Document:

exv10w3

 

Exhibit 10.3

Director Form

THE SPECTRANETICS CORPORATION

2006 INCENTIVE AWARD PLAN

STOCK OPTION GRANT NOTICE AND

STOCK OPTION AGREEMENT

     The Spectranetics Corporation, a Delaware corporation (the “Company”), pursuant to its 2006
Incentive Award Plan (the “Plan”), hereby grants to the holder listed below (“Participant”), an
option to purchase the number of shares of the Company’s common stock, par value $0.001 per share
(“Stock”), set forth below (the “Option”). This Option is subject to all of the terms and
conditions set forth herein and in the Stock Option Agreement attached hereto as Exhibit A
(the “Stock Option Agreement”) and the Plan, which are incorporated herein by reference. Unless
otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in
this Grant Notice and the Stock Option Agreement.

	 	 	 	 	 	 	 
	Participant:

	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Grant Date:
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Exercise Price per Share:

	 	 	$	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Total Exercise Price:

	 	 	$	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Total Number of Shares
	 	 	 	 	 	 
	Subject to the Option:

	 	shares	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Expiration Date:
	 	 	 	 	 	 
	 

	 	 	 	 	 	 

	 	 	 
	Type of Option:

	 	Non-Qualified Stock Option
	 
	 	 
	Vesting Schedule:

	 	Subject to the Participant’s continued service as a
Director, the Option shall vest and become exercisable
with respect to 331/2% of the shares subject thereto on
each of the first, second and third anniversaries of the
Grant Date.

     By his or her signature, the Participant agrees to be bound by the terms and conditions of the
Plan, the Stock Option Agreement and this Grant Notice. The Participant has reviewed the Stock
Option Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Grant Notice and fully understands all
provisions of this Grant Notice, the Stock Option Agreement and the Plan. Participant hereby
agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee
upon any questions arising under the Plan or relating to the Option.

	 	 	 	 	 	 	 	 	 
	THE SPECTRANETICS CORPORATION	 	PARTICIPANT	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	 	 	By:	 	 	 	 
	 

	 	 
	 	 	 	 	 	 
	Print Name:

	 	 	 	Print Name:	 	 	 	 
	 

	 	 
	 	 	 	 	 	 
	Title:
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	Address:

	 	 	 	Address:	 	 	 	 
	 

	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 

 

 

EXHIBIT A

TO STOCK OPTION GRANT NOTICE

THE SPECTRANETICS CORPORATION STOCK OPTION AGREEMENT

     Pursuant to the Stock Option Grant Notice (the “Grant Notice”) to which this Stock Option
Agreement (this “Agreement”) is attached, The Spectranetics Corporation, a Delaware corporation
(the “Company”), has granted to the Participant an option under the Company’s 2006 Incentive Award
Plan (as amended from time to time, the “Plan”) to purchase the number of shares of Stock indicated
in the Grant Notice.

ARTICLE I.

GENERAL

     1.1 Defined Terms. Wherever the following terms are used in this Agreement they
shall have the meanings specified below, unless the context clearly indicates otherwise.
Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and
the Grant Notice.

          (a) “Administrator” shall mean the Board or the Committee responsible for conducting the
general administration of the Plan in accordance with Article 12 of the Plan; provided that if the
Participant is an Independent Director, “Administrator” shall mean the Board.

          (b) “Termination of Consultancy” shall mean the time when the engagement of the Participant as
a Consultant to the Company or a Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, by resignation, discharge, death or retirement, but
excluding: (a) terminations where there is a simultaneous employment or continuing employment of
the Participant by the Company or any Subsidiary, and (b) terminations where there is a
simultaneous re-establishment of a consulting relationship or continuing consulting relationship
between the Participant and the Company or any Subsidiary. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a particular leave of
absence constitutes a Termination of Consultancy. Notwithstanding any other provision of the Plan,
the Company or any Subsidiary has an absolute and unrestricted right to terminate a Consultant’s
service at any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.

          (c) “Termination of Directorship” shall mean the time when the Participant, if he or she is or
becomes an Independent Director, ceases to be a Director for any reason, including, but not by way
of limitation, a termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.

          (d) “Termination of Employment” shall mean the time when the employee-employer relationship
between the Participant and the Company or any Subsidiary is terminated for any reason, with or
without cause, including, but not by way of limitation, a termination by resignation, discharge,
death, disability or retirement; but excluding: (a) terminations where there is a simultaneous
reemployment or continuing employment of the Participant by the Company or any Subsidiary, and (b)
terminations where there is a simultaneous establishment of a consulting relationship or continuing
consulting relationship between the Participant and the Company or any Subsidiary. The
Administrator, in its absolute discretion, shall determine the effect of all matters and questions
relating to Termination of

A- 1

 

Employment, including, but not by way of limitation, the question of whether a particular
leave of absence constitutes a Termination of Employment.

          (e) “Termination of Services” shall mean the Participant’s Termination of Consultancy,
Termination of Directorship or Termination of Employment, as applicable.

     1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions
of the Plan which are incorporated herein by reference. In the event of any inconsistency between
the Plan and this Agreement, the terms of the Plan shall control.

ARTICLE II.

GRANT OF OPTION

     2.1 Grant of Option. In consideration of the Participant’s past and/or continued
employment with or service to the Company or a Subsidiary and for other good and valuable
consideration, effective as of the Grant Date set forth in the Grant Notice (the “Grant Date”), the
Company irrevocably grants to the Participant the Option to purchase any part or all of an
aggregate of the number of shares of Stock set forth in the Grant Notice, upon the terms and
conditions set forth in the Plan and this Agreement. The Option is a Non-Qualified Stock Option.

     2.2 Exercise Price. The exercise price of the shares of Stock subject to the Option
shall be as set forth in the Grant Notice, without commission or other charge; provided, however,
that the price per share of the shares of Stock subject to the Option shall not be less than 100%
of the Fair Market Value of a share of Stock on the Grant Date.

     2.3 Consideration to the Company. In consideration of the grant of the Option by the
Company, the Participant agrees to render faithful and efficient services to the Company or any
Subsidiary. Nothing in the Plan or this Agreement shall confer upon the Participant any right to
continue in the employ or service of the Company or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company and its Subsidiaries, which rights are hereby
expressly reserved, to discharge or terminate the services of the Participant at any time for any
reason whatsoever, with or without Cause, except to the extent expressly provided otherwise in a
written agreement between the Company or a Subsidiary and the Participant.

ARTICLE III.

PERIOD OF EXERCISABILITY

     3.1 Commencement of Exercisability.

          (a) Subject to Sections 3.2, 3.3 and 5.10, the Option shall become vested and exercisable in
such amounts and at such times as are set forth in the Grant Notice.

          (b) No portion of the Option which has not become vested and exercisable at the date of the
Participant’s Termination of Employment, Termination of Directorship or Termination of Consultancy
shall thereafter become vested and exercisable, except as may be otherwise provided by the
Administrator or as set forth in a written agreement between the Company and the Participant.

A- 2

 

          (c) Notwithstanding Sections 3.1(a) and 3.1(b), pursuant to Section 11.2 of the Plan, the
Option shall become fully vested and exercisable in the event of a Change in Control, in connection
with which the successor corporation does not assume the Option or substitute an equivalent right
for the Option. Should the successor corporation assume the Option or substitute an equivalent
right, then no such acceleration shall apply.

     3.2 Duration of Exercisability. The installments provided for in the vesting schedule
set forth in the Grant Notice are cumulative. Each such installment which becomes vested and
exercisable pursuant to the vesting schedule set forth in the Grant Notice shall remain vested and
exercisable until it becomes unexercisable under Section 3.3.

     3.3 Expiration of Option. The Option may not be exercised to any extent by anyone
after the first to occur of the following events:

          (a) The expiration of ten years from the Grant Date;

          (b) The expiration of one year from the date of the Participant’s Termination of Services,
unless such termination occurs by reason of the Participant’s Termination of Directorship due to
retirement; or

          (c) The expiration of three years from the date of the Participant’s Termination of
Directorship due to retirement.

ARTICLE IV.

EXERCISE OF OPTION

     4.1 Person Eligible to Exercise. Except as provided in Section 5.2(b), during
the lifetime of the Participant, only the Participant may exercise the Option or any portion
thereof. After the death of the Participant, any exercisable portion of the Option may, prior to
the time when the Option becomes unexercisable under Section 3.3, be exercised by the Participant’s
personal representative or by any person empowered to do so under the deceased the Participant’s
will or under the then applicable laws of descent and distribution.

     4.2 Partial Exercise. Any exercisable portion of the Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior to the time when
the Option or portion thereof becomes unexercisable under Section 3.3.

     4.3 Manner of Exercise. The Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary of the Company (or any third party administrator or
other person or entity designated by the Company) of all of the following prior to the time when
the Option or such portion thereof becomes unexercisable under Section 3.3:

          (a) An Exercise Notice in a form specified by the Administrator, stating that the Option or
portion thereof is thereby exercised, such notice complying with all applicable rules established
by the Administrator;

          (b) The receipt by the Company of full payment for the shares of Stock with respect to which
the Option or portion thereof is exercised, including payment of any applicable withholding tax,
which may be in one or more of the forms of consideration permitted under Section 4.4;

A- 3

 

          (c) Any other written representations as may be required in the Administrator’s reasonable
discretion to evidence compliance with the Securities Act or any other applicable law rule, or
regulation; and

          (d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by
any person or persons other than the Participant, appropriate proof of the right of such person or
persons to exercise the Option.

Notwithstanding any of the foregoing, the Company shall have the right to specify all conditions of
the manner of exercise, which conditions may vary by country and which may be subject to change
from time to time.

     4.4 Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Participant:

          (a) Cash;

          (b) Check;

          (c) With the consent of the Administrator, delivery of a notice that the Participant has
placed a market sell order with a broker with respect to shares of Stock then issuable upon
exercise of the Option, and that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale to the Company in satisfaction of the aggregate exercise price; provided,
that payment of such proceeds is then made to the Company at such time as may be required by the
Company, but in any event not later than the settlement of such sale;

          (d) With the consent of the Administrator, surrender of other shares of Stock which have a
fair market value on the date of surrender equal to the aggregate exercise price of the shares of
Stock with respect to which the Option or portion thereof is being exercised;

          (e) With the consent of the Administrator, surrendered shares of Stock issuable or
transferable upon the exercise of the Option having a fair market value on the date of exercise
equal to the aggregate exercise price of the shares of Stock with respect to which the Option or
portion thereof is being exercised; or

          (f) With the consent of the Administrator, property of any kind which constitutes good and
valuable consideration.

