) each holder’s Pro Rata Redemption Amount of the principal amount of
      Notes of such Series the Company has elected to redeem pursuant to this Section
      3(a).

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (ii)           Mechanics
      of Company Alternative Redemption.  If the Company has exercised
      its right to a Company Alternative Redemption in accordance with Section 3(a)
      and the conditions of this Section 3(a) are satisfied on the Company Alternative
      Redemption Date (including the Condition to Company Alternative Redemption
      as
      set forth in Section 3(a)(iii)) (or waived in writing by the Holder), then
      the
      Holder’s Pro Rata Redemption Amount, if any, that remains outstanding on the
      Company Alternative Redemption Date shall be redeemed by the Company on such
      Company Alternative Redemption Date by the payment by the Company to the Holder
      on such Company Alternative Redemption Date, by wire transfer of immediately
      available funds, of an amount in cash equal to the Company Alternative
      Redemption Price for the Holder’s Pro Rata Redemption Amount, unless (A) the
      Company revokes the Company Alternative Redemption Notice by (I) delivery of
      written notice thereof to the Holder on or prior to such Company Alternative
      Redemption Date and (II) payment to the Holder, on the date of delivery of
      such
      notice of revocation, by wire transfer of immediately available funds, of an
      amount in cash equal to 0.50% of the Holder’s Pro Rata Redemption Amount set
      forth in the Company Alternative Redemption Notice, (B) and simultaneously
      takes
      the same action with respect to all of the Other Notes of the same Series as
      this Note.  In the event that the Company revokes a Company
      Alternative Redemption Notice, the Company shall not deliver another Company
      Alternative Redemption Notice to the Holder prior to the date that is three
      (3)
      months after the date of delivery to the Holder of the Company’s notice of such
      revocation.  Notwithstanding anything contained herein to the
      contrary, no notice delivered by the Company to any Holder regarding a Company
      Alternative Redemption (or revocation thereof) shall contain any material
      non-public information regarding the Company or its Subsidiaries.

    

    (iii)           Condition
      to Company Alternative Redemption.  For purposes of this Section
      3(a), “Condition to Company Alternative Redemption” means that, during the
      period beginning on and including the Issuance Date and ending on and including
      the applicable Company Alternative Redemption Date, there shall not have
      occurred the public announcement of a pending, proposed or intended Hostile
      Change of Control (as defined in Section 5(b)) that has not been abandoned,
      terminated or consummated and Publicly Disclosed as such at least ten (10)
      Trading Days prior to the Company Alternative Redemption Notice
      Date.

    

    (iv)           Remedies.  In
      the event that the Company does not pay the Company Alternative Redemption
      Price
      in full for the Holder’s Pro Rata Redemption Amount on the Company Alternative
      Redemption Date and the Condition to Company Alternative Redemption was
      satisfied, or to the extent not satisfied, was waived by the Holder, then in
      addition to any remedy the Holder may have under this Note and the Securities
      Purchase Agreement (including indemnification pursuant to Section 8 thereof
      or
      at law or in equity), the Company Alternative Redemption Price payable in
      respect of such unredeemed Pro Rata Redemption Amount shall bear interest at
      a
      rate equal to the lesser of (A) 1.5% per month (equivalent to a per annum rate
      of 18.0%), prorated for partial months, or (B) the highest lawful interest
      rate,
      unless the Company has revoked the Company Alternative Redemption Notice on
      or
      prior to the Company Alternative Redemption Date in accordance with Section
      3(a)(ii).

    

    (b)           Mandatory
      Redemption by the Company at Maturity Date.  If any Principal
      remains outstanding on the Maturity Date, then the Holder shall surrender this
      Note, duly endorsed for cancellation to the Company, and such Principal shall
      be
      redeemed by the Company as of the Maturity Date by payment on the Maturity
      Date
      to the Holder, by wire transfer of immediately available funds, of an amount
      equal to the sum of 100% of such Principal (together with the Interest Amount
      with respect to such Principal) plus the Restatement Premium.

    

    (c)           Surrender
      of Note.  Notwithstanding anything to the contrary set forth
      herein, upon any redemption of this Note in accordance with the terms hereof
      (including pursuant to this Section 3, Section 4 or Section 5(b)), the Holder
      shall not be required to physically surrender this Note to the Company unless
      all of the Principal is being redeemed or cancelled.  The Holder and
      the Company shall maintain records showing the principal amount redeemed or
      cancelled and the dates of such redemptions or cancellations or shall use such
      other method, reasonably satisfactory to the Holder and the Company, so as
      not
      to require physical surrender of this Note upon each such redemption or
      cancellation.  In the event of any dispute or discrepancy, such
      records of the Holder establishing the Principal and other amounts to which
      the
      Holder is entitled shall be controlling and determinative in the absence of
      error.  Notwithstanding the foregoing, if this Note is redeemed or
      cancelled as aforesaid, the Holder may not transfer this Note unless the Holder
      first physically surrenders this Note to the Company, whereupon the Company
      will
      forthwith issue and deliver upon the order of the Holder a new Note of like
      tenor, registered as the Holder may request, representing in the aggregate
      the
      remaining Principal represented by this Note.  The Holder and any
      assignee, by acceptance of this Note, acknowledge and agree that, by reason
      of
      the provisions of this paragraph, following redemption or cancellation of any
      portion of this Note, the Principal of this Note may be less than the principal
      amount stated on the face hereof.  Each Note shall bear the following
      legend:

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    ANY
      TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,
      INCLUDING SECTION 3(c) HEREOF.  THE PRINCIPAL AMOUNT OF THIS NOTE MAY
      BE LESS THAN THE PRINCIPAL AMOUNT STATED ON THE FACE HEREOF PURSUANT TO SECTION
      3(c) HEREOF.

    

    (4)           Redemption
      at Option of the Holder.

    

    (a)           Mandatory
      Redemption Offer Upon Reserve Test Failure.  Concurrently with the
      delivery of each Independent Reserve Report to the Collateral Agent in
      accordance with Section 4(i) of the Securities Purchase Agreement, the Company
      shall deliver to the Collateral Agent, by facsimile or overnight courier, a
      certificate executed by its principal financial officer (an “Officer’s
      Certificate”) setting forth and certifying as to, as of the effective
      date of such Independent Reserve Report, (i) whether there as a Reserve Test
      Failure as of such date and (ii)(X) the Proved PV10 Amount (based on such
      Independent Reserve Report) and Net Debt Amount and the details of the
      calculations and components thereof, (Y) the ratio of the Proved PV10 Amount
      to
      the Net Debt Amount as of such date, and (Z), if applicable, the Holder’s Pro
      Rata Reserve Test Failure Amount as of such date.  If there was a
      Reserve Test Failure as of such date, the Officer’s Certificate shall be
      accompanied by a written offer to redeem the Principal in an amount equal to
      the
      Pro Rata Reserve Test Failure Amount (“Reserve Test Failure Redemption
      Offer”).  A Reserve Test Failure Redemption Offer shall be
      irrevocable by the Company.  In the event that the Company Publicly
      Discloses its Proved PV10 Amount or Net Debt Amount as of any date (other than
      the end of the period covered by a Periodic Report) and there is a Reserve
      Test
      Failure as of such date, the Company shall contemporaneously Publicly Disclose
      such Reserve Test Failure, as well as the Reserve Test Failure Amount as of
      the
      same date.

