Document:

EXHIBIT
      10.2

     

    Upper
      Call Option Transaction

     

    April
      4,
      2008

     

    THE
      SECURITIES REPRESENTED HEREBY (THE “OPTIONS”)
      WERE
      ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED
      STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”),
      AND
      THE OPTIONS MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
      TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN APPLICABLE EXEMPTION
      FROM THE REGISTRATION REQUIREMENTS THEREOF.

     

    
      	
              To:

            	
              TXCO
                Resources, Inc.

              777
                E. Sonterra Blvd., Suite 350

              San
                Antonio, TX 78258

              Attention:
                James E. Sigmon, President

            
	 	 
	
              From:

            	
              Capital
                Ventures International

              By:
                Heights Capital Management, Inc., Its Authorized Agent

              101
                California Street, Suite 3250

              San
                Francisco, CA 94111

              Attention:
                Martin Kobinger

               

            

    

    

    Ladies
      and Gentlemen:

     

    The
      purpose of this agreement (this “Confirmation”)
      is to
      confirm the terms and conditions of the above-referenced transaction entered
      into on the Trade Date specified below (the “Transaction”)
      between Capital Ventures International (“Party
      A”)
      and
      TXCO Resources, Inc. (“Party
      B”).
      This
      communication constitutes a “Confirmation”
as
      referred to in the ISDA Master Agreement specified below.

     

    
      	1.  	
              This
                Confirmation is subject to, and incorporates, the definitions and
                provisions of the 2000 ISDA Definitions (including the Annex thereto)
                (the
                “2000
                Definitions”)
                and the definitions and provisions of the 2002 ISDA Equity Derivatives
                Definitions (the “Equity
                Definitions”
                and, together with the 2000 Definitions, the “Definitions”),
                in each case as published by the International Swaps and Derivatives
                Association, Inc. (“ISDA”).
                In the event of any inconsistency between the 2000 Definitions and
                the
                Equity Definitions, the Equity Definitions will
                govern.

            

    

     

    This
      Confirmation evidences a complete and binding agreement between Party A and
      Party B as to the terms of the Transaction to which this Confirmation relates.
      This Confirmation shall be subject to an agreement (the “Agreement”)
      in the
      form of the 2002 ISDA Master Agreement (the “ISDA
      Form”)
      as if
      Party A and Party B had executed an agreement in such form (without any Schedule
      but with the elections set forth in this Confirmation, it being understood
      the
“Cross-Default” shall not apply to this Transaction). For the avoidance of
      doubt, the Transaction shall be the only transaction under the
      Agreement.

     

    All
      provisions contained in, or incorporated by reference to, the Agreement will
      govern this Confirmation except as expressly modified herein. In the event
      of
      any inconsistency between this Confirmation and either the Definitions or the
      Agreement, this Confirmation shall govern.

     

    
      
         

      

      
        
        

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	2.  	
              The
                general terms relating to the Transaction are as
                follows:

            

    

     

    
      	
              Option
                Style:

            	
              European

            
	 	 
	
              Option
                Seller:

            	
              Party
                B

            
	 	 
	
              Option
                Buyer:

            	
              Party
                A

            
	 	 
	
              Strike
                Price:

            	
              $18.10

            
	 	 
	
              Trade
                Date:

            	
              April
                4, 2008

            
	 	 
	
              Effective
                Date:

            	
              April
                4, 2008

            
	 	 
	
              Option
                Type:

            	
              Call

            
	 	 
	
              Components:

            	
              The
                Transaction will be divided into individual Components, each with
                the
                terms set forth in this Confirmation, and, in particular, with the
                Number
                of Options and Expiration Dates set forth in this Confirmation. The
                payments and deliveries to be made upon settlement of the Transaction
                will
                be determined separately for each Component as if each Component
                were a
                separate Transaction under the Agreement. To the extent that Party
                A
                reasonably concludes that it is desirable for purposes of Party A
                staying
                under 9.9% “beneficial ownership” (within the meaning of the Exchange Act
                and the rules promulgated thereunder) of Shares, Party A may increase
                the
                number of Components and change the Number of Options and Expiration
                Dates
                of the Components so long as (i) the average Expiration Date of all
                Components remains April 4, 2014, and (ii) the aggregate Number of
                Options
                with respect to all Components remains the same.

            
	 	 
	
              Issuer:

            	
              TXCO
                Resources, Inc.