     4.5 Conditions to Issuance of Stock Certificates. The shares of Stock deliverable
upon the exercise of the Option, or any portion thereof, may be either previously authorized but
unissued shares of Stock or issued shares of Stock which have then been reacquired by the Company.
Such shares of Stock shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any shares of Stock purchased upon the exercise of the Option or portion thereof
prior to fulfillment of all of the following conditions:

          (a) The admission of such shares of Stock to listing on all stock exchanges on which such
Stock is then listed;

          (b) The completion of any registration or other qualification of such shares of Stock under
any state or federal law or under rulings or regulations of the Securities and Exchange Commission

A- 4

 

or of any other governmental regulatory body, which the Administrator shall, in its absolute
discretion, deem necessary or advisable;

          (c) The obtaining of any approval or other clearance from any state or federal governmental
agency which the Administrator shall, in its absolute discretion, determine to be necessary or
advisable;

          (d) The receipt by the Company of full payment for such shares of Stock, including payment of
any applicable withholding tax, which may be in one or more of the forms of consideration permitted
under Section 4.4; and

          (e) The lapse of such reasonable period of time following the exercise of the Option as the
Administrator may from time to time establish for reasons of administrative convenience.

     4.6 Rights as Stockholder. The holder of the Option shall not be, nor have any of the
rights or privileges of, a stockholder of the Company in respect of any shares of Stock purchasable
upon the exercise of any part of the Option unless and until such shares of Stock shall have been
issued by the Company to such holder (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company). No adjustment will be made for a
dividend or other right for which the record date is prior to the date the shares of Stock are
issued, except as provided in Section 11.1 of the Plan.

ARTICLE V.

OTHER PROVISIONS

     5.1 Administration. The Administrator shall have the power to interpret the Plan
and this Agreement and to adopt such rules for the administration, interpretation and application
of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All
actions taken and all interpretations and determinations made by the Administrator in good faith
shall be final and binding upon Participant, the Company and all other interested persons. No
member of the Committee or the Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan, this Agreement or the Option.

     5.2 Option Not Transferable.

          (a) Subject to Section 5.2(b), the Option may not be sold,
pledged, assigned or
transferred in any manner other than by will or the laws of descent and distribution, unless and
until the shares of Stock underlying the Option have been issued, and all restrictions applicable
to such shares of Stock have lapsed. Neither the Option nor any interest or right therein shall be
liable for the debts, contracts or engagements of Participant or his or her successors in interest
or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or involuntary or by operation
of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and void and of no
effect, except to the extent that such disposition is permitted by the preceding sentence.

          (b) Notwithstanding any other provision in this Agreement, with the consent of the
Administrator, the Participant may transfer the Option (or any portion thereof) to any one or more
Permitted Transferees (as defined below), subject to the following terms and conditions: (i) any
portion of the Option transferred to a Permitted Transferee shall not be assignable or transferable
by the Permitted

A- 5

 

Transferee other than by will or the laws of descent and distribution; (ii) any portion of the
Option which is transferred to a Permitted Transferee shall continue to be subject to all the terms
and conditions of the Option as applicable to the Participant (other than the ability to further
transfer the Option); and (iii) the Participant and the Permitted Transferee shall execute any and
all documents requested by the Administrator, including, without limitation documents to (A)
confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an
exemption for the transfer under applicable federal and state securities laws and (C) evidence the
transfer. For purposes of this Section 5.2(b), “Permitted Transferee” shall mean, with respect to
a Participant, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former
spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the
Participant’s household (other than a tenant or employee), a trust in which these persons (or the
Participant) control the management of assets, charitable institutions, or trusts or other entities
whose beneficiaries or beneficial owners are these persons (or the Participant) and/or charitable
institutions, and any other entity in which these persons (or the Participant) own more than fifty
percent of the voting interests, or any other transferee specifically approved by the Administrator
after taking into account any state or federal tax or securities laws applicable to transferable
Options. Notwithstanding the foregoing, in no event shall the Option be transferable by the
Participant to a third party (other than the Company) for consideration.

     5.3 Adjustments. The Participant acknowledges that the Option is subject to
adjustment, modification and termination in certain events as provided in this Agreement and
Article 11 of the Plan.

     5.4 Notices. Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of the Secretary of the Company at the address given
beneath the signature of the Company’s authorized officer on the Grant Notice, and any notice to be
given to Participant shall be addressed to Participant at the address given beneath Participant’s
signature on the Grant Notice. By a notice given pursuant to this Section 5.4, either party may
hereafter designate a different address for notices to be given to that party. Any notice which is
required to be given to Participant shall, if Participant is then deceased, be given to the person
entitled to exercise his or her Option pursuant to Section 4.1 by written notice under this Section
5.4. Any notice shall be deemed duly given when sent via email or when sent by certified mail
(return receipt requested) and deposited (with postage prepaid) in a post office or branch post
office regularly maintained by the United States Postal Service.

     5.5 Titles. Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.

     5.6 Governing Law; Severability. The laws of the State of Delaware shall govern the
interpretation, validity, administration, enforcement and performance of the terms of this
Agreement regardless of the law that might be applied under principles of conflicts of laws.

     5.7 Conformity to Securities Laws. The Participant acknowledges that the Plan and
this Agreement are intended to conform to the extent necessary with all provisions of the
Securities Act and the Exchange Act and any and all regulations and rules promulgated by the
Securities and Exchange Commission thereunder, and state securities laws and regulations.
Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is
granted and may be exercised, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be
deemed amended to the extent necessary to conform to such laws, rules and regulations.

A- 6

 

     5.8 Amendments, Suspension and Termination. To the extent permitted by the Plan, this
Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board, provided, that, except as may otherwise be
provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall
adversely effect the Option in any material way without the prior written consent of the
Participant.

     5.9 Successors and Assigns. The Company may assign any of its rights under this
Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer herein set forth in
Section 5.2, this Agreement shall be binding upon Participant and his or her heirs, executors,
administrators, successors and assigns.

     5.10 Limitations Applicable to Section 16 Persons. Notwithstanding any other
provision of the Plan or this Agreement, if Participant is subject to Section 16 of the Exchange
Act, the Plan, the Option and this Agreement shall be subject to any additional limitations set
forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, this Agreement shall be deemed amended
to the extent necessary to conform to such applicable exemptive rule

     5.11 Not a Contract of Employment. Nothing in this Agreement or in the Plan shall
confer upon the Participant any right to continue to serve as an employee or other service provider
of the Company or any of its Subsidiaries.

     5.12 Entire Agreement. The Plan, the Grant Notice and this Agreement (including all
Exhibits thereto) constitute the entire agreement of the parties and supersede in their entirety
all prior undertakings and agreements of the Company and Participant with respect to the subject
matter hereof.

     5.13 Section 409A. This Option is not intended to constitute “nonqualified deferred
compensation” within the meaning of Section 409A of the Code (“Section 409A”). However,
notwithstanding any other provision of the Plan, this Agreement or the Grant Notice, if at any time
the Committee determines that the Option (or any portion thereof) may be subject to Section 409A,
the Committee shall have the right, in its sole discretion, to adopt such amendments to the Plan,
this Agreement or the Grant Notice or adopt other policies and procedures (including amendments,
policies and procedures with retroactive effect), or take any other actions, as the Committee
determines are necessary or appropriate either for the Option to be exempt from the application of
Section 409A or to comply with the requirements of Section 409A.

A- 7exv4w1

 

Exhibit 4.1

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

PAYMENT OF THIS INSTRUMENT SHALL, TO THE EXTENT SET FORTH IN ANNEX I OF THE CREDIT AGREEMENT, DATED
JUNE 15, 2006, AS AMENDED NOVEMBER 1, 2006 AND MAY 14, 2007, BY AND AMONG TETON ENERGY CORPORATION,
BNP PARIBAS, AS ADMINISTRATIVE AGENT AND THE LENDERS SIGNATORY THERETO, BE SUBORDINATE AND JUNIOR
IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS, THE PROVISIONS OF
WHICH ANNEX I OF SUCH CREDIT AGREEMENT BEING INCORPORATED HEREIN AND BY THIS REFERENCE BEING MADE A
PART HEREOF.

	 	 	 
	Original Issue Date: May 16, 2007

	 	$                    

Original Conversion Price (subject to adjustment as provided herein): $5.00 Denver, Colorado

SENIOR SUBORDINATED CONVERTIBLE NOTE

THIS NOTE IS ONE IN A SERIES OF SENIOR SUBORDINATED CONVERTIBLE NOTES (“NOTE(S)”) ISSUED
PURSUANT TO THE TERMS OF A PLACEMENT AGREEMENT BETWEEN THE COMPANY AND COMMONWEALTH ASSOCIATES,
L.P., DATED MAY 11, 2007 (THE “PLACEMENT AGREEMENT”), THAT AGGREGATE THE PRINCIPAL AMOUNT OF UP
$9,000,000.00. ALL CAPITALIZED TERMS HEREIN HAVE THE SAME MEANING AS STATED OR PROVIDED IN THE
PLACEMENT AGREEMENT.

FOR VALUE RECEIVED, Teton Energy Corporation, a Delaware company (the “Company”) having a
principal place of business at 410 17th Street, Denver, Colorado 80202, promises to pay
to ___or its registered assigns (the “Holder”), or shall have paid
pursuant to the terms of this Senior Subordinated Convertible Note (the “Note”), the
principal sum of $___, due May 16, 2008, or such earlier date as this Note is required or
permitted to be repaid as provided hereunder (the “Maturity Date”), and to pay interest to
the Holder in accordance with the provisions hereof. Each Holder also shall be entitled to receive
Warrants, each to purchase one share of the Company’s Common Stock at a

1

 

rate of 200% coverage for each $1,000,000 of principal amount, in a form substantially as that
in Annex B (the “Warrants”). This Note is subject to the following additional provisions:

     Section 1. Definitions.

     (i) Each capitalized term used in this Note, but not defined herein shall have the
meaning ascribed to such term in that certain Senior Revolving Credit Agreement (defined
below);

     (ii) For the purposes hereof, in addition to the terms defined elsewhere in this Note,
the following terms shall have the following meanings:

     “Administrative Agent” means BNP Paribas, in its capacity as Administrative
Agent for the Holders under the Senior Revolving Credit Agreement, together with any
successors in such capacity.

     “Alternate Consideration” shall have the meaning set forth in Section 5(d).

     “Approved Stock Plan” means any employee benefit plan which has been or
hereafter is approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, officer or director for services
provided to the Company, and specifically includes all current stock-based plans of the
Company including the Company’s 2003 Employee Stock Option Plan and the 2005 Long Term
Incentive Plan.

     “Base Conversion Price” shall have the meaning set forth in Section 5(b).

     “Blockage Period” means a Non-Payment Blockage Period or a Payment Blockage
Period.

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

     “Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company, or (ii) the
Company merges into or consolidates with any other Person, or any Person merges into or
consolidates with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 60% of the aggregate
voting power of the Company or the successor entity of such transaction, or (iii) the
Company sells or transfers its assets, as an entirety or substantially as an entirety, to
another Person and the stockholders of the Company immediately prior

2

 

to such transaction own less than 60% of the aggregate voting power of the acquiring
entity immediately after the transaction, (iv) a replacement at one time or within a three
year period of more than one-half of the members of the Company’s board of directors which
is not approved by a majority of those individuals who are members of the board of directors
on the date hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by a majority
of the members of the board of directors who are members on the date hereof), or (v) the
execution by the Company of an agreement to which the Company is a party or by which it is
bound, providing for any of the events set forth above in (i) or (iv).

     “Common Stock” means the common stock, par value $0.001 per share, of the
Company.

     “Conversion Date” shall have the meaning set forth in Section 4(b).

     “Conversion Price” shall have the meaning set forth in Section 4(c).