    

    (i)           Mechanics
      of Reserve Test Failure Redemption.  At any time up until a date
      that is fifteen (15) Business Days after the date of the Reserve Test Failure
      Redemption Offer, the Holder may require the Company to redeem up to its Pro
      Rata Reserve Test Failure Amount by delivering written notice thereof via
      facsimile and overnight courier (a “Reserve Test Redemption
      Notice”) to the Company, which Reserve Test Redemption Notice shall
      indicate (A) the portion of the Pro Rata Reserve Test Failure Amount that the
      Holder is electing to have the Company redeem from it and (B) the applicable
      price at which the Company must redeem the Principal representing such portion
      of the Pro Rata Reserve Test Failure Amount calculated as the product of (X)
      the
      applicable Par Redemption Rate and (Y) the sum of (I) 100% of the Principal
      that
      the Holder is electing to have the Company redeem and (II) the Interest Amount
      with respect to such Principal (the “Pro Rata Reserve Test Redemption
      Price”).

    

    (ii)           Payment
      of Reserve Test Redemption Price.  Upon the Company’s receipt of a
      Reserve Test Redemption Notice from any holder of the Other Notes, the Company
      shall promptly notify the Holder by facsimile of the Company’s receipt of such
      notice(s).  Each holder (including the Holder) that has sent such a
      notice shall, if required pursuant to Section 3(c), promptly submit to the
      Company such holder’s Note that such holder has elected to have
      redeemed.  The Company shall deliver to the Holder the Pro Rata
      Reserve Test Redemption Price in cash, by wire transfer of immediately available
      funds, within five (5) Business Days after the Company’s receipt of a Reserve
      Test Redemption Notice.

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (b)           Redemption
      Offer Upon Permitted Real Property Disposition.  If at any time
      the net cash proceeds received by the Company or any Subsidiary for Real
      Property Dispositions (as defined in the Securities Purchase Agreement) exceeds
      (i) in the case of Real Property Dispositions of Real Property not located
      in
      Texas, $40,000,000 in the aggregate or (ii) in the case of Real Property
      Dispositions of Real Property located in Texas, $12,000,000 in the aggregate,
      the Company shall provide a written offer to use such excess net cash proceeds
      to redeem the Principal in an amount equal to the Pro Rata Disposition Price
      ("Disposition Redemption Offer").  In addition, if
      the aggregate acreage of Real Property located in Texas that is sold or
      otherwise disposed of by Company or any Subsidiary pursuant to Real Property
      Dispositions exceeds 1600 acres, the Company shall provide a Disposition
      Redemption Offer in an amount equal to the cash consideration received for
      such
      excess acreage.  A Disposition Redemption Offer shall be irrevocable
      by the Company.  Upon the Company's receipt of a notice of a holder's
      election (including the Holder) for repayment hereunder ("Disposition
      Redemption Notice"), the Company shall promptly notify the other
      holders of the Notes by facsimile of the Company's receipt of such
      notice(s).  The Company shall deliver to the Holder the Pro Rata
      Disposition Price in cash, by wire transfer of immediately available funds,
      within five (5) Business Days after the Company’s receipt of a Disposition
      Redemption Notice.

    

    (c)           Void
      Redemption.  In the event that the Company does not pay the Pro
      Rata Reserve Test Redemption Price or Pro Rata Disposition Price within the
      specified time period set forth in Section 4(a) or Section 4(b), as the case
      may
      be, at any time thereafter and until the Company pays such unpaid Pro Rata
      Reserve Test Redemption Price or Pro Rata Disposition Price in full, the Holder
      shall have the option (“Void Optional Redemption Option”) to,
      in lieu of redemption, require the Company to promptly return to the Holder
      any
      or all of the Notes or any portion thereof representing the Principal that
      was
      submitted for redemption by the Holder under this Section 4 and for which the
      Pro Rata Reserve Test Redemption Price or Pro Rata Disposition Price (together
      with any interest thereon) has not been paid, by sending written notice thereof
      to the Company via facsimile (“Void Optional Redemption
      Notice”).  Upon the Company’s receipt of such Void Optional
      Redemption Notice, (i) the Reserve Test Redemption Notice or Disposition
      Redemption Notice, as the case may be, shall be null and void with respect
      to
      the Principal subject to the Void Optional Redemption Notice, and (ii) the
      Company shall immediately return to the Holder any Note subject to the Void
      Optional Redemption Notice.  A holder’s delivery of a Void Optional
      Redemption Notice and exercise of its rights following such notice shall not
      affect the Company’s obligations to make any payments that have accrued prior to
      the date of such notice.

    

    (5)           Other
      Rights of the Holders.

    

    (a)           Reorganization,
      Reclassification, Consolidation, Merger or Sale.  Any
      recapitalization, reorganization, reclassification, consolidation, merger,
      sale
      of all or substantially all of the Company’s assets to another Person or other
      transaction that is effected in such a way that holders of Common Shares are
      entitled to receive (either directly or upon subsequent liquidation) stock,
      securities or assets with respect to or in exchange for Common Shares is
      referred to herein as “Organic Change.”  Prior to the
      consummation of any (i) sale of all or substantially all of the Company’s assets
      to an acquiring Person (including, for the avoidance of doubt, the sale of
      all
      or substantially all of the assets of the Company’s Subsidiaries in the
      aggregate) or (ii) other Organic Change following which the Company is not
      the
      surviving entity, the Company will secure from the Person purchasing such assets
      or the successor resulting from such Organic Change (in each case, the
“Acquiring Entity”) a written agreement, in form and substance
      satisfactory to the Majority Holders, to deliver to the Holder in exchange
      for
      this Note, a security of the Acquiring Entity evidenced by a written instrument
      satisfactory to the Majority Holders.

    