            
	 	 
	
              Shares:

            	
              The
                shares of common stock of the Issuer, par value $0.01 per Share (Ticker
                Symbol: TXCO).

            
	 	 
	
              Number
                of Options:

            	
              For
                each Component, as provided in Annex
                A
                to
                this Confirmation.

            
	 	 
	
              Option
                Entitlement:

            	
              One
                Share per Option

            

    

     

    
      
         

      

      
        2

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	
              Market
                Disruption Event:

            	
              Section
                6.3(a) of the Equity Definitions is hereby amended by replacing clause
                (ii) thereof in its entirety with the following: “(ii) an Exchange
                Disruption, or” and inserting immediately following clause (iii) thereof
                the following: “; in each case that the Calculation Agent reasonably
                determines is material.”

            
	 	 
	
              Relevant
                Price:

            	
              VWAP
                Price

            
	 	 
	
              VWAP
                Price:

            	
              The
                “Volume Weighted Average Price” per Share on such day, as displayed on
                Bloomberg Page “TXCO UQ<equity>AQR” (or any successor thereto) for
                the Issuer with respect to the period from 9:30 a.m. to 4:00 p.m.
                (New
                York City time) on such day, as determined by the Calculation Agent.
                If no
                price at such time is available, or there is a Market Disruption
                Event on
                such Expiration Date, the Calculation Agent shall determine the VWAP
                Price
                in a commercially reasonable manner.

            
	 	 
	
              Premium:

            	
              $4,514,737

            
	 	 
	
              Premium
                Payment Date:

            	
              Effective
                Date.

            
	 	 
	
              Exchange:

            	
              The
                Nasdaq Global Market

            
	 	 
	
              Related
                Exchange:

            	
              Any
                exchange on which options or futures on the relevant Shares are
                traded.

            
	 	 
	
              Clearance
                System:

            	
              DTC

            
	 	 
	
              Calculation
                Agent:

            	
              Party
                A. Whenever the Calculation Agent acts or makes a determination,
                it will
                do so in good faith and in a commercially reasonable manner consistent
                with its obligations under the Equity Definitions.

            
	 	 
	
              Procedures
                for Exercise:

            	 
	 	 
	
              In
                respect of each Component:

            	 
	 	 
	
              Expiration
                Time:

            	
              The
                close of trading on the Exchange

            
	 	 
	
              Expiration
                Date:

            	
              Each
                of the ten (10) consecutive Scheduled Trading Days occurring immediately
                prior to the Component Expiration Date, provided
                that
                if any Expiration Date shall not be an Exchange Business Day, such
                Expiration Date shall be postponed to the immediately succeeding
                Exchange
                Business Day and the corresponding Expiration Date for each subsequent
                Daily Number of Options shall be moved back an equal number of Exchange
                Business Days reflecting such
                postponement.

            

    

     

    
      
         

      

      
        3

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	
              Component
                Expiration Date:

            	
              The
                Component Expiration Date provided in Annex
                A
                to
                this Confirmation.

            
	 	 
	
              Daily
                Number of Options:

            	
              One-tenth
                the Number of Options provided in Annex
                A
                to
                this Confirmation with respect to each Component.

            
	 	 
	
              Automatic
                Exercise:

            	
              Applicable.

            
	 	 
	
              Settlement
                Terms:

            	 
	 	 
	
              Settlement
                Method Election:

            	
              Applicable;
                provided
                that (i) any such election shall apply to all Exercise Dates (in
                accordance with the terms below) and may be for Cash Settlement or
                Net
                Share Settlement; (ii) references to “Physical Settlement” in Section 7.1
                of the Equity Definitions shall be replaced by references to “Net Share
                Settlement”; (iii) Party B may elect Cash Settlement only if Party B
                represents and warrants to Party A in writing on the date of such
                election
                that, as of such date, Party B is not aware of any material nonpublic
                information concerning itself or the Shares and is electing Cash
                Settlement in good faith and not as part of a plan or scheme to evade
                compliance with the federal securities laws; and (iv) any election
                of
                settlement method shall apply to all Components. At any time prior
                to
                making a Settlement Method Election, Party B may, without the consent
                of
                Party A, amend this Confirmation by notice to Party A to eliminate
                Party
                B’s right to elect Cash Settlement.

            
	 	 
	
              Electing
                Party:

            	
              Party
                B

            
	 	 
	
              Settlement
                Method Election Date:

            	
              The
                thirtieth (30th) Scheduled Trading Day immediately preceding the
                first
                Expiration Date.