     “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

     “Conversion Shares” means the shares of Common Stock issuable upon conversion
of this Note.

     “Dilutive Issuance” shall have the meaning set forth in Section 5(b).

     “Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).

     “Eligible Swap Agreement” means any present or future Swap Agreement between
the Company or any Subsidiary and any Senior Revolving Lender or any Affiliate of any Senior
Revolving Lender. For the avoidance of doubt, a Swap Agreement ceases to be an Eligible
Swap Agreement if the Person that is the counterparty to the Borrower under a Swap Agreement
ceases to be a Senior Revolving Lender under the Senior Revolving Credit Agreement (or, in
the case of an affiliate of a Senior Revolving Lender, the Person affiliated therewith
ceases to be a Senior Revolving Lender under the Senior Revolving Credit Agreement).

     “Enforcement Action” means, with respect to any Subordinated Obligations: any
enforcement of any right or remedy including any enforcement or foreclosure of Liens granted
by the Company or any Subsidiary to secure any or all of such Subordinated Obligations, any
enforcement or foreclosure of Liens on any capital stock or other equity interests in the
Borrowers or any Subsidiary which may be granted by the Company or any of their Subsidiaries
or any holder of equity in the Borrower to secure any or all of such Subordinated
Obligations, or any other efforts to collect proceeds from the Company’s or any of its
Subsidiaries’ assets or properties (including proceeds of production) to satisfy the
Subordinated Obligations, including, without limitation, the commencement, or the joining
with any other creditor of the Company or any Subsidiary

3

 

in the commencement of any Insolvency Proceeding against the Company or any Subsidiary;
provided, that none of the following shall constitute an Enforcement Action: (a)
acceleration of any of the Subordinated Obligations following acceleration of any of the
Senior Indebtedness (provided that such acceleration of Senior Indebtedness has not
previously been rescinded), (b) acceleration of any of the Senior Indebtedness following
acceleration of any of the Subordinated Obligations (provided that such acceleration of the
Subordinated Obligations has not previously been rescinded), (c) actions by any Holder to
obtain possession of or receive Reorganization Securities, or (d) taking any action
described above during the existence of any Insolvency Proceeding subject to the
jurisdiction of a court of competent authority.

     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions scheduled to occur or occurring by virtue of one or
more Notice of Conversions of the Holder, if any, (ii) all liquidated damages and other
amounts owing to the Holder in respect of this Note shall have been paid; (iii) there is
then existing no Event of Default or event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (iv) the issuance of the shares in question to
the Holder would not violate the limitations set forth in Section 5, and (v) no public
announcement of a pending or proposed Fundamental Transaction, Change of Control Transaction
or acquisition transaction has occurred that has not been consummated.

     “Event of Default” shall have the meaning set forth in Section 8.

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

     “Excluded Securities” means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Note or the exercise of
the Warrants; (iii) pursuant to a bona fide firm commitment underwritten follow-on public
offering for the issuance of new shares of Common Stock by the Company with a well-regarded
underwriter which generates gross proceeds to the Company in excess of $5,000,000 (other
than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act, including,
without limitation, a registered direct offering, and “equity lines”); (iv) pursuant to any
follow-on offering into which there is an option for the Note to be converted; (v) upon
conversion of any Options or Convertible Securities which are outstanding on the day
immediately preceding the Original Issue Date, provided that the terms of such Options or
Convertible Securities are not materially amended, modified or changed on or after the
Original Issue Date, including, without limitation any amendment, modification or change to
decrease the exercise or conversion price, increase the term of, or increase the number of
shares issuable upon conversion or exercise of such Option or Convertible Security; (vi) in
connection with mergers, acquisitions, strategic business partnerships or joint ventures, in
each case with non-affiliated third parties and otherwise on an arm’s-length basis, the
primary purpose of which is not to raise additional capital; and (vii) any other issuances
that the parties may separately agree is excluded.

4

 

     “Fundamental Transaction” shall have the meaning set forth in Section 5(d).

     “Insolvency Proceeding” shall mean (a) any voluntary or involuntary case,
action, or proceeding before any Governmental Authority having jurisdiction over the
applicable Person or its assets relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up, or relief of debtors, or (b) any general
assignment for the benefit of creditors, composition, marshaling of assets for creditors, or
other similar arrangement in respect of its creditors generally or any substantial portion
of its creditors; in each case whether undertaken under U.S. Federal, state, or foreign law.

     “Interest Payment Date” shall have the meaning set forth in Section 2(a).

     “Interest Period” means, initially, the period beginning on and including the
Original Issue Date and ending on and including June 30, 2007 and each successive period as
follows: the period beginning on and including July 1 and ending on and including September
30; the period beginning on and including October 1 and ending on and including December 31;
the period beginning on and including January 1 and ending on and including March 31; and
the period beginning on and including April 1 and ending on and including June 30.

     “Late Fees” shall have the meaning set forth in Section 2(d).

     “Mandatory Default Amount” shall equal the sum of (i) the greater of: (A) 110%
of the principal amount of this Note to be prepaid, plus all accrued and unpaid interest
thereon, or (B) the principal amount of this Note to be prepaid, plus all other accrued and
unpaid interest hereon, divided by the Conversion Price on (x) the date the Mandatory
Default Amount is demanded or otherwise due or (y) the date the Mandatory Default Amount is
paid in full, whichever is less, multiplied by the VWAP on (x) the date the Mandatory
Default Amount is demanded or otherwise due or (y) the date the Mandatory Default Amount is
paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of this Note.

     “New York Courts” shall have the meaning set forth in Section 9(d).

     “Note Register” shall have the meaning set forth in Section 2(c).

     “Notice of Conversion” shall have the meaning set forth in Section 4(b).

     “Offering” means a subsequent financing, if any, by the Company, which
financing is completed within 90 days after the Closing of the Note financing.

     “Options” means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.

5

 

     “Original Issue Date” shall mean the date of the first issuance of the Notes
regardless of the number of transfers of any Note and regardless of the number of
instruments which may be issued to evidence such Note.

     “Non-Payment Blockage Period” means, with respect to any Non-Payment Default,
the period from and including the date of receipt by the Holders or the Administrative Agent
or other representative of a Non-Payment Default Notice relating thereto until the first to
occur of (a) the date upon which the Senior Indebtedness have been paid in full in cash, all
commitments of any holder of Senior Indebtedness to make loans or extensions of credit have
terminated, and all letters of credit issued by any holder of Senior Indebtedness have
expired, terminated or fully collateralized in cash, (b) the 179th day after receipt of such
Non-Payment Default Notice, (c) the date on which the Non-Payment Default which is the
subject of such Non-Payment Default Notice has been waived in writing by the applicable
holder or holders of the Senior Indebtedness or an agent or representative on their behalf,
cured, or ceased to exist, or (d) the date upon which the Person(s) giving such Non-Payment
Default Notice notify the Holders or the Administrative Agent or other representative in
writing of the termination of such Non-Payment Blockage Period.

     “Non-Payment Default” means the occurrence of any event under any Senior
Revolving Document evidencing Senior Indebtedness, not constituting a Payment Default, which
gives the holder(s) of such Senior Indebtedness, or an agent or representative acting on
behalf of such holder(s), the right to cause the maturity of such Senior Indebtedness to be
accelerated immediately without any further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace period.

     “Non-Payment Default Notice” means a written notice from or on behalf of the
Senior Indebtedness Representative that a Non-Payment Default has occurred and is continuing
which identifies such Non-Payment Default and specifically designates such notice as a
“Non-Payment Default Notice.”

     “Payment Blockage Period” means, with respect to any Payment Default or Senior
Indebtedness Acceleration, the period from and including the date of receipt by the Holders
or the Administrative Agent or other representative of a Payment Default Notice relating
thereto until the first to occur of (a) the date upon which the Senior Indebtedness have
been paid in full in cash, all commitments of any holder of Senior Indebtedness to make
loans or extensions of credit have terminated, and all letters of credit issued by any
holder of Senior Indebtedness have expired, terminated or fully collateralized in cash, (b)
if such Payment Default Notice relates to a Payment Default, the date on which the Payment
Default which is the subject of such Payment Default Notice has been waived in writing by
the applicable holder or holders of the Senior Indebtedness or an agent or representative on
their behalf, cured or ceased to exist, or if such Payment Default Notice relates to a
Senior Indebtedness Acceleration, the date on which such acceleration is rescinded, annulled
or ceased to exist, or (c) the day upon which the Person(s) giving such Payment Default
Notice notify the Holders or the

6

 

Administrative Agent or other representative in writing of the termination of such
Payment Blockage Period.

     “Payment Default” means a default by the Company or any Guarantor in the
payment of any amount owing with respect to the Senior Indebtedness, whether with respect to
principal, interest, premium, letter of credit reimbursement obligations, commitment fees or
letter of credit fees or otherwise when the same becomes due and payable, whether at
maturity or at a date fixed for payment of an installment or prepayment or by declaration or
acceleration or otherwise.

     “Payment Default Notice” means a written notice from or on behalf of the Senior
Indebtedness Representative that either (i) a Payment Default with respect to such Senior
Indebtedness has occurred and is continuing, or (ii) a Senior Indebtedness Acceleration with
respect to such Senior Indebtedness has occurred and is continuing.

     “Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a governmental
agency.

     “Principal Market” means initially the American Stock Exchange or any market on
which the Company may be listed from time to time.

     “Reorganization Securities” means (a) debt securities that are issued pursuant
to an Insolvency Proceeding the payment of which is subordinate and junior at least to the
extent provided in this Section 6 to the payment of the Senior Indebtedness outstanding at
the time of the issuance thereof (including any refinancing of Senior Indebtedness pursuant
to an Insolvency Proceeding) and to the payment of all debt securities issued in exchange
for such Senior Indebtedness in such Insolvency Proceeding (whether such subordination is
effected by the terms of such securities, an order or decree issued in such Insolvency
Proceeding, by agreement of the Holders or otherwise), or (b) equity securities that are
issued pursuant to an Insolvency Proceeding; provided, in either case, that such securities
are authorized by an order or decree made by a court of competent jurisdiction in such
Insolvency Proceeding.

     “Required Senior Revolving Lenders” means Senior Revolving Lenders holding at
least sixty-six and two-thirds percent (66-2/3%) of the outstanding Senior Indebtedness, or
if no principal amount of Loans or letters of credit is then outstanding, Senior Revolving
Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the total
commitments.

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

     “Senior Indebtedness” means and includes (a) all principal indebtedness for
loans now outstanding or hereafter incurred, and all letter of credit reimbursement
obligations now existing or hereafter arising, under the Senior Revolving Credit Agreement,
(b) all

7

 

amounts now or hereafter owing to any of the Senior Revolving Lenders or any of their
Affiliates under any Eligible Swap Agreement, (c) all interest accruing on the Senior
Indebtedness described in the preceding clauses (a) and (b), and (d) all other monetary
obligations (whether now outstanding or hereafter incurred) for which the Company or any
Guarantor is responsible or liable as obligor, guarantor or otherwise under or pursuant to
any of the Senior Revolving Credit Documents including, without limitation, all fees,
penalties, yield protections, breakage costs, damages, indemnification obligations,
reimbursement obligations, and expenses (including, without limitation, fees and expenses of
counsel to the Senior Indebtedness Representative and the Senior Revolving Lenders) together
with interest on the foregoing to the extent provided for in the Senior Revolving Credit
Documents. The interest described in the preceding clause (c) and the premiums and
penalties described in the preceding clause (d) include, without limitation, all interest
accruing after the commencement of any Insolvency Proceeding under the terms of the Senior
Revolving Credit Documents whether or not such interest constitutes an allowed claim in any
such Insolvency Proceeding.