    (b)           Optional
      Redemption Upon Change of Control.  In addition to the rights of
      the Holder under Section 5(a), upon the earlier of receipt of a Notice of Change
      of Control or a Change of Control, the Holder shall have the right, at the
      Holder’s option, to require the Company to redeem all or a portion of the
      Principal at a price equal to the product of (i) the applicable Company
      Alternative Redemption Rate (or 115% in the case of an event satisfying clause
      (III) of the definition of Change of Control that is not pursuant to a written
      agreement with the Company approved by the Company’s Board of Directors (a
“Hostile Change of Control”)) and (ii) the sum of (A) such
      Principal and (B) the Interest Amount with respect to such Principal (such
      product with respect to all of the Principal, the “Change of Control
      Redemption Amount”).  No sooner than thirty (30) nor later
      than twenty (20) Business Days prior to the consummation of a Change of Control,
      the Company shall deliver written notice thereof via facsimile and overnight
      courier (a “Notice of Change of Control”) to the Holder,
      provided that such information shall be made known to the public prior to,
      or
      contemporaneously with such notice being provided to the Holder.  The
      Notice of Change of Control shall be accompanied by a written offer to redeem
      from the Holder an amount equal to the Change of Control Redemption Amount
      (a
“Change of Control Redemption
      Offer”).  Notwithstanding anything contained herein to the
      contrary, no Notice of Change of Control or Change of Control Redemption Offer
      shall contain any material non-public information regarding the Company or
      any
      of its Subsidiaries.  A Change of Control Redemption Offer shall be
      irrevocable by the Company; provided, however, that it shall automatically
      be
      revoked upon the termination or abandonment of the Change of Control to which
      it
      relates and the Public Disclosure thereof.  At any time during the
      period beginning after receipt of a Change of Control Redemption Offer and
      ending on the earlier of the date of such Change of Control or the automatic
      revocation of the Change of Control Redemption Offer as provided above, the
      Holder may require the Company to redeem all or a portion of the Principal
      by
      delivering written notice thereof via facsimile and/or overnight courier (a
      “Notice of Redemption Upon Change of Control”) to the Company,
      which Notice of Redemption Upon Change of Control shall indicate (i) the
      Principal that the Holder is submitting for redemption, and (ii) the aggregate
      amount to which the Holder is entitled upon redemption of such Principal, as
      calculated pursuant to the first sentence of this Section 5(b) (the
“Change of Control Redemption Price”).  Upon the
      Company’s receipt of a Notice(s) of Redemption Upon Change of Control from any
      holder of the Other Notes, the Company shall promptly, but in no event later
      than three (3) Business Days following such receipt, notify the Holder by
      facsimile of the Company’s receipt of such Notice(s) of Redemption Upon Change
      of Control.  The Company shall deliver the Change of Control
      Redemption Price simultaneously with the consummation of the Change of Control;
      provided that, if required by Section 3(c), this Note shall have been so
      delivered to the Company.  The Company shall not enter into any
      binding agreement or other arrangement with respect to a Change of Control
      unless such agreement or other arrangement provides that the payments provided
      for in this Section 5(b) in connection with such Change of Control shall be
      made
      in accordance herewith, and the Company complies with such
      provision.  If the Holder has delivered to the Company a Notice of
      Redemption Upon Change of Control and the Change of Control is not consummated
      by the date that is thirty (30) Business Days after the date of the Notice
      of
      Change of Control, the Holder may revoke its Notice of Redemption Upon Change
      of
      Control at any time on or after such date and prior to the consummation of
      the
      Change of Control by delivering written notice thereof via facsimile and/or
      overnight courier to the Company.  If the Company terminates or
      abandons the Change of Control, it shall Publicly Disclose such termination
      or
      abandonment, and upon such disclosure, the Holder’s Notice of Redemption Upon
      Change of Control, if previously delivered to the Company and not revoked,
      shall
      be deemed null and void without further action on the part of the Holder or
      the
      Company.

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (c)           On
      or before the dates set forth in the table appearing below following this
      Section 5(c) (or, if any such date is not a Business Day, the immediately
      succeeding Business Day) for each calendar month of the Company, the Company
      shall deliver to the Collateral Agent (i) consolidated and consolidating balance
      sheets of the Company and its Subsidiaries as of the end of such month and
      consolidated and consolidating statements of income, and cash flows of the
      Company and its Subsidiaries for the period commencing at the end of the
      previous fiscal Year and ending with the end of such calendar month, all in
      reasonable detail and stating in comparative form the respective consolidated
      figures for the corresponding date in the current fiscal year, and all prepared
      substantially in accordance with GAAP, and certified by the principal financial
      officer of the Company, subject to year-end adjustments and the absence of
      footnotes, (ii) a report detailing the Key Statistics by Area of the Company
      and
      its Subsidiaries, all in reasonable detail and substance reasonably satisfactory
      to the Collateral Agent and certified by the principal financial officer of
      the
      Company as being true and correct in all material respects and (iii) an
      officer's certificate certifying that no Default or Event of Default exists
      as
      of such date.

    

    
      	
              Calendar
                Month Ending

            	 	
              Delivery
                Date

            
	 	 	 
	
              January
                31

            	 	
              The
                following April 19

            
	 	 	 
	
              February
                28/29

            	 	
              The
                following April 29

            
	 	 	 
	
              March
                31

            	 	
              The
                following May 20

            
	 	 	 
	
              April
                30

            	 	
              The
                following June 14

            
	 	 	 
	
               May
                31

            	 	
              The
                following July 15

            
	 	 	 
	
              June
                30

            	 	
              The
                following August 19

            
	 	 	 
	
              July
                31

            	 	
              The
                following September 13

            
	 	 	 
	
              August
                31

            	 	
              The
                following October 15

            
	 	 	 
	
              September
                30

            	 	
              The
                following November 19

            
	 	 	 
	
              October
                31

            	 	
              The
                following December 14

            
	 	 	 
	
              November
                30

            	 	
              The
                following January 14

            
	 	 	 
	
              December
                31

            	 	
              The
                following April 4

            

    

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    (6)           Interest.  Interest
      shall be payable in cash on the Maturity Date and each Interest Payment Date,
      to
      the record holder of this Note on such Interest Payment Date, by wire transfer
      of immediately available funds to an account designated by the
      Holder.  Any accrued and unpaid Interest that is not paid within five
      (5) Business Days of the Maturity Date and such accrued and unpaid Interest’s
      Interest Payment Date, as the case may be, shall bear interest, until the same
      is paid in full, at a rate equal to the lesser of (i) 1.5% per month (equivalent
      to a per annum rate of 18.0%), prorated for partial months, or (ii) the highest
      lawful interest rate (the “Default Interest”).

    

    (7)           Defaults
      and Remedies.

    

    (a)           Events
      of Default.  An “Event of Default,” each of which
      shall constitute an event of failure or default under this Note,
      is:

    

    (i)           the
      failure by the Company to pay any Principal of this Note in accordance with
      Section (1) or Section 3(b), any Company Alternative Redemption Price under
      Section 3(a) (unless the Company has revoked the applicable Company Alternative
      Redemption Notice on or prior to the applicable Company Alternative Redemption
      Date in accordance with Section 3(a)(ii)), or any Change of Control Redemption
      Price under Section 5, when and as due;

    

    (ii)           the
      failure by the Company to pay any Interest on this Note under Sections 3, 4,
      5
      or 6 and any fees, expenses or other amounts not described in the immediately
      preceding clause (i) or clause (xii) that is not cured within three (3) Business
      Days from the date such Interest or other amount was due;

    

    (iii)           the
      failure by the Company for 30 days after notice to it to comply with any other
      provision of this Note in all material respects;

    

    (iv)           any
      default under, or acceleration prior to maturity of, or any event or
      circumstances arising such that, any person is entitled, or could, with the
      giving of notice and/or lapse of time and/or the fulfillment of any condition
      and/or the making of any determination, become entitled, to require repayment
      before its stated maturity of, or to take any step to enforce any security
      for,
      any mortgage, indenture or instrument under which there may be issued or by
      which there may be secured or evidenced any indebtedness for money borrowed
      of
      at least $2,500,000 by the Company or any of its Subsidiaries or for money
      borrowed the repayment of at least $2,500,000 of which is guaranteed by the
      Company or any of its Subsidiaries, whether such indebtedness or guarantee
      exists as of the Issuance Date or shall be created thereafter;

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (v)           the
      Company or any of its Subsidiaries pursuant to or within the meaning of any
      Bankruptcy Law (A) commences a voluntary case or applies for a receiving order;
      (B) consents to the entry of an order for relief against it in an involuntary
      case or consents to any involuntary application for a receiving order; (C)
      consents to the appointment of a Custodian of it or any of its Subsidiaries
      for
      all or substantially all of its property; (D) makes a general assignment for
      the
      benefit of its creditors; or (E) admits in writing that it is generally unable
      to pay its debts as the same become due;

    

    (vi)           an
      involuntary case or other proceeding is commenced directly against the Company
      or any of its Subsidiaries seeking liquidation, reorganization or other relief
      with respect to it or its Indebtedness under any Bankruptcy Law now or hereafter
      in effect or seeking the appointment of a trustee, receiver, liquidator,
      custodian or other similar official of it or any substantial part of its
      property, and such involuntary case or other Bankruptcy Law proceeding remains
      undismissed and unstayed for a period of sixty (60) days, or an order for relief
      is entered against the Company or any of its Subsidiaries as debtor under the
      Bankruptcy Laws as are now or hereafter in effect;

    

    (vii)           
      the Company fails to comply with Section 4(c) of the Securities Purchase
      Agreement or otherwise fails to file, or is determined to have failed to file,
      in a timely manner any Periodic Report or Current Report required to be filed
      with the SEC pursuant to the 1934 Act (other than a Current Report on Form
      8-K
      that is required solely pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06
      or
      4.02(a) of Form 8-K, or pursuant to any other revised provision of such Form
      requiring similar information, if such Form is amended), provided that any
      filing made within the time period permitted by Rule 12b-25 under the 1934
      Act
      and pursuant to a timely filed Form 12b-25 shall, for purposes of this clause
      (vii), be deemed to be timely filed; provided, however, that the late filing
      or
      the failure to file a Periodic Report or  either with the SEC after
      the date of the Securities Purchase Agreement, and the late filing of a Current
      Report (other than a Current Report on Form 8-K that is required solely pursuant
      to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06 or 4.02(a) of Form 8-K, or pursuant
      to any other revised provision of such Form requiring similar information,
      if
      such Form is amended) with the SEC after the date of the Securities Purchase
      Agreement shall only be deemed an Event of Default if the Company fails to
      file
      such Periodic Report or Current Report, as the case may be, with the SEC, or
      fails to file another report containing substantially the same information
      contained in the initial late report, within  thirty (30) days after
      the date on which such initial report was due;

    

    (viii)   any
      other
      representation or warranty made by the Company or any of it Subsidiaries in
      this
      Note, the Securities Purchase Agreement, any of the Transaction Documents or
      any
      other agreement, document, certificate or other instrument delivered in
      connection with the transactions contemplated thereby and hereby, subject to
      all
      of the materiality qualifiers set forth therein, proves to be inaccurate on
      the
      date as of which it was made and such inaccuracy would reasonably be expected
      to
      (A) adversely affect the security interest of the Holder or the Collateral
      Agent
      in any Collateral (as defined in the Security Agreement) that individually
      or in
      the aggregate has a fair market value of $2,000,000 or more or (B) have (x)
      a
      Material Adverse Effect (as defined in Section 3(a) of the Securities Purchase
      Agreement) or (y) a Property Material Adverse Effect (as defined in Section
      3(s)
      of the Securities Purchase Agreement);

    

    (ix)           the
      Company or any of its Subsidiaries shall default in the performance or
      observance of any of the covenants, agreements or conditions contained in this
      Note, the Securities Purchase Agreement or any of the Transaction Documents
      (other than those referred to in any subsection of this Section 7(a) other
      than
      this subsection (ix)), subject to all of the materiality qualifiers set forth
      therein, and such default would reasonably be expected to (A) adversely affect
      the security interest of the Holder or the Collateral Agent in any Collateral
      that individually or in the aggregate has a fair market value of $2,000,000
      or
      more or (B) have a Material Adverse Effect or a Property Material Adverse
      Effect, and shall, in either such case, continue for a period of 30
      days;

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    (x)           one
      or more judgments, non-interlocutory orders or decrees shall be entered by
      a
      U.S. or Canadian, state, provincial or federal or foreign court or
      administrative agency of competent jurisdiction against any the Company or
      any
      of its Subsidiaries involving in the aggregate a liability (to the extent not
      covered by independent third-party insurance), as to any single or related
      series of transactions, incidents or conditions, of $2,500,000 or more, and
      the
      same shall remain unsatisfied, unvacated, unbonded or unstayed pending appeal
      for a period of thirty (30) days after the entry thereof;

    

    (xi)           
      the Company fails to deliver an Officer’s Certificate pursuant to Section 4(a)
      within five (5) days after the date such Officer’s Certificate is required to be
      delivered pursuant to Section 4(a), any Officer’s Certificate delivered to the
      Holder does not contain any of the information required to be included therein
      pursuant to Section 4(a), or any of the information contained in any Officer’s
      Certificate delivered to the Holder is not true, correct and complete in all
      material respects;

    

    (xii)           
      the Company fails to (A) deliver to an Independent Reserve Report under Section
      4(i) of the Securities Purchase Agreement when due, unless such failure is
      cured
      within five (5) days after the date such Independent Reserve Report is due,
      (B)
      make a Reserve Test Failure Redemption Offer with respect to the Note in
      accordance with Section 4(a) hereof, (C) pay the Pro Rata Reserve Test
      Redemption Price to any holder that has delivered to the Company a Reserve
      Test
      Redemption Notice, as set forth in, and in accordance with, Section 4(a) of
      each
      of the Notes, (D) make a Disposition Redemption Offer with respect to the Note
      in accordance with Section 4(b) hereof, or (E) pay the Pro Rata Disposition
      Price to any holder that has delivered to the Company a Disposition Redemption
      Notice, as set forth in, and in accordance with, Section 4(b) of each of the
      Notes;

     

    (xiii)   the
      Company’s
      failure to comply with the provisions of 4(t)(v) or 4(aa) of the Securities
      Purchase Agreement, and such failure shall continue for a period of 30
      days;

     

    (xiv)   the
      Company’s
      failure to comply with the provisions of Section 8 or 9 hereof, or Sections
      4(l)(i), 4(n), 4(o), 4(p), 4(q), 4(r), 4(s), 4(t)(i), 4(t)(iii), 4(t)(iv),
      4(t)(vi) (unless, in the case of Section 4(t)(vi), such noncompliance relates
      solely to the failure of the Company to grant to the Holder or Collateral Agent
      a valid, perfected first priority security interest in the assets of any
      acquired Subsidiary that, individually or in the aggregate, has an aggregate
      fair market value of less than $2,000,000), 4(v) or 4(y) of the Securities
      Purchase Agreement;

    

    (xv)           the
      Company’s failure to comply with Section 4(u)(i) or 4(u)(ii) of the Securities
      Purchase Agreement; provided that with respect to the obligations thereunder
      to
      grant the Holder or Collateral Agent a valid, perfected first priority security
      interest in Real Property, only to the extent such Real Property has an
      individual or aggregate fair market value of  $2,000,000 or
      more;

    

    (xvi)   the
      Company’s
      failure to comply with the provisions of Section 4(l)(ii) or 4(t)(ii) or of
      the
      Securities Purchase Agreement, except, in the case of a breach of a covenant
      or
      other term that is curable, then only if such breach continues for a period
      of
      at least five (5) days; or

    

    (xvii)   the
      Company’s
      failure to comply with the provisions of Section 4(t)(vi) of the Securities
      Purchase Agreement with respect to the granting to the Holder or the Collateral
      Agent a valid, perfected first priority security interest in the assets of
      any
      acquired Subsidiary that, individually or in the aggregate, has a fair market
      value of less than $2,000,000 and such failure continues for a period of at
      least five (5) days.

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    Within
      two Business Days after the occurrence of any Event of Default, the Company
      shall make Public Disclosure thereof and contemporaneously deliver written
      notice thereof to the Holder.