     “Senior Indebtedness Acceleration” means with respect to the Senior
Indebtedness that the holder or holders of such Senior Indebtedness, or an agent or
representative on behalf of such holder or holders, have caused the maturity of such Senior
Indebtedness to be accelerated.

     “Senior Indebtedness Default” means a Payment Default or a Non-Payment Default.

     “Senior Indebtedness Representative” means (a) initially, BNP Paribas, as
Administrative Agent for the Senior Revolving Lenders under the Senior Revolving Credit
Agreement or (b) such other Person selected by the Required Lenders (as such term is defined
in the Senior Revolving Credit Agreement) to replace BNP Paribas or the then Senior
Indebtedness Representative.

     “Senior Revolving Credit Agreement” means that certain $50,000,000 Credit
Agreement dated as of June 15, 2006, as amended November 1, 2006 and May 14, 2007, by and
among Teton Energy Corporation, BNP Paribas, as Administrative Agent, and the
financial institutions listed therein from time to time as Senior Revolving Lenders, as from
time to time renewed, extended, amended, supplemented, or restated, and any agreements
representing the refinancing, replacement, or substitution in whole or in part of the
revolving credit loans and letter of credit liabilities made or incurred under such Senior
Revolving Credit Agreement.

     “Senior Revolving Credit Documents” means, collectively, (a) the Senior
Revolving Credit Agreement and the Eligible Swap Agreements, (b) any note, bond or other
instrument evidencing Senior Indebtedness, (c) all mortgages, security agreements, pledge
agreements or financing statements evidencing, creating or perfecting any Lien to secure the
Senior Indebtedness in any way, (d) all guarantees of the Senior Indebtedness, (d) all other
documents, instruments or agreements relating to the Senior Indebtedness now or hereafter
executed or delivered by and among the Company, any Subsidiary, the

8

 

Senior Indebtedness Representative or any Senior Revolving Lender, including without
limitation each of the other the “Loan Documents” as such term is defined in the Senior
Revolving Credit Agreement, and (e) all renewals, extensions, amendments, modifications or
restatements of the foregoing.

     “Senior Revolving Lenders” means all Persons which now or hereafter constitute
a “Lender” under the Senior Revolving Credit Agreement and their respective successors and
assigns, and all Person refinancing any Senior Indebtedness and their respective successors
and assigns.

     “Subordinated Obligations” means any and all indebtedness (whether for
principal, interest, fees, indemnifications or otherwise, but not expenses) now or hereafter
owing by the Company or any Subsidiary under or in connection with the Note.

     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq SmallCap Market,
the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
OTC Bulletin Board.

     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the primary Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. EST to
4:02 p.m. Eastern Time) using the VAP function; (b) if the Common Stock is not then listed
or quoted on the Trading Market and if prices for the Common Stock are then reported in the
“Pink Sheets” published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (c) in all other cases, the fair market value of a share of
Common Stock as determined by a nationally recognized-independent appraiser selected in good
faith by Holders holding a majority of the principal amount of Notes then outstanding.

     Section 2. Interest.

     a) Payment of Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of this Note at
the rate of eight percent (8%) per annum (the “Note Interest Rate”), payable
quarterly on April 1, July 1, October 1 and January 1, beginning on the first such date
after the Original Issue Date, on each Conversion Date (as to that principal amount then
being converted), and on the Maturity Date (except that, if any such date is not a Business
Day, then such payment shall be due on the next succeeding Business Day) (each such date, an
“Interest Payment Date”), in cash or, if requested by BNP Paribas, in shares of

9

 

Common Stock at stated value of the VWAP on the Interest Payment Date (the amount to be
paid in shares, the “Interest Share Amount”); provided, however, (i)
payment in shares of Common Stock may only occur if during the 20 Trading Days immediately
prior to the applicable Interest Payment Date (“Interest Notice Period”) and through
and including the date such shares of Common Stock are issued to the Holder all of the
Equity Conditions, unless waived by the Holder in writing, have been met and the Company
shall have given the Holder notice in accordance with the notice requirements set forth
below and (ii) prior to the commencement of such Interest Notice Period (but not more than 5
Trading Days prior to the commencement of the Interest Notice Period), the Company shall
have delivered to the Holder’s account with The Depository Trust Company a number of shares
of Common Stock to be applied against such Interest Share Amount equal to the quotient of
(x) the applicable Interest Share Amount divided by (y) the then-Conversion Price (the
“Interest Conversion Shares”). Interest may not be paid in kind if the price of the
Company’s Common Stock at the stated value of the VWAP on the Interest Payment Date would be
less than the Conversion Price.

     b) Company’s Election to Pay Interest in Kind. Subject to the terms and
conditions herein, the decision whether to pay interest hereunder in shares of Common Stock
or cash shall be at the discretion of the Company, with BNP Paribas’ approval. Prior to the
commencement of an Interest Notice Period, the Company shall provide the Holder with written
notice of its election to pay interest hereunder on the applicable Interest Payment Date
either in cash, shares of Common Stock or a combination thereof (the Company may indicate in
such notice that the election contained in such notice shall continue for later periods
until revised) and the Interest Share Amount as to the applicable Interest Payment Date.
During any Interest Notice Period, the Company’s election (whether specific to an Interest
Payment Date or continuous) shall be irrevocable as to such Interest Payment Date. Subject
to the aforementioned conditions, failure to timely provide such written notice shall be
deemed an election by the Company to pay the interest on such Interest Payment Date in cash.
The aggregate number of shares of Common Stock otherwise issuable to the Holder on an
Interest Payment Date shall be reduced by the number of Interest Conversion Shares
previously issued to the Holder in connection with such Interest Payment Date. The
Company’s ability to make the election in this Section 2(b) is qualified by the limitations
in Section 2(a).

     c) Interest Calculations. Interest shall be calculated on the basis of a
360-day year and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Payment of interest in shares of Common
Stock (other than the Interest Conversion Shares issued prior to an Interest Notice Period)
shall otherwise occur pursuant to Section 4(d)(ii) and only for purposes of the payment of
interest in shares, the Interest Payment Date shall be deemed the Conversion Date. Interest
shall cease to accrue with respect to any principal amount converted, provided that the
Company in fact delivers the Interest Conversion Shares within the time period required by
Section 4(d)(ii). Interest hereunder will be paid to the Person in whose name this Note is
registered on the records of the Company regarding registration and transfers of Notes (the
“Note Register”).

10

 

     d) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at the rate of 15% per annum (or such lower maximum amount of
interest permitted to be charged under applicable law) (“Late Fees”) which will
accrue daily, from the date such interest is due hereunder through and including the date of
payment. Notwithstanding anything to the contrary contained herein, if on any Interest
Payment Date the Company has elected to pay interest in Common Stock and is not able to pay
accrued interest in the form of Common Stock because it does not then satisfy the conditions
for payment in the form of Common Stock set forth above, then, at the option of the Holder,
the Company, in lieu of delivering either shares of Common Stock pursuant to this Section 2
or paying the regularly scheduled cash interest payment, shall deliver, within three Trading
Days of each applicable Interest Payment Date, an amount in cash equal to the product of the
number of shares of Common Stock otherwise deliverable to the Holder in connection with the
payment of interest due on such Interest Payment Date and the average VWAP during the period
commencing on the Interest Payment Date and ending on the Trading Day prior to the date such
payment is made. If any Interest Conversion Shares are issued to the Holder in connection
with an Interest Payment Date and are not applied against an Interest Share Amount, then the
Holder shall promptly return such excess shares to the Company.

     Section 3. Registration of Transfers and Exchanges.

     a) Different Denominations. This Note is exchangeable for an equal aggregate
principal amount of Notes of different authorized denominations, as requested by the Holder
surrendering the same. No service charge will be made for such registration of transfer or
exchange.

     b) Reliance on Note Register. Prior to due presentment to the Company for
transfer of this Note, the Company and any agent of the Company may treat the Person in
whose name this Note is duly registered on the Note Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes, whether or not
this Note is overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.

     Section 4. Prepayment and Conversion.

     a) Prepayment. Upon ten (10) days notice and subject to the approval of BNP
Paribas, as described in Section 4(b), this Note may be prepaid without penalty, in whole or
in part, from the proceeds of the Offering, any subsequent offering by the Company of the
Company’s securities, or any combination thereof, provided, that in the event that the
Company raises in excess of $15 million in a non-debt financing transaction within the
90-day period following the issuance of the Note, BNP Paribas’ approval shall not be
required.

     b) Voluntary Conversion. At any time after the Original Issue Date and the
commencement by the Company of the Offering, until this Note is no longer outstanding,

11

 

this Note shall be convertible into Conversion Shares at the option of the Holder, in
whole or in part at any time and from time to time (subject to the limitations on conversion
set forth in Section 4(d) hereof); provided, however, that (i) if, at the
end of the one-year period commencing on the Original Issue Date (the “Note Term”),
this Note has not been converted into Conversion Shares in whole or in part by the Holder,
the Company must obtain the approval of BNP Paribas to pay the balance of the Note in cash
and (ii) before the Note can be paid off in full or in part, in cash, the Company must
obtain the approval of BNP Paribas. The Holder shall effect conversions by delivering to
the Company the form of Notice of Conversion attached hereto as Annex A (a
“Notice of Conversion”), specifying therein the principal amount of this Note to be
converted and the date on which such conversion is to be effected (a “Conversion
Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion
Date shall be the date that such Notice of Conversion is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to physically surrender this Note to
the Company unless the entire principal amount of this Note plus all accrued and unpaid
interest thereon has been so converted. Conversions hereunder shall have the effect of
lowering the outstanding principal amount of this Note in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing the principal amount
converted and the date of such conversions. The Company shall deliver any objection to any
Notice of Conversion within one (1) Business Day of receipt of such notice. In the event of
any dispute or discrepancy, the records of the Holder shall be controlling and determinative
in the absence of manifest error. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of this paragraph, following
conversion of a portion of this Note, the unpaid and unconverted principal amount of this
Note may be less than the amount stated on the face hereof.

     c) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $5.00 (subject to adjustment herein) (the “Conversion Price”).

     d) Mechanics of Conversion

     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of Shares issuable upon a conversion hereunder shall be determined by the
quotient obtained by dividing (x) the outstanding principal amount of this Note to
be converted by (y) the Conversion Price.

     ii. Delivery of Certificate Upon Conversion. Not later than five
Trading Days after any Conversion Date, the Company will deliver or cause to be
delivered to the Holder (A) a certificate or certificates representing the Common
Stock, which will represent the number of Conversion Shares being acquired upon the
conversion of this Note and (B) a bank check in the amount of accrued and unpaid
interest (if the Company is required to pay accrued interest in cash). The Company
shall, if available and if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to be delivered by the
Company under this Section electronically through the Depository Trust

12

 

Corporation or another established clearing corporation performing similar
functions.