    

    (b)           Remedies.  If
      an Event of Default occurs and is continuing, the Holder of this Note may
      declare all of this Note, including all amounts due hereunder (the
“Acceleration Amount”), to be due and payable immediately,
      except that in the case of an Event of Default arising from events described
      in
      clauses (v) and (vi) of Section 7(a), this Note shall immediately become due
      and
      payable without further action or notice; provided that in the case of an Event
      of Default arising from events described in clause (xiv) of Section 7(a), the
      Acceleration Amount shall equal the applicable Change of Control Redemption
      Amount.  In addition to any remedy the Holder may have under this
      Note, the Security Documents and the Securities Purchase Agreement, such unpaid
      amount shall bear interest, until paid in full, at a per annum rate equal to
      the
      lesser of (A) the sum of (i) the Applicable Interest Rate and (ii) three percent
      (3.0%) per annum (prorated for partial years) and (B) the highest lawful
      interest rate.  Nothing in this Section 7 shall limit any other rights
      the Holder may have under this Note, the Security Documents or the Securities
      Purchase Agreement.

    

    (c)           Void
      Acceleration.  In the event that the Company does not pay the
      Acceleration Amount within five (5) Business Days of this Note becoming due
      under Section 7(b), at any time thereafter and until the Company pays such
      unpaid Acceleration Amount in full, the Holder shall have the option to, in
      lieu
      of redemption, require the Company to promptly return this Note (to the extent
      this Note has been previously delivered to the Company), in whole or any portion
      thereof, to the Holder, by sending written notice thereof to the Company via
      facsimile (the “Void Acceleration Notice”).  Upon the
      Company’s receipt of such Void Acceleration Notice, (i) the acceleration
      pursuant to Section 7(b) shall be null and void with respect to the portion
      of this Note subject to such Void Acceleration Notice, and (ii) the Company
      shall promptly return the portion of this Note (to the extent this Note has
      been
      previously delivered to the Company) subject to such Void Acceleration
      Notice.

    

    (8)           Indebtedness;
      Liens.  Payments of principal and other payments due under this
      Note shall not be subordinated to any obligations of the Company.  The
      Holder of this Note is entitled to the benefits of the Security Documents,
      and
      in the event of a transfer of this Note in accordance with the terms hereof
      and
      the Securities Purchase Agreement, the Holder shall be deemed to have assigned
      its rights under the Security Documents.  For so long as this Note is
      outstanding, the Company shall not, and shall not permit any of its Subsidiaries
      to, (a) issue, incur, assume, maintain, suffer to exist or extend the term
      of
      any Indebtedness except for (I) Indebtedness under the Notes, (II) Permitted
      Subordinated Indebtedness, (III) Indebtedness solely between the Company and/or
      one of its U.S. or Canadian Subsidiaries, on the one hand, and the Company
      and/or one of its U.S. or Canadian Subsidiaries, on the other, provided that
      in
      each case all of the equity of any such Subsidiary (excluding directors’
qualifying shares to the extent that the issuance thereof is required by law)
      is
      directly or indirectly owned by the Company, such Subsidiary is controlled
      by
      the Company, such Subsidiary is a party to the Guaranty Agreement and the
      Security Agreement and the holders of the Notes have a valid, perfected first
      priority security interest in substantially all of the assets of such Subsidiary
      (other than assets located in Australia or as provided in Section 4(o)(ii)
      or
      4(t)(vii) of the Securities Purchase Agreement), (IV) surety bonds, bids,
      performance bonds, and similar obligations (exclusive of obligations for the
      payment of borrowed money) obtained by the Company and its Subsidiaries in
      the
      ordinary course of business for the purpose of satisfying federal, state,
      provincial and territorial and/or local legal requirements for owning and
      operating their oil and gas properties, (V) Capital Lease Obligations incurred
      in connection with acquiring equipment for the Company’s oil and gas exploration
      and production business in amounts not exceeding individually, the fair market
      value of the equipment subject to such Capital Lease Obligations and in an
      amount not exceeding, in the aggregate, $2,500,000 at any one time, (VI)
      reimbursement obligations at any one time in respect of letters of credit or
      lines of credit issued by one or more financial institutions for the account
      of
      the Company or any of its Subsidiaries in connection with the Company’s
      establishment and maintenance of a Hedged (as defined in Section 4(r) of the
      Securities Purchase Agreement) position with respect to, at any time, a maximum
      of 75% of the Company’s estimate of its proved producing oil and gas reserves
      anticipated to be produced for the succeeding 24 calendar months on a rolling
      24
      calendar-month basis, so long as the aggregate amount of all such letters of
      credit and lines of credit does not exceed $5,000,000 at any one time, (VII)
      reimbursement obligations in respect of letters of credit issued for the account
      of the Company or any of its Subsidiaries for the purpose of securing
      performance obligations of the Company or its Subsidiaries incurred in the
      ordinary course of business (and not issued in connection with the Company’s
      establishment and maintenance of a Hedged position) so long as the aggregate
      face amount of all such letters of credit does not exceed $2,500,000 at any
      one
      time; (VIII) Indebtedness under the 15% Notes (provided that the terms of such
      15% Notes have not been amended or modified after their issuance dates); (IX)
      Indebtedness under the Convertible Debentures (provided that the terms of such
      Convertible Debentures have not been amended or modified after their issuance
      dates); and (X) Indebtedness under the Subordinated Notes (provided that the
      terms of such Subordinated Notes have not been amended or modified after their
      issuance dates); (b) issue, incur, assume, assure, maintain, suffer to exist
      or
      extend the term of any Indebtedness in a principal amount in excess of
      $5,000,000 where the proceeds of such Indebtedness are to
      be used to develop, or in connection with the development of, assets in which
      the holders of the Notes do not have a valid, perfected first-priority security
      interest; (c) issue any capital stock of the Company or any Subsidiary
      redeemable prior to or on the Maturity Date; (d) directly or indirectly, create,
      assume or suffer to exist any Lien, other than a Permitted Lien, on any asset
      now owned or hereafter acquired by the Company or any of its Subsidiaries,
      provided, however, that with respect to Liens, other than
      Permitted Liens, on Real Property (and Collateral related thereto to the extent
      that the Liens on such related Collateral are perfected only in real property
      records) that is owned or leased as of the date hereof, or is hereafter
      acquired, by the Company or any of its Subsidiaries and which Liens existed
      or
      exist at the time the Company or any of its Subsidiaries acquired or acquires
      such Real Property (and related Collateral, if applicable) but of which neither
      the Company nor any of its Subsidiaries were or are aware at the time of
      consummation of such acquisition, it shall not constitute a violation of this
      clause (d) if such Liens are terminated and released within ten (10) Business
      Days after the date on which the Company or any of its Subsidiaries first
      becomes aware of the existence thereof, so long as such Liens were or are not
      created, incurred or granted by the Company or any of its Subsidiaries; (e)
      except as required or expressly permitted by Section 4(d) or
      4(q) of the Securities Purchase Agreement, redeem, or
      otherwise repay any principal of, any Indebtedness (other than Indebtedness
      under the Notes and Indebtedness permitted by clauses (a)(III), (a)(IV), (a)(V),
      (a)(VI), (a)(VII), (a)(IX) and (a)(X) of this Section 8; (f) on or at any time
      after an Event of Default, pay any interest on any Indebtedness, (g) redeem
      or
      otherwise repay, other than entirely in consideration for non-redeemable capital
      stock of the Company or Permitted Subordinated Indebtedness, any Indebtedness
      under the Subordinated Notes or the Convertible Debentures prior to the
      scheduled maturity thereof or at any time at which there is a Reserve Test
      Failure or Event of Default or would be a Reserve Test Failure or an Event
      of
      Default after giving effect to such repayment or redemption; or (h) accelerate
      the maturity, or otherwise amend or modify any of the terms, of any Indebtedness
      such that would materially adversely affect any of the interests of the holders
      of the Notes.

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    (9)           Dividends;
      Participation; Restrictions.  While this Note is outstanding, the
      Company shall not, and shall not permit any of its Subsidiaries to: (i) except
      as otherwise provided in Section 4(p) of the Securities Purchase Agreement,
      declare, set aside or pay any dividends on or make any other distributions
      (whether in cash, stock, equity securities or property) in respect of any
      capital stock (including the Common Shares) or authorize the issuance of any
      other securities in respect of, in lieu of or in substitution for any capital
      stock or establish or set any record date with respect to any of the foregoing,
      (ii) purchase, redeem or otherwise acquire, directly or indirectly, any shares
      in the Company’s capital or any shares of the capital stock of any of its
      Subsidiaries, except repurchases of unvested shares at cost in connection with
      the termination of the employment relationship with any employee pursuant to
      share option or purchase agreements in effect on the date hereof or cashless
      exercise of options by employees under existing share options or purchase
      agreements, in each case as set forth on Schedule 3(c) of the Securities
      Purchase Agreement, or (iii) grant, issue or sell any Options, Convertible
      Securities or rights to purchase stock, warrants, securities or other property
      pro rata to the record holders of any class of its capital
      stock.  While this Note is outstanding, the Company and its
      Subsidiaries shall not enter into any agreement which would limit or restrict
      the Company’s or any of its Subsidiaries’ ability to perform under, or take any
      other voluntary action to avoid or seek to avoid the observance or performance
      of any of the terms to be observed or performed by it under, this Note, the
      Securities Purchase Agreement, the Registration Rights Agreement and the
      Security Documents.

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    (10)           Notices.

    

    (a)           The
      Company will give written notice to the Holder at least ten (10) Business Days
      prior to the date on which the Company closes its books or takes a record (I)
      with respect to any pro rata subscription offer to holders of Common Shares
      or
      (II) for determining rights to vote with respect to any Organic Change),
      dissolution or liquidation, provided that such information shall be made known
      to the public prior to, or contemporaneously with, such notice being provided
      to
      the Holder.

    

    (b)           The
      Company will also give written notice to the Holder at least twenty (20)
      Business Days prior to the date on which any Organic Change (as defined in
      Section 5(a)), dissolution or liquidation will take place, provided that such
      information shall be made known to the public prior to or in conjunction with
      such notice being provided to the Holder.

    

    (11)           Vote
      to Change the Terms of the Notes.  The written consent of the
      Company and the holders representing at least two-thirds (2/3) of the principal
      amount then outstanding under the Notes of the same
      Series shall be required for any change that relates only
      to such Series of Notes (including this Note) and upon receipt of such consent,
      each such Note of such Series shall be deemed amended thereby.  The
      written consent of the Company and the holders representing at least two-thirds
      (2/3) of the Aggregate Notes Balance shall be required for any change that
      relates to all of the Notes (including this Note), and upon receipt of such
      consent, each Note shall be deemed amended thereby.

    

    (12)           Lost
      or Stolen Notes.  Upon receipt by the Company of evidence
      reasonably satisfactory to the Company of the loss, theft, destruction or
      mutilation of this Note, and, in the case of loss, theft or destruction, of
      an
      indemnification undertaking by the Holder to the Company in customary form
      and
      reasonably satisfactory to the Company and, in the case of mutilation, upon
      surrender and cancellation of this Note, the Company shall execute and deliver
      a
      new Note of like tenor and date.

    

    (13)           Remedies,
      Characterizations, Other Obligations, Breaches and Injunctive
      Relief.  The remedies provided in this Note shall be cumulative
      and in addition to all other remedies available under this Note, at law or
      in
      equity (including a decree of specific performance and/or other injunctive
      relief), no remedy contained herein shall be deemed a waiver of compliance
      with
      the provisions giving rise to such remedy, and nothing herein shall limit the
      Holder’s right to pursue actual damages for any failure by the Company to comply
      with the terms of this Note.  The Company covenants to the Holder that
      there shall be no characterization concerning this instrument other than as
      expressly provided herein.  Amounts set forth or provided for herein
      with respect to payments, and the like (and the computation thereof) shall
      be
      the amounts to be received by the Holder thereof and shall not, except as
      expressly provided herein, be subject to any other obligation of the Company
      (or
      the performance thereof).  The Company acknowledges that a breach by
      it of its obligations hereunder will cause irreparable harm to the Holder and
      that the remedy at law for any such breach may be inadequate.  The
      Company therefore agrees that, in the event of any such breach or threatened
      breach, the Holder shall be entitled, in addition to all other available
      remedies, to an injunction restraining any breach, without the necessity of
      showing economic loss and without any bond or other security being
      required.

    

    (14)           Specific
      Shall Not Limit General; Construction.  No specific provision
      contained in this Note shall limit or modify any more general provision
      contained herein.  This Note shall be deemed to be jointly drafted by
      the Company and all of the Purchasers and shall not be construed against any
      person as the drafter hereof.

    

    (15)           Failure
      or Indulgence Not Waiver.  No failure or delay on the part of the
      Holder in the exercise of any power, right or privilege hereunder shall operate
      as a waiver thereof, nor shall any single or partial exercise of any such power,
      right or privilege preclude other or further exercise thereof or of any other
      right, power or privilege.

    

    (16)           Notice.  Whenever
      notice is required to be given under this Note, unless otherwise provided
      herein, such notice shall be given in accordance with Section 9(f) of the
      Securities Purchase Agreement.

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    (17)           Transfer
      of this Note.  The Holder may assign or transfer some or all of
      its rights hereunder, subject to compliance with the 1933 Act and the provisions
      of Section 2(f) of the Securities Purchase Agreement without the consent of
      the
      Company.

    

    (18)           Payment
      of Collection, Enforcement and Other Costs.  If (a) this Note is
      placed in the hands of an attorney for collection or enforcement or is collected
      or enforced through any legal proceeding; or (b) an attorney is retained to
      represent the Holder in any bankruptcy, reorganization, receivership of the
      Company or other proceedings affecting Company creditors’ rights and involving a
      claim under this Note, then the Company shall pay the costs incurred by the
      Holder for such collection, enforcement or action, including reasonable
      attorneys’ fees and disbursements.

    

    (19)           Cancellation.  After
      all principal and other amounts at any time owed under this Note have been
      paid
      in full in accordance with the terms hereof, this Note shall automatically
      be
      deemed canceled, shall be surrendered to the Company for cancellation and shall
      not be reissued.

    

    (20)           Note
      Exchangeable for Different Denominations.  Subject to
      Section 3(c) in the event of a redemption pursuant to this Note of less
      than all of the Principal, the Company shall promptly cause to be issued and
      delivered to the Holder, upon tender by the Holder of this Note, a new Note
      of
      like tenor representing the remaining Principal that has not been so converted
      or redeemed.  This Note is exchangeable, upon the surrender hereof by
      the Holder at the principal office of the Company, for a new Note or Notes
      containing the same terms and conditions and representing in the aggregate
      the
      Principal, and each such new Note will represent such portion of such Principal
      as is designated by the Holder at the time of such surrender.  The
      date the Company issued this Note shall be the “Issuance Date”
hereof regardless of the number of times a new Note shall
      be
      issued.

    

    (21)           Taxes.