     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder by the fifth Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion,
in which event the Company shall immediately return the certificates representing
the principal amount of this Note tendered for conversion.

     iv. Obligation Absolute; Partial Liquidated Damages. If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the fifth Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day after 10 Trading Days after such damages begin to
accrue) for each Trading Day after such fifth Trading Day until such certificates
are delivered. The Company’s obligations to issue and deliver the Conversion Shares
upon conversion of this Note in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce the
same, any waiver or consent with respect to any provision hereof, the recovery of
any judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or any violation
or alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares;
provided, however, such delivery shall not operate as a waiver by
the Company of any such action the Company may have against the Holder. Nothing
herein shall limit the Holder’s right to pursue actual damages or declare an Event
of Default pursuant to Section 8 herein for the Company’s failure to deliver
Conversion Shares within the period specified herein and such Holder shall have the
right to pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The exercise
of any such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

     v. Principal Market Regulation. The Company shall not be obligated to
issue any shares of Common Stock upon conversion of this Note, and the Holder of
this Note shall not have the right to receive upon conversion of this Note any
shares of Common Stock, if the issuance of such shares of Common Stock would exceed
the aggregate number of shares of Common Stock which the Company may issue upon
conversion of the Notes without breaching the

13

 

Company’s obligations under the rules or regulations of the Principal Market
(the “Exchange Cap”), except that such limitation shall not apply in the event that
the Company (A) obtains the approval of its stockholders as required by the
applicable rules of the Principal Market for issuances of Common Stock in excess of
such amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably satisfactory
to the Required Holders. Until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the
“Purchasers”) shall be issued in the aggregate, upon conversion of Notes, shares of
Common Stock in an amount greater than the product of the Exchange Cap multiplied by
a fraction, the numerator of which is the principal amount of Notes issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Closing Date and the
denominator of which is the aggregate principal amount of all Notes issued to the
Purchasers pursuant to the Securities Purchase Agreement on the Closing Date (with
respect to each Purchaser, the “Exchange Cap Allocation”). In the event that any
Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the
transferee shall be allocated a pro rata portion of such Purchaser’s Exchange Cap
Allocation, and the restrictions of the prior sentence shall apply to such
transferee with respect to the portion of the Exchange Cap Allocation allocated to
such transferee. In the event that any holder of Notes shall convert all of such
holder’s Notes into a number of shares of Common Stock which, in the aggregate, is
less than such holder’s Exchange Cap Allocation, then the difference between such
holder’s Exchange Cap Allocation and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Exchange Cap Allocations
of the remaining holders of Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.

     vi. Fractional Shares. Upon a conversion hereunder, the Company shall
not be required to issue certificates representing fractions of the Common Stock,
but may, if otherwise permitted, make a cash payment in respect of any final
fraction of a Common Stock based on the VWAP at such time.

     vii. Transfer Taxes. The issuance of certificates for Common Stock on
conversion of this Note shall be made without charge to the Holder hereof for any
documentary stamp or similar taxes that may be payable in respect of the issue or
delivery of such certificate, provided that the Company shall not be required to pay
any tax that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that of the
Holder and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.

14

 

     Section 5. Certain Adjustments.

     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Note is outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (“Common Stock Equivalents”) (which,
for avoidance of doubt, shall not include any shares of Common Stock issued by the Company
pursuant to this Note, including as interest thereon), other than dividends paid on the
            shares Preferred Stock or the conversion of the Preferred Stock into Common Stock, (B)
subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issues by reclassification of shares of the Common Stock any shares
of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding treasury
            shares, if any) outstanding immediately before such event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

     b) Subsequent Equity Sales. Other than the securities issued in the Offering,
including the underlying securities thereof and other Excluded Securities, if the Company,
at any time while this Note is outstanding, shall offer, sell, grant any option to purchase
or offer, sell or grant any right to reprice its securities, or otherwise dispose of or
issue (or announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock, at an effective price per share less than the then Conversion Price (such
lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices or
otherwise, or due to warrants, options or rights per share which is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per
share which is less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive Issuance), then
immediately after such Dilutive Issuance, the Conversion Price then in effect shall be
reduced to an amount equal the product of (A) the Conversion Price in effect immediately
prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of
(I) the product derived by multiplying the Conversion Price in effect immediately prior to
such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding
immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by
the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the
Applicable Price in effect immediately prior to such Dilutive Issuance

15

 

by (II) the number of shares of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance. The Company shall notify the Holder in writing, no later than the
Business Day following the issuance of any Common Stock or Common Stock Equivalents subject
to this section, indicating therein the applicable issuance price, or of applicable reset
price, exchange price, conversion price and other pricing terms (such notice the
“Dilutive Issuance Notice”). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion Price
regardless of whether the Holder accurately refers to the Base Conversion Price in the
Notice of Conversion.

     c) Floor Price. Until such time as the Company receives any stockholder
approval that may be required under any applicable stockholder approval provisions in order
to allow the Conversion Price to be less than the Conversion Floor Price (as defined below),
including, without limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or designated (the
“Required Stockholder Approval”), no adjustment pursuant to Section 5(b) shall cause the
Conversion Price to be less than $5.00, as adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction (the “Conversion Floor Price”).

     d) Pro Rata Distributions. If the Company, at any time while this Note is
outstanding, shall distribute to all holders of Common Stock and Preferred Stock (and not to
holders of the Notes) evidences of its indebtedness or assets (including cash and cash
dividends) or rights or warrants to subscribe for or purchase any security, then in each
such case the Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of stockholders entitled
to receive such distribution by a fraction of which the denominator shall be the VWAP
determined as of the record date mentioned above, and of which the numerator shall be such
VWAP on such record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors. In either case the
adjustments shall be described in a statement provided to the Holder of the portion of
assets or evidences of indebtedness so distributed or such subscription rights applicable to
one share of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned above.

     e) Fundamental Transaction. If, at any time while this Note is outstanding, (A)
the Company effects any merger or consolidation of the Company with or into another Person,
(B) the Company effects any sale of all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or

16

 

property, or (D) the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then upon any subsequent conversion of this Note, the Holder shall have
the right to receive, for each Conversion Unit that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Note following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction shall (i) assume in
writing all of the obligations of the Company under this Note pursuant to written agreements
in form and substance satisfactory to the Holder (such approval not to be unreasonably
withheld or delayed) prior to such Fundamental Transaction and (ii) to issue to the Holder a
new debenture of such successor entity evidenced by a written instrument substantially
similar in form and substance to this Note, including, without limitation, having a
principal amount and interest rate equal to the principal amounts and the interest rates of
this Note and having similar ranking to this Note, and satisfactory to the Holder (any such
approval not to be unreasonably withheld or delayed). The provisions of this Section shall
apply similarly and equally to successive Fundamental Transactions and shall be applied
without regard to any limitations on the conversion or redemption of this Note.

     f) Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury
shares, if any) issued and outstanding.

     g) Adjustment to Conversion Price. Whenever the Conversion Price is adjusted
pursuant to any of this Section 5, the Company shall promptly mail to each Holder a notice
setting forth the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.

     h) Make Whole. In the event that a Holder of Notes is prohibited from
receiving the full amount due pursuant to the terms of the Notes as a result of the rules

17

 

and regulations of the Principal Market, then the Holder shall be entitled to a
Make-Whole amount for such difference. For purposes of such provision, the “Make-Whole
amount” means the amount of principal and/or interest that was due under the Note that was
not paid on account of applicable rules and regulations of the Principal Market, which
amount shall be due and owing in cash, consistent with the terms herein.

     Section 6. Subordination to Senior Indebtedness.

     a) Subordination of Obligations. The Company and each Subsidiary covenants and
agrees, and each Holder by its acceptance of a Note covenants and agrees, that the payment
of the Subordinated Obligations shall, to the extent set forth in this Section 6, be
subordinate and junior and subject in right of payment to the prior payment in full in cash
of all Senior Indebtedness, whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed.

     b) Payment Default or Acceleration. Except under circumstances when the terms
of Section 6(e) are applicable, if (a) a Payment Default or Senior Indebtedness Acceleration
shall have occurred and be continuing and (b) the Administrative Agent or other
representative shall have received a Payment Default Notice, then neither the Company nor
any Subsidiary may make, receive or collect, any direct or indirect payment or distribution
of any kind or character (in cash, securities, other Property, by setoff, or otherwise other
than Reorganization Securities) of any properties or assets of the Company or any Subsidiary
on account of the Subordinated Obligations during the Payment Blockage Period; provided,
however, that in the case of any payment on or in respect of any Subordinated Obligation
that would (in the absence of any such Payment Default Notice) have been due and payable on
any date (a “Scheduled Payment Date”) during such Payment Blockage Period pursuant
to the terms of the Note as in effect on the date hereof or as amended consistent with the
provisions of Section 6(k), the provisions of this Section 6(b) shall not prevent the making
and acceptance of such payment (a “Scheduled Payment”), together with any additional
default interest as is due on the Notes, on or after the date immediately following the
termination of such Payment Blockage Period. In the event that, notwithstanding the
foregoing, either the Company or any Subsidiary shall make any payment or distribution to
any Holder prohibited by the foregoing provisions of this Section 6(b), then and in such
event such payment or distribution shall be held in trust for the benefit of and immediately
shall be paid over to the holders of the Senior Indebtedness or the Senior Indebtedness
Representative for application against the Senior Indebtedness remaining unpaid until such
Senior Indebtedness are paid in full in cash. Any Payment Default Notice shall be deemed
received by the Holders upon the date of actual receipt by the Holders or the Administrative
Agent or other representative of such Payment Default Notice in writing.

     c) Non-Payment Default. Except under circumstances when the terms of Section
6(b) or Section 6(d) are applicable, if (a) a Non-Payment Default shall have occurred and be
continuing, (b) the Holders or the Administrative Agent or other representative shall have
received a Non-Payment Default Notice, and (c) no Non-

18

 

Payment Default Notice shall have been given within the 360-day period immediately
preceding the giving of such Non-Payment Default Notice, then neither the Company nor any
Subsidiary may make, and no Holder shall accept, receive or collect, any direct or indirect
payment or distribution of any kind or character (in cash, securities, other Property, by
setoff, or otherwise other than Reorganization Securities) of any properties or assets of
the Company or any Subsidiary on account of the Subordinated Obligations during the
Non-Payment Blockage Period; provided, however, that in the case of any Scheduled Payment on
or in respect of any Subordinated Obligation that would (in the absence of any such
Non-Payment Default Notice) have been due and payable on any Scheduled Payment Date during
such Non-Payment Blockage Period pursuant to the terms of the Notes as in effect on the date
hereof or as amended consistent with the requirements of Section 6(k), the provisions of
this Section 6(c) shall not prevent the making and acceptance of such Scheduled Payment,
together with any additional default interest as is due on the Notes, on or after the date
immediately following the termination of such Non-Payment Blockage Period. In the event
that, notwithstanding the foregoing, the Company or any Subsidiary shall make any payment or
distribution to any Holder prohibited by the foregoing provisions of this Section 6(c), then
and in such event such payment or distribution shall be held in trust for the benefit of and
immediately shall be paid over to the holders of the Senior Indebtedness or the Senior
Indebtedness Representative for application against the Senior Indebtedness remaining unpaid
until such Senior Indebtedness are paid in full in cash. Any Non-Payment Default Notice
shall be deemed received by the Holders upon the date of actual receipt by the Holders or
the Administrative Agent or other representative of such Non-Payment Default Notice in
writing.

     d) Insolvency, Bankruptcy, etc. In the event of the institution of any
Insolvency Proceeding relative to the Company or any Subsidiary, then:

     (i) The holders of the Senior Indebtedness shall be entitled to receive payment
in full in cash of the Senior Indebtedness before the Holders are entitled to
receive any direct or indirect payment or distribution of any kind or character,
whether in cash, Property or securities (other than Reorganization Securities) on
account of the Subordinated Obligations.