    

    (a)           Payments
      Free of Taxes.  Any and all payments by or on account of any
      obligation of the Company or any of its Subsidiaries under the Notes, the
      Securities Purchase Agreement or any Security Document shall be made without
      any
      set-off, counterclaim or deduction and free and clear of and without deduction
      for any Indemnified Taxes; provided that if the Company or any of its
      Subsidiaries shall be required to deduct any Indemnified Taxes from such
      payments, then (i) the sum payable shall be increased as necessary so that
      after
      making all required deductions (including deductions applicable to additional
      sums payable under this Section 21(a)), the Holder receives an amount equal
      to
      the sum it would have received had no such deductions been made, (ii) the
      Company or such Subsidiary, as applicable, shall make such deductions and (iii)
      the Company or such Subsidiary shall pay the full amount deducted to the
      relevant Governmental Authority in accordance with applicable law; provided,
      further, that if the Company or any of its Subsidiaries is required to make
      any
      additional payment to the Holder under this Section 21(a), and if the Holder
      is
      entitled to a cash refund or credit against cash taxes payable which is both
      identifiable and quantifiable by the Holder as being attributable to the
      imposition of such Indemnified Taxes (a “Tax Refund”), and such
      Tax Refund may be obtained without increased liability or obligation to the
      Holder (including any obligation of the Holder to file tax returns in
      jurisdictions where it would not otherwise be obligated to file tax returns),
      then, upon the written request of the Company, the Holder shall apply for such
      Tax Refund and, to the extent such Tax Refund is received by the Holder, shall
      reimburse the Company or such Subsidiary for such amount as the Holder shall
      determine to be the proportion of the Tax Refund attributable to such additional
      payment as will leave the Holder after the reimbursement in the same position
      as
      it would have been if the additional payment had not been required; provided
      that, if any Tax Refund reimbursed by the Holder to the Company or such
      Subsidiary is subsequently disallowed, the Company shall repay the Holder such
      amount (together with interest and any applicable penalty payable by the Holder
      to the relevant taxing authority) promptly after the Holder notifies the Company
      of such disallowance.  The Company agrees to reimburse the Holder for
      the Holder’s reasonable out-of-pocket expenses, if any, incurred in complying
      with any request hereunder and agrees that all costs incurred by the Holder
      in
      respect of this Section 21(a) may be deducted from the amount of any
      reimbursement to the Company or any of its Subsidiaries in respect of any Tax
      Refund pursuant to this Section 21(a).

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    (b)           Indemnification
      by the Company.  The Company shall indemnify the Holder, within
      ten (10) days after written demand therefor, for the full amount of any
      Indemnified Taxes paid by the Holder, on or with respect to any payment by
      or on
      account of any obligation of the Company or any of its Subsidiaries under the
      Notes, the Securities Purchase Agreement and the Security Documents (including
      Indemnified Taxes imposed or asserted on or attributable to amounts payable
      under this Section 21) and any penalties, interest and reasonable expenses
      arising therefrom or with respect thereto, whether or not such Indemnified
      Taxes
      were correctly or legally imposed or asserted by the relevant Governmental
      Authority.  A certificate of the Holder as to the amount of such
      payment or liability under this Section 21 shall be delivered to the Company
      and
      shall be conclusive absent demonstrable error.

    

    (22)           Foreign
      Currency Payments.  The Company and each of its Subsidiaries will
      make payment relative to its indebtedness, liabilities and obligations owing
      under the Notes, the Securities Purchase Agreement and the Security Documents
      in
      Dollars.  If the Company or any of its Subsidiaries makes payment
      relative to any such indebtedness, liabilities and obligations to the Holder
      in
      a currency other than Dollars (whether voluntarily or pursuant to an order
      or
      judgment of a court or tribunal of any jurisdiction), such payment will
      constitute a discharge of the liability of the Company or such Subsidiary
      hereunder or thereunder in respect of such indebtedness, liabilities and
      obligations only to the extent of the amount of Dollars which the Holder is
      able
      to purchase at New York, New York with the amount it receives on the date of
      receipt.  If the amount of Dollars which the Holder is able to
      purchase is less than the amount of such currency originally due to it in
      respect to the relevant indebtedness, liabilities and obligations, the Company
      and each of its Subsidiaries will indemnify and save the Holder harmless from
      and against any loss or damage arising as a result of such deficiency. This
      indemnity will constitute an obligation separate and independent from the other
      obligations contained in the Notes, the Securities Purchase Agreement and the
      Security Documents, will give rise to a separate and independent cause of
      action, will apply irrespective of any indulgence granted by the Holder and
      will
      continue in full force and effect notwithstanding any judgment or order in
      respect of any amount due hereunder or under any judgment or order.

    

    (23)           Waiver
      of Notice.  To the extent permitted by law, the Company hereby
      waives demand, notice, protest and all other demands and notices in connection
      with the delivery, acceptance, performance, default or enforcement of this
      Note,
      the Security Documents and the Securities Purchase Agreement.

    

    (24)           Governing
      Law.  This Note shall be construed and enforced in accordance
      with, and all questions concerning the construction, validity, interpretation
      and performance of this Note shall be governed by, the internal laws of the
      State of New York, without giving effect to any choice of law or conflict of
      law
      provision or rule (whether of the State of New York or any other country or
      jurisdiction) that would cause the application of the laws of any jurisdiction
      or country other than the State of New York.  Each party hereby
      irrevocably submits to the exclusive jurisdiction of the state and federal
      courts sitting in the City of New York, borough of Manhattan, for the
      adjudication of any dispute hereunder or in connection herewith or with any
      transaction contemplated hereby or discussed herein, and hereby irrevocably
      waives, and agrees not to assert in any suit, action or proceeding, any claim
      that it is not personally subject to the jurisdiction of any such court, that
      such suit, action or proceeding is brought in an inconvenient forum or that
      the
      venue of such suit, action or proceeding is improper.  Each party
      hereby irrevocably waives personal service of process and consents to process
      being served in any such suit, action or proceeding by mailing a copy thereof
      to
      such party at the address for such notices to it under this Note and agrees
      that
      such service shall constitute good and sufficient service of process and notice
      thereof.  Nothing contained herein shall be deemed to limit in any way
      any right to serve process in any manner permitted by law.  EACH PARTY
      HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST,
      A
      JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
      HEREWITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
      HEREBY.

    

    (25)           Effect
      of Redemption; No Prepayment.  Upon payment of the applicable
      Holder’s Redemption Amount, the Change of Control Redemption Price, or the
      Company Alternative Redemption Price each in accordance with the terms hereof
      with respect to any portion of the Principal of this Note, such portion of
      the
      Principal of this Note shall be deemed paid in full and shall no longer be
      deemed outstanding for any purpose.  Except as specifically set forth
      in this Note, the Company does not have any right, option or obligation to
      pay
      any portion of the Principal at any time prior to the Maturity
      Date.

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    (26)           Payment
      Set Aside.  To the extent that the Company or any of its
      Subsidiaries makes a payment or payments to the Holder hereunder or the Holder
      enforces or exercises its rights hereunder, and such payment or payments or
      the
      proceeds of such enforcement or exercise or any part thereof are subsequently
      invalidated, declared to be fraudulent or preferential, set aside, recovered
      from, disgorged by or are required to be refunded, repaid or otherwise restored
      to the Company or such Subsidiary, by a trustee, receiver or any other person
      under any law (including any Bankruptcy Law, U.S. state or federal law, Canadian
      federal, provincial or territorial law, or common law or equitable cause of
      action), then to the extent of any such restoration the obligation or part
      thereof originally intended to be satisfied shall be revived and continued
      in
      full force and effect as if such payment had not been made or such enforcement
      or setoff had not occurred.