     (ii) Any direct or indirect payment or distribution of any kind or character,
whether in cash, Property or securities, by setoff or otherwise, which may be
payable or deliverable in such proceedings in respect of the Subordinated
Obligations but for the provisions of this Section 6 shall be paid or delivered by
the Person making such payment or distribution, whether the Company, a Subsidiary of
the Company, a trustee in bankruptcy, a receiver, a liquidating trustee, or
otherwise, directly to the holders of the Senior Indebtedness or the Senior
Indebtedness Representative, to the extent necessary to make payment in full in cash
of all Senior Indebtedness remaining unpaid; provided, however, that no such
delivery of any Reorganization Securities shall be made to any holders of the Senior
Indebtedness. In the event that, notwithstanding the foregoing

19

 

provisions of this Section 6(d), any Holder shall have received any such
payment or distribution of any kind or character, whether in cash, Property or
securities, by setoff or otherwise, before all Senior Indebtedness is paid in full
in cash, which is to be paid to the holders of the Senior Indebtedness under the
foregoing provisions of this Section 6(d), then and in such event such payment or
distribution shall be held in trust for the benefit of and immediately shall be paid
over to the holders of the Senior Indebtedness or the Senior Indebtedness
Representative for application to the payment of all Senior Indebtedness remaining
unpaid until all such Senior Indebtedness shall have been paid in full in cash.

     (iii) If no proof of claim is filed in any Insolvency Proceeding with respect
to any Subordinated Obligations by the tenth day prior to the bar date for any such
proof of claim, the Senior Indebtedness Representative may, after notice to the
Holders or the Administrative Agent or other representative, file such a proof of
claim on behalf of the Holders, and each Holder hereby irrevocably appoints the
Senior Indebtedness Representative as its agent and attorney-in-fact for such
limited purpose; provided, that the foregoing shall not confer to the holder of any
Senior Indebtedness the right to vote on behalf of the Holders in any Insolvency
Proceedings.

     e) No Impairment. No right of any present or future holder of Senior
Indebtedness to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company or any
Subsidiary or by any non-compliance by the Borrower or any Subsidiary with the terms,
provisions, and covenants of this Section 6, the Credit Agreement or the Notes, regardless
of any knowledge thereof any such Holder may have or be otherwise charged with. The
provisions of this Section 6 shall be enforceable directly by any present or future holder
of the Senior Indebtedness and/or the Senior Indebtedness Representative.

     f) Rights of Creditors; Subrogation. The provisions of this Section 6 are for
the purpose of defining the relative rights of the holders of the Senior Indebtedness on the
one hand, and the Holders on the other hand, and nothing herein shall impair, as between the
Company and the Guarantors and the Holders, the obligation of the Company and the
Guarantors, which are unconditional and absolute, to pay to the Holders the principal
thereof and interest thereon in accordance with their terms and the provisions thereof, nor
shall anything herein, prevent the Holders from exercising all remedies otherwise permitted
by applicable law or hereunder upon default under the Credit Agreement or under the Notes
(including the right to demand payment and sue for performance thereof and of the Notes and
to accelerate the maturity thereof as provided by the terms of the Notes), subject to the
rights of holders of the Senior Indebtedness under this Section 6. Upon payment in full of
the Senior Indebtedness in cash and termination of the commitments of any holder of the
Senior Indebtedness to make loans or extensions of credit, and expiration or termination of
all letters of credit issued by any holder of the Senior Indebtedness, the Holders shall, to
the extent of any payments or distributions paid

20

 

or delivered to the holders of the Senior Indebtedness or otherwise applied to the
Senior Indebtedness pursuant to the provisions of this Section 6, be subrogated to the
rights of the holders of the Senior Indebtedness to receive payments or distributions of
assets of the Company or any Guarantor made on Senior Indebtedness (and any security
therefor) until the Subordinated Obligations shall be paid in full (and, for this purpose,
no such payments or distributions paid or delivered to the holders of the Senior
Indebtedness or otherwise applied to the Senior Indebtedness shall be deemed to have
discharged the Subordinated Obligations), and, for the purposes of such subrogation, no
payments to the holders of the Senior Indebtedness of any cash, assets, stock, or
obligations to which the Holders would be entitled except for the provisions of this Section
6 shall, as between the Company and the Guarantors, any of their respective creditors (other
than the holders of the Senior Indebtedness), and the Holders, be deemed to be a payment by
the Company or any Guarantor to or on account of Senior Indebtedness. The fact that failure
to make any payment on account of the Subordinated Obligations is caused by reason of the
operation of any provision of this Section 6 shall not be construed as preventing the
occurrence of an Event of Default.

     g) Payments on Senior Indebtedness. In the event that any Holder determines in
good faith that evidence is required with respect to the right of any holder of the Senior
Indebtedness to participate in any payment or distribution pursuant to this Section 6 or the
amount of such participation, such Holder may request such Person to furnish evidence to the
reasonable satisfaction of such Holder as to the amount of Senior Indebtedness held by such
Person, the extent to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under this Section
6, and if such evidence is not furnished, such Holder may defer any payment to such Person
pending judicial determination as to the right of such Person to receive such payment;
provided that, upon the written request of such Person to such Holder, such payment shall be
made to the court having jurisdiction over such judicial determination or to another Person
mutually satisfactory to such Person and such Holder, as escrowee, to be held and invested
pending such judicial determination in accordance with such instructions as shall be
mutually satisfactory to such Person and such Holder and upon such judicial determination
becoming final and non-appealable to be distributed in accordance therewith to the Person
entitled thereto.

     h) Notice of Acceleration; Enforcement Action.

     (i) Each Holder agrees that in the event any Event of Default shall occur, and
as a result thereof, any Holder or the Administrative Agent or other representative
of such Holder accelerates maturity of the Notes, then such Holder or the
Administrative Agent or other representative shall give prompt (and in any event
within three (3) Business Days) notice thereof in writing to the holders of the
Senior Indebtedness or the Senior Indebtedness Representative. Neither the Company
nor any Subsidiary may pay the Notes until ten (10) Business Days after the Senior
Indebtedness Representative receives the notice described above and, after that ten
(10) Business Day period, may pay the Notes, and the Holders

21

 

may receive or collect such payment, only if the provisions of this Section 6
do not prohibit such payment at that time.

     (ii) Each Holder agrees that in the event any Event of Default shall occur, and
as a result thereof, any Holder or the Administrative Agent or other representative
of such Holder intends to commence any Enforcement Action, then such Holder or the
Administrative Agent or other representative shall first deliver notice thereof in
writing to the Senior Indebtedness Representative both (i) not less than ten (10)
days prior to taking any such Enforcement Action, and (ii) one (1) Business Day
after such Enforcement Action is taken.

     i) Reinstatement. The provisions of this Section 6 shall remain in force and
effect until the indefeasible payment in full of all Senior Indebtedness and the termination
of all commitments of any holder of the Senior Indebtedness to make loans or extensions of
credit, and expiration or termination of all letters of credit issued by any holder of the
Senior Indebtedness. To the extent any payment of or distribution in respect of the Senior
Indebtedness (whether by or on behalf of the Company or any of their Subsidiaries, as
proceeds of security or enforcement of any right of set off or otherwise) is declared to be
fraudulent or preferential, set aside or required to be paid to the Company or any
Subsidiary or any receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar person under any bankruptcy, insolvency, receivership, fraudulent conveyance or
similar law, then if such payment or distribution is recovered by, or paid over to, the
Company or any Subsidiary or such receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person, the Senior Indebtedness or part thereof originally intended
to be satisfied shall be deemed to be reinstated and outstanding as if such payment has not
occurred and the provisions of this Section 6 shall continue to be applicable in respect of
said reinstated Senior Indebtedness.

     j) Rights of Holders of the Senior Indebtedness. The holders of the Senior
Indebtedness may, at any time and from time to time subject to the terms of the Senior
Indebtedness, without the consent of or notice to the Holders or the Administrative Agent or
other representative of the Holders, without incurring responsibility to the Holders and
without impairing or releasing the subordination or other benefits provided in this Section
6 or the obligations hereunder of the Holders to the holders of the Senior Indebtedness, do
any one or more of the following: (a) change the manner, place or terms of payment or extend
the time of payment of, or renew, increase (but not in excess of the cap provided for in the
definition of “Senior Indebtedness”), alter or amend, Senior Indebtedness or any instrument
evidencing the same or any covenant or agreement under which Senior Indebtedness is
outstanding or secured or any liability of any obligor thereon; (b) sell, exchange, release
or otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (c) settle or compromise any Senior Indebtedness or any liability of any
obligor thereon or release any Person liable in any manner for the payment of Senior
Indebtedness; and (d) waive any default under Senior Indebtedness and exercise or refrain
from exercising any rights against the Company, any Subsidiary or

22

 

any other Person. The foregoing provisions are not intended to permit a change to the
definition of “Senior Indebtedness.”

     k) Amendments. No amendment of this Section 6, or the definitions used in this
Section 6, or which would have the effect of modifying this Section 6, or the definitions
used in this Section 6, shall be effective unless it is in writing and made with the prior
written consent of each of the Required Senior Revolving Lenders or by the Senior
Indebtedness Representative acting at their written discretion on their behalf.

     l) Identity of Holders for Notice Purposes. For purposes of any notice
required or permitted to be given hereunder by the holders of the Senior Indebtedness or the
Senior Indebtedness Representative to the Holders, or any of them, the holders of the Senior
Indebtedness and the Senior Indebtedness Representative shall be entitled to rely,
conclusively, on the identity and address of each Holder as set forth in the Credit
Agreement or as otherwise set forth in the most recent notice received by the Senior
Indebtedness Representative from a Holder referring to the Credit Agreement for purposes of
providing the identity and address of each Holder. The Holders agree that any notices
required to be given to the Holders shall be effective if such notice is given to the
Administrative Agent or other representative of the Holders. For so long as the
Subordinated Obligations are outstanding, the Holders agree to designate and maintain an
agent or other representative for such purposes.

     m) Liens.