    

    (27)           Interpretative
      Matters.  Unless the context otherwise requires, (a) all
      references to Sections, Schedules or Exhibits are to Sections, Schedules or
      Exhibits contained in or attached to this Note, (b) words in the singular or
      plural include the singular and plural and pronouns stated in either the
      masculine, the feminine or neuter gender shall include the masculine, feminine
      and neuter, and (c) the use of the word “including” in this Note shall be by way
      of example rather than limitation

    

    (28)           Restatement.  This
      Note is one of the Senior Secured Notes issued pursuant to the Securities
      Purchase Agreement and is entitled to the benefits thereof.  This Note
      is given in renewal and replacement of the Senior Secured Note dated
      [__________], 200___ executed by the Company (the “Original Note”) and
      all indebtedness evidenced by the Original Note is hereby continued to be
      evidenced by this Note.  It is the intention of the Company and the
      Holder that this Note shall not constitute a novation or discharge of the
      indebtedness evidenced by the Original Note, nor shall this Note affect or
      impair the priority of the security interests and mortgages created by the
      Security Documents, it being the intention of the Company and the Holder to
      preserve all security interests and mortgages securing payment of the
      indebtedness evidenced by the Note, which security interests and mortgages
      are
      acknowledged by the Company to be valid and subsisting against the Collateral
      (as defined in the Security Agreement).

    

    

    *
      * * * * *

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the Company has caused this Note to be signed by
      Michael A Gerlich, its Vice President and Chief Financial Officer, as of the
      _____ day of November, 2007.

    

    
      	 	
              GASTAR
                EXPLORATION LTD.

            
	 	 	 
	 	 	 
	 	
              By:

            	/s/
              Michael A. Gerlich
	 	
              Name:   Michael
                A. Gerlich

            
	 	
              Title:   Vice
                President and Chief Financial
                Officer

            

    

     

     

    24ex10_1.htm

    
      

    

    Exhibit
      10.1

     

    STOCK
      ISSUANCE AND WITHHOLDING AGREEMENT

    

    This
      Agreement is made on the 28th day
      of September 2007, by and between GEORGE R. JENSEN, JR. (“Jensen”), and USA
      TECHNOLOGIES, INC., a Pennsylvania corporation (“USA”).

    

    Background

    

    USA
      and Jensen entered into an Amended
      and Restated Employment And Non-Competition Agreement dated May 11, 2006 (the
      “Employment Agreement”), pursuant to which USA granted to Jensen, as a bonus,
      25,000 shares of Common Stock (the “Bonus Shares”) that vested on January 1,
      2007. The Bonus Shares have been issued to Jensen. Further, on February 12,
      2007, USA adopted the Long-Term Equity Incentive Program (the “Plan”). Pursuant
      to the Plan, Jensen has earned 169,641 shares of Common Stock of USA (the “Plan
      Shares”) on account of the 2007 fiscal year. The Plan Shares have not yet been
      issued to Jensen. As more fully set forth herein, the parties desire to make
      arrangements for the issuance of the Plan Shares to Jensen and for the
      satisfaction, among other things, of USA’s tax withholding obligations in
      respect of the Bonus Shares already issued to Jensen.

    

    Agreement

    

    NOW,
      THEREFORE, in consideration of the
      covenants set forth herein, and intending to be legally bound hereby, the
      parties agree as follows:

    

    1.           Jensen
      hereby elects to have USA withhold and retain 9,600 Plan Shares which are
      otherwise issuable to Jensen pursuant to the Plan. The 9,600 Plan Shares have
      an
      aggregate fair market value of approximately $80,428.80 as of close of business
      on September 28, 2007, which amount represents the minimum amount of tax
      required to be withheld by USA under federal, state and local laws in respect
      of
      the Bonus Shares already issued to Jensen.

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    2.           As
      of the date hereof, USA shall issue to Jensen an aggregate of 160,041 shares.
      These shares represent the 169,641 Plan Shares earned by Jensen for the 2007
      fiscal year less the 9,600 shares to be retained by USA in order to satisfy
      its
      tax withholding obligations in connection with the Bonus Shares already issued
      to Jensen.

    

    3.           USA
      shall instruct its transfer agent to issue the Plan Shares referred to in
      Section 2 hereof as of the date hereof. The certificates representing the Plan
      Shares shall be subject to stop transfer instructions and shall bear the
      following restrictive legends:

    

    THESE
      SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR JURISDICTION, IN RELIANCE UPON
      EXEMPTIONS UNDER THOSE ACTS. THE SALE OR OTHER DISPOSITION OF THESE SECURITIES
      IS PROHIBITED UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL SATISFACTORY
      TO IT THAT SUCH SALE OR DISPOSITION CAN BE MADE WITHOUT REGISTRATION UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR
      JURISDICTION. BY ACQUIRING THESE SECURITIES, THE HOLDER REPRESENTS THAT THE
      HOLDER HAS ACQUIRED SUCH SECURITIES FOR INVESTMENT PURPOSES ONLY AND THAT THE
      HOLDER WILL NOT SELL OR OTHERWISE DISPOSE OF THESE SECURITIES WITHOUT
      REGISTRATION OR COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES AND REGULATIONS
      ISSUED THEREUNDER.

    

    THE
      SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CANCELLATION PURSUANT
      TO
      THE TERMS OF A CERTAIN STOCK ISSUANCE AND WITHHOLDING AGREEMENT DATED SEPTEMBER
      28, 2007 ENTERED INTO BY THE CORPORATION AND THE INITIAL HOLDER HEREOF, A COPY
      OF WHICH AGREEMENT MAY BE INSPECTED BY THE HOLDER OF THIS CERTIFICATE AT THE
      PRINCIPAL OFFICE OF THE CORPORATION, OR FURNISHED BY THE CORPORATION TO THE
      HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST WITHOUT CHARGE.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    4.           Jensen
      agrees that, on or before December 31, 2007, Jensen shall satisfy all applicable
      federal, state and local income and other tax withholding obligations of USA
      in
      connection with the 25,000 additional bonus shares that vested on June 1, 2007
      under his Employment Agreement as well as the 169,641 Plan Shares earned by
      him
      on account of the 2007 fiscal year through either: (a) the delivery by Jensen
      to
      USA of the amount of the withholding tax obligations, or (b) the cancellation
      of
      a portion of the shares issued to Jensen hereunder by that number of shares
      having a value equal to the withholding tax obligations required to be withheld
      by law.

    

    5.           The
      implementation and interpretation of this Agreement shall be governed by and
      enforced in accordance with the laws of the Commonwealth of Pennsylvania without
      regard to its conflict of laws rules.

    

    6.           The
      rights and obligations of both parties under this Agreement shall inure to
      the
      benefit of and shall be binding upon their personal representatives, heirs,
      successors and assigns.

    

    7.           This
      Agreement may only be modified by an agreement in writing executed by both
      USA
      and Jensen.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the parties hereto have executed this Stock Issuance And
      Withholding Agreement on the day and year first above written.

    

    

    
      	 	/s/
              George R. Jensen
	 	
              GEORGE
                R. JENSEN, JR.

            
	 	 	 
	 	
              USA
                TECHNOLOGIES, INC.

            
	 	 	 
	 	 	 
	 	
              By:

            	/s/
              Stephen P. Herbert
	 	 	
              Stephen
                P. Herbert,

              President

            

    

     

     
      4

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