     (i) All Liens granted by the Company, or, if applicable, any Guarantor, which
at any time secure the Senior Revolving Credit Agreement, are hereby made, and will
at all times prior to the full payment or discharge of the Senior Indebtedness be,
subject and subordinate to all Liens granted by the Borrower or any Guarantor which
at any time secure the Senior Indebtedness, which subordination shall be effective
whether or not all such Liens securing Senior Indebtedness have been properly
recorded, filed and otherwise perfected prior to all such Liens securing any Note
and regardless of the relative priority of such Liens as determined without regard
to this Section 6. The mortgages included in the Senior Revolving Credit Documents
do (and other mortgages, security agreements and similar Senior Revolving Credit
Documents may) describe the indebtedness secured thereby in a manner which might
include indebtedness other than the Senior Indebtedness. For so long as any Note is
outstanding, as between the Holders and the holders of the Senior Indebtedness, only
the Senior Indebtedness shall be deemed to be secured by any Liens granted under the
Senior Revolving Credit Documents.

     (ii) Each Holder agrees that it will not initiate, join in or prosecute any
claim, action or other proceeding challenging the validity or enforceability of the
Senior Indebtedness or the Liens securing the Senior Indebtedness.

23

 

     n) Successors and Assigns. Each Holder acknowledges and agrees that the
provisions of this Section 6 are, and are intended to be, an inducement and a consideration
to each holder of the Senior Indebtedness to make, extend and continue the Senior
Indebtedness; and each holder of the Senior Indebtedness shall be deemed conclusively to
have relied upon the provisions of this Section 6 in permitting the Company to incur the
Subordinated Obligations and in making, extending, continuing and/or acquiring such Senior
Indebtedness. This Section 6 shall pass to and be fully binding upon the successors and
assigns of each Holder and shall inure to the benefit of the present and future holders of
the Senior Indebtedness and the Senior Indebtedness Representative and their respective
successors and assigns (including without limitation any Person refinancing any Senior
Indebtedness).

     o) Purchase of Senior Indebtedness. The Senior Indebtedness Representative, on
behalf of itself and the Senior Revolving Lenders (and, where appropriate with regard to the
Eligible Swap Agreements, their respective Affiliates), and the Company hereby agrees with
the Holder that, if the Senior Indebtedness Representative delivers a Payment Default Notice
to the Administrative Agent or the Holder, then the Holder may (but shall not be obligated
to) purchase the Senior Indebtedness and all of the rights, titles and interests of the
Senior Indebtedness Representative and the Senior Revolving Lenders under the Senior
Revolving Credit Documents, by giving notice of Holder’s intent to buy within ten days after
delivery of such Payment Default Notice and consummating such sale within thirty days after
the delivery of such Payment Default Notice for a price in immediately available funds equal
to the unpaid principal of and accrued interest on the Senior Indebtedness, the cash
collateralization amount of outstanding Letters of Credit (as defined in the Senior
Revolving Credit Agreement) at par value plus 5%, all other amounts then due to the Senior
Indebtedness Representative and the Senior Revolving Lenders under the Senior Revolving
Credit Documents and all unpaid amounts and Swap Termination Value payments due to the
Senior Revolving Lenders (and their respective Affiliates, where appropriate) of the
Eligible Swap Agreements, all subject to documentation reasonably acceptable to the Senior
Indebtedness Representative, the Senior Revolving Lenders and the Holder, but without any
necessity for any consent from the Company or any Guarantor.

     Section 7. Negative Covenants. So long as any portion of this Note is
outstanding, the Company will not directly or indirectly, without the prior approval of BNP
Paribas:

     a) except as provided under the Senior Revolving Credit Agreement, and this Note, enter
into, create, incur, assume, guarantee or suffer to exist any Indebtedness;

     b) except as provided under the Senior Revolving Credit Agreement, and this Note, enter
into, create, incur, assume or suffer to exist any Lien;

     c) amend its certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of the Holder;

24

 

     d) enter into any agreement with respect to any of the foregoing; or

     e) except as provided under the Senior Revolving Credit Agreement, and this Note, pay
cash dividends or distributions on any equity securities of the Company.

     Section 8. Events of Default.

     a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court, or any order,
rule or regulation of any administrative or governmental body):

     i. any default in the payment of (A) the principal amount of any Note, or (B)
interest (including Late Fees) on, or liquidated damages in respect of, any Note, as
and when the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default, solely in the case of
an interest payment or other default under clause (B) above, is not cured, within 30
calendar days;

     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in this Note or any other Note (other than a breach by the
Company of its obligations to deliver Shares to the Holder upon conversion which
breach is addressed in clause (vii) below) which failure is not cured, if possible
to cure, within the earlier to occur of (A) 30 calendar days after notice of such
default sent by the Holder or by any other Holder and (B) 30 Trading Days after the
Company shall become or should have become aware of such failure;

     iii. any representation or warranty made herein, or in any other report,
financial statement or certificate made or delivered to the Holder or any other
holder of Notes shall be untrue or incorrect in any material respect as of the date
when made or deemed made;

     iv. if (i) the Company shall commence a case, as debtor, or there shall be
commenced against the Company, a case under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto, or the Company
commences any other proceeding under any reorganization, arrangement, adjustment of
debt, relief of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction whether now or hereafter in effect relating to the Company or (ii)
there is commenced against the Company any such bankruptcy, insolvency or other
proceeding which remains undismissed for a period of 60 days; or (iii) the Company
is adjudicated by a court of competent jurisdiction insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is entered; or
(iv) the Company suffers any appointment of any custodian or the like for it or any
substantial part of its
property which continues undischarged or unstayed for a period of 60 days; or
(v)

25

 

the Company makes a general assignment for the benefit of creditors; or (vi) the
Company shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or (vii) the Company shall
call a meeting of its creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or (viii) the Company shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or (ix) any corporate or other action is taken by the Company for the
purpose of effecting any of the foregoing;

     v. the Company shall default in any of its obligations under the Loan
Documents, as such term is defined in Section 6, and such default shall result in
such Indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;

     vi. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of 40%
of its assets in one or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity securities
of the Company (other than repurchases of shares of Common Stock or other equity
securities of departing officers and directors of the Company; provided such
repurchases shall not exceed $100,000, in the aggregate, for all officers and
directors during the term of this Note); or

     vii. the Company shall fail for any reason to deliver certificates to a Holder
prior to the fifth Trading Day after a Conversion Date pursuant to and in accordance
with Section 4(d) or the Company shall provide notice to the Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversions of any Notes in accordance with the terms hereof.

     b) Remedies Upon Event of Default. If any Event of Default occurs, the full
principal amount of this Note, together with interest and other amounts owing in respect
thereof, to the date of acceleration shall become, at the Holder’s election, immediately due
and payable in cash. The aggregate amount payable upon an Event of Default shall be equal
to the Mandatory Default Amount. Commencing 5 days after the occurrence of any Event of
Default that results in the eventual acceleration of this Note, the interest rate on this
Note shall accrue at the rate of 15% per annum, or such lower maximum amount of interest
permitted to be charged under applicable law. Upon the payment in full of the Mandatory
Default Amount on this entire Note the Holder shall promptly surrender this Note to or as
directed by the Company. The Holder need not provide and the Company hereby waives any
presentment, demand, protest or other notice of any kind, and the Holder may immediately and
without expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Holder at any time

26

 

prior to payment hereunder and the Holder shall have all rights as a Note holder until such
time, if any, as the full payment under this Section shall have been received by it. No
such rescission or annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.

     Section 9. Miscellaneous.

     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth above,
facsimile number (303) 565-4606, Attn: Chief Executive Officer or Chief Financial Officer,
or such other address or facsimile number as the Company may specify for such purposes by
notice to the Holder delivered in accordance with this Section. Any and all notices or
other communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile telephone number or address of
such Holder appearing on the books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this Section later
than 5:30 p.m. (New York City time) on any date and earlier than 11:59 P.M. (New York City
time) on such date, (iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given.

     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any) on, this
Note at the time, place, and rate, and in the coin or currency, herein prescribed. This
Note is a direct debt obligation of the Company. This Note ranks pari passu
with all other Notes now or hereafter issued under the terms set forth herein.

     c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or
destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen
or destroyed but only upon receipt of evidence of such loss, theft or destruction of such
Note, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory
to the Company.

27

 

     d) Effectiveness of Registration Statement. For so long as any Notes or
Warrants issued pursuant to this transaction are outstanding or until the shares underlying
the Notes or the Warrants may be freely traded without volume restriction under Rule 144
promulgated under the Securities Act of 1933, as amended, the Company agrees to keep the
registration statement on Form S-3 (File No. 333-132451), or any successor thereto effective
(the “Registration Statement”).

     Further, the Company will assure that it has at least $10,000,000 of availability on
the Registration Statement that it will maintain available to use to retire the Note while
the Note is outstanding; and the Company further covenants that it will utilize such
liquidity promptly in the event it determines that it may lose its ability to register
shares utilizing the Registration Statement at any time prior to Maturity.

     e) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the transactions contemplated by
the Note shall be commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts 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, or such New York Courts are improper or inconvenient venue for such proceeding.
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 via registered
or certified mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for 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 hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Note or the transactions contemplated hereby. If either
party shall commence an action or proceeding to enforce any provisions of this Note, then
the prevailing party in such action or proceeding shall be reimbursed by the other party for
its attorneys’ fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.

     f) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Note. The failure
of the Company or the Holder to insist upon strict adherence to any term of this Note on one
or more occasions shall not be considered a waiver or deprive that party of the right

28

 

thereafter to insist upon strict adherence to that term or any other term of this Note.
Any waiver must be in writing.

     g) Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain applicable to all
other persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates applicable laws governing usury, the applicable rate
of interest due hereunder shall automatically be lowered to equal the maximum permitted rate
of interest. The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law or other law which would prohibit or forgive
the Company from paying all or any portion of the principal of or interest on this Note as
contemplated herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Note.

     h) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the next succeeding
Business Day.

     i) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect any of the
provisions hereof.

*********************

29

 

     IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized
officer as of the date first above indicated.

	 	 	 	 	 
	 	TETON ENERGY CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

	 	 	 	 	 

ANNEX A

NOTICE OF CONVERSION

     The undersigned hereby elects to convert principal under the Senior Subordinated Convertible
Note of Teton Energy Corporation, a Delaware corporation (the “Company”), due on May 16,
2008, into Common Stock of the Company, subject to adjustment, both as more fully described in the
Note, according to the conditions hereof, as of the date written below. If Common Stock is to be
issued in the name of a person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be charged to the holder
for any conversion, except for such transfer taxes, if any.

     The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

Conversion calculations:

	 	 	 
	 	 	Date to Effect Conversion:

	 	 	 

	 	 	Principal Amount of Note to be Converted:

	 	 	 

	 	 	Payment of Interest in Common Stock __ yes __ no

	 	 	 

	 	 	If yes, $_____ of Interest Accrued on Account of
Conversion at Issue.

	 	 	 

	 	 	Conversion Price: $                    

	 	 	 

	 	 	Number of Shares to be issued:

	 	 	 

	 	 	Signature:

	 	 	 

	 	 	Name:

	 	 	 

	 	 	Address:

31

 

Schedule 1

CONVERSION SCHEDULE

The Senior Subordinated Convertible Note due on May 16, 2008, in the aggregate principal amount of
$                     issued by Teton Energy Corporation. This Conversion Schedule reflects conversions
made under Section 4 of the above referenced Note.

Dated:

	 	 	 	 	 	 	 
	 	 	 	 	Aggregate	 	 
	 	 	 	 	Principal	 	 
	 	 	 	 	Amount	 	 
	 	 	 	 	Remaining	 	 
	 	 	 	 	Subsequent to	 	 
	Date of Conversion	 	 	 	Conversion	 	 
	(or for first	 	 	 	(or original	 	 
	entry, Original	 	Amount of	 	Principal	 	 
	Issue Date)	 	Conversion	 	Amount)	 	Company Attest
	 
	 	 	 	 	 	 

32

 

THE WARRANT EVIDENCED HEREBY, AND THE SECURITIES ISSUABLE HEREUNDER, HAVE BEEN AND SHALL BE
ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE APPLICABLE STATE
SECURITY LAWS. THE WARRANT AND SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO DISTRIBUTION OR RESALE, AND SHALL NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
THE PROPOSED DISPOSITION IS THE SUBJECT OF A CURRENTLY EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND SUCH STATE SECURITIES LAWS IN CONNECTION WITH SUCH
DISPOSITION.

TETON ENERGY CORPORATION

COMMON STOCK PURCHASE WARRANT

Original Issue Date: MAY ___, 2007

Void After: 11:59 P.M., MAY ___, 2012

This Warrant is Issued to

[                    ]

(hereinafter called the “Holder,” which term shall include the Holder’s legal
representatives, heirs, successors and assigns) by Teton Energy Corporation, a Delaware corporation
(hereinafter referred to as the “Company”). This Warrant may be transferred by the Holder
only in accordance with the provisions of Section 12.

     1. Exercise of Warrant. For value received and subject to the terms and conditions
hereinafter set forth, the Holder is entitled, upon surrender of this Warrant at any time on or
after May ___, 2007 and on or prior to May ___, 2012 (the “Exercise Date”) (with the
subscription form annexed hereto (the “Subscription Form”) duly executed) at the office of
the Company at 410 17th Street, Suite 1850, Denver, Colorado 80202, or such other office
in the United States of which the Company shall notify the Holder hereof in writing, to purchase
from the Company, at the purchase price hereinafter specified (as adjusted from time to time, the
“Exercise Price”),
                     shares (the “Warrant Shares”) (as adjusted from time
to time) of the Common Stock, $0.001 par value per share, of the Company (the “Common
Stock”). The initial Exercise Price shall be $5.00 per share.

     2. Issuance of Stock Certificates. As promptly as practicable after surrender of this
Warrant and receipt of payment of the Exercise Price, the Company shall issue and deliver to the
Holder a certificate or certificates for the shares purchased hereunder, in certificates of such
denominations and in such names as the Holder may specify.

     3. Payment of Exercise Price. Payment of the Exercise Price shall be made by check
made payable to the order of the Company or wire transfer of immediately available funds to a bank
account designated by the Company.

     4. Cashless Exercise. The Holder may notify the Company in a Subscription Form of its
election to utilize cashless exercise, in which event the Company shall issue to the Holder the
number of Warrant Shares determined as follows:

 

 

	 	 	 	 	 
	 

	 	 	 	X = Y [(A-B)/A]
	 
	 	 	 	 
	 

	 	where:	 	 
	 
	 	 	 	 
	 

	 	 	 	X = the number of Warrant Shares to be issued to the Holder.
	 
	 	 	 	 
	 

	 	 	 	Y = the number of Warrant Shares with respect to which this Warrant
is being exercised.
	 
	 	 	 	 
	 

	 	 	 	A = the volume weighted average of the closing prices for the five
trading days immediately prior to (but not including) the Exercise
Date.
	 
	 	 	 	 
	 

	 	 	 	B = the Exercise Price.

For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and
acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to
have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to
have commenced, on the date this Warrant was originally issued.

     5. Limitation on Exercise. Notwithstanding anything to the contrary contained herein,
the number of Warrant Shares that may be acquired by the Holder upon any exercise of this Warrant
(or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following
such exercise (or other issuance), the total number of shares of Common Stock then beneficially
owned by such Holder and its affiliates and any other persons whose beneficial ownership of Common
Stock would be aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act, does
not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including
for such purpose the shares of Common Stock issuable upon such exercise). For such purposes,
beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder.

     6. Adjustment for Dividends, Distributions, Subdivisions, Combinations, Mergers,
Consolidations or Sale of Assets.

          6.1 Manner of Adjustment.

                         (a) Stock Dividends, Distributions or Subdivisions. In the event the Company shall
issue shares of Common Stock in a stock dividend, stock distribution or subdivision, the Exercise
Price in effect immediately before such stock dividend, stock distribution or subdivision shall,
concurrently with the effectiveness of such stock dividend, stock distribution or subdivision, be
proportionately decreased and the number of shares of Common Stock purchasable by exercise of this
Warrant shall be proportionately increased.

                         (b) Combinations or Consolidations. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Exercise Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or consolidation, be
proportionately increased and the number of shares of Common Stock purchasable by exercise of this
Warrant shall be proportionately decreased.

                         (c) Adjustment for Reclassification, Exchange or Substitution. In the event that the
class of securities issuable upon the exercise of this Warrant shall be changed into the same or a

34

 

different number of shares of any class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than any event addressed by Sections 6.1(a),
6.1(b) or 6.1(d)), then and in each such event the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification, or other change, by holders of the number of
shares of the class of securities into which such Warrant might have been exercisable for
immediately prior to such reorganization, reclassification, or change, all subject to further
adjustment as provided herein.

                         (d) Adjustment for Merger, Consolidation or Sale of Assets. In the event that the
Company shall merge or consolidate with or into another entity or sell all or substantially all of
its assets, this Warrant shall thereafter be exercisable for the kind and amount of shares of stock
or other securities or property to which a holder of the number of shares of Common Stock of the
Company deliverable upon exercise of this Warrant would have been entitled upon such consolidation,
merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the
Company’s Board of Directors) shall be made in the application of the provisions set forth in this
Section 6 with respect to the rights and interest thereafter of the Holder of this Warrant, to the
end that the provisions set forth in this Section 6 shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon
the exercise of this Warrant.

          6.2 Certificate as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Exercise Price pursuant to this Section 6, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to
the Holder a certificate setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based.

          6.3 Closing of Books. The Company shall at no time close its transfer books against
the transfer of any shares of Common Stock issued or issuable upon the exercise of this Warrant in
any manner which interferes with the timely and proper issuance of such shares.

     7. Covenants of the Company. During the period within which the rights represented by
this Warrant may be exercised, the Company shall at all times have authorized and reserved for the
purpose of issue upon exercise of the rights evidenced hereby, a sufficient number of shares of the
class of securities issuable upon exercise of this Warrant to provide for the exercise of such
rights. All securities which may be issued upon the exercise of the rights represented by this
Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof. Upon surrender for
exercise, this Warrant shall be canceled and shall not be reissued; provided,
however, that upon the partial exercise hereof a substitute Warrant of like tenor and date
representing the rights to subscribe for and purchase any such unexercised portion hereof shall be
issued.

     8. No Rights as Shareholder Until Exercise. This Warrant shall not entitle the Holder
to any voting rights or any other rights as a stockholder of the Company but upon presentation of
this Warrant with the Subscription Form duly executed and the tender of payment of the Exercise
Price at the office of the Company pursuant to the provisions of this Warrant, the Holder shall
forthwith be deemed a stockholder of the Company in respect of the securities for which the Holder
has so subscribed and paid.

     9. No Change Necessary. The form of this Warrant need not be changed because of any
adjustment in the Exercise Price or in the number of shares issuable upon its exercise. A Warrant
issued after any adjustment or any partial exercise or upon replacement may continue to express the
same Exercise Price and the same number of shares (appropriately reduced in the case of partial
exercise) as are

35

 

stated on this Warrant as initially issued, and that Exercise Price and that number of shares
shall be considered to have been so changed as of the close of business on the date of adjustment.

     10. Addresses for Notices. All notices, requests, consents and other communications
hereunder shall be in writing, either delivered in hand or mailed by registered or certified mail,
return receipt requested, or sent by facsimile, and shall be deemed to have been duly made when
delivered:

                         If to the Holder, to the Holder’s address as shown on the books of the Company; or

                         If to the Company, to the address set forth on the first page of this Warrant.

     11. Substitution.
In the case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new Warrant of like tenor and denomination and deliver the
same (a) in exchange and substitution for and upon surrender and cancellation of any mutilated
Warrant, or (b) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence
satisfactory to the Company of the loss, theft, or destruction of such Warrant (including, without
limitation, a reasonably detailed affidavit with respect to the circumstances of any loss, theft or
destruction), and of indemnity (or, in the case of the initial Holder or any other institutional
holder, an indemnity agreement) satisfactory to the Company.

     12. Transfer Restrictions. This Warrant shall be freely transferable by the Holder,
and may be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise).

     13. Taxes. The Company makes no representation about tax treatment to the Holder with
respect to receipt or exercise of the Warrant or acquiring, holding or disposing of the Common
Stock, and the Holder represents that the Holder has had the opportunity to discuss such treatment
with the Holder’s tax advisers.

     14. Remedies. Each party stipulates that the remedies at law in the event of any
default or threatened default by the other party in the performance or compliance with any of the
terms of this Warrant are and shall not be adequate, and that such terms may be specifically
enforced by a decree for that specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.

     15. Governing Law. This Warrant shall be construed and enforced in accordance with,
and governed by, the laws of the State of New York without regard to its principles of conflicts of
laws.

     16. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the Holder and the Company.

[remainder of page intentionally left blank]

36

 

* * *

     IN WITNESS WHEREOF, the parties have caused this Warrant to be executed this ___day of May,
2007.

	 	 	 	 	 	 	 
	 	 	TETON ENERGY CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

 

EXHIBIT A

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

TETON ENERGY CORPORATION

     The undersigned holder hereby exercises the right to purchase                      of the shares
of Common Stock (“Warrant Shares”) of Teton Energy Corporation, a Delaware corporation (the
“Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).
Capitalized terms used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.

     1. Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be
made as:

	 	 	 
	                    

	 	a “Cash Exercise” with respect to                      Warrant
Shares; and/or
	 
	 	 
	                    

	 	a “Cashless Exercise” with respect to                      Warrant
Shares.

     2. Payment of Exercise Price. In the event that the holder has elected a Cash Exercise with
respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the
Aggregate Exercise Price in the sum of $                     to the Company in accordance with the
terms of the Warrant.

     3. Delivery of Warrant Shares. The Company shall deliver to the holder                      Warrant
Shares in accordance with the terms of the Warrant.

Date:                      __, ______

	 	 	 	 	 
	 
	 	 	 
	Name of Registered Holder
	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 	 	 
	 

	 	Name:
	 	 
	 

	 	Title:	 	 

 

ACKNOWLEDGMENT

     The Company hereby acknowledges this Exercise Notice and hereby directs Computershare Investor
Services to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated ___, 2007 from the Company and acknowledged and agreed to
by Computershare Investor Services.

	 	 	 	 	 
	 	TETON ENERGY CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

39

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00128-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00128-of-00352.parquet"}]]