            
	 	 
	
              Default
                Settlement Method:

            	
              Net
                Share Settlement

            
	 	 
	
              Settlement
                Date:

            	
              For
                the Daily Number of Options exercised or deemed exercised on each
                Expiration Date prior to the Component Expiration Date, the third
                Exchange
                Business Day following the Component Expiration Date.

            
	 	 

    

     

    
      
         

      

      
        4

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	
              Cash
                Settlement:

            	
              If
                Cash Settlement applies, then, notwithstanding any contrary terms
                of
                Article 8 of the Equity Definitions, for any Daily Number of Options
                exercised or deemed exercised on any Expiration Date, Party B shall
                pay,
                on the Settlement Date, the Cash Settlement Amount to Party A. The
                Cash
                Settlement Amount shall be determined as follows:

            
	 	 
	 	
              (i)
                If the Settlement Price is less than or equal to the Strike Price,
                then
                the Cash Settlement Amount shall equal zero.

            
	 	 
	 	
              (ii)
                If the Settlement Price is greater than the Strike Price, then the
                Cash
                Settlement Amount shall equal the product of (x) the Daily Number
                of
                Options, (y) the Option Entitlement and (z) the Settlement Price
                minus the
                Strike Price.

            
	 	 
	
              Net
                Share Settlement:

            	
              On
                a Settlement Date, Party B shall deliver to Party A a number of Shares
                equal to the Number of Shares to be Delivered and will pay to Party
                A the
                Fractional Share Amount, if any.

            
	 	 
	
              Number
                of Shares to be Delivered:

            	
              The
                Cash Settlement Amount (determined as if Cash Settlement were applicable)
                divided by
                the Settlement Price, rounded down to the nearest whole
                number.

            
	 	 
	
              Cash
                Settlement Payment Date:

            	
              For
                all Daily Number of Options exercised or deemed exercised on each
                Expiration Date, the third Exchange Business Day following the Component
                Expiration Date.

            
	 	 
	
              Settlement
                Currency:

            	
              USD

            
	 	 
	
              Settlement
                Price:

            	
              For
                any Daily Number of Options, the VWAP Price of the Shares on the
                relevant
                Expiration Date determined by Calculation Agent at the Expiration
                Time on
                the relevant Expiration Date for such Daily Number of Options. If
                no price
                at such time is available, or there is a Market Disruption Event
                on such
                Expiration Date, the Calculation Agent shall determine the Settlement
                Price in a commercially reasonable manner.

            
	 	 
	
              Failure
                to Deliver:

            	
              Applicable

            
	 	 
	
              Other
                Applicable Provisions:

            	
              To
                the extent Party B is obligated to deliver Shares hereunder, the
                provisions of Sections 9.1(c), 9.8, 9.9, 9.10, 9.11 (except that
                the
                Representation and Agreement contained in Section 9.11 of the Equity
                Definitions shall be modified by excluding any representations therein
                relating to restrictions, obligations, limitations or requirements
                under
                applicable securities laws as a result of the fact that Party B is
                the
                issuer of the Shares) and 9.12 of the Equity Definitions will be
                applicable as if “Physical Settlement” applied to the
                Transaction.

            

    

     

    
      
         

      

      
        5

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	
              Adjustments:

            	 
	 	 
	
              Method
                of Adjustment:

            	
              Calculation
                Agent Adjustment

            
	 	 
	
              Extraordinary
                Dividend:

            	
              Any
                dividend or distribution that has an ex-dividend date occurring on
                or
                after the Trade Date and on or prior to the date on which Party B
                satisfies all of its delivery obligations hereunder; provided that
                no
                regular or periodic dividend on any of Party B’s outstanding preferred
                stock (including the Preferred Shares) shall be an Extraordinary
                Dividend.

            
	 	 
	
              Extraordinary
                Events:

            	 
	 	 
	
              Consequences
                of Merger Events and Tender Offers:

            
	 
	
              (a) Share-for-Share:

            	
              Modified
                Calculation Agent Adjustment, or at Party A’s election, Cancellation and
                Payment (Calculation Agent Determination)

            
	 	 
	
              (b) Share-for-Other:

            	
              Cancellation
                and Payment (Calculation Agent Determination)

            
	 	 
	
              (c) Share-for-Combined:

            	
              Component
                Adjustment, or at Party A’s election, Cancellation and Payment
                (Calculation Agent Determination)

            
	 	 
	
              Tender
                Offer:

            	
              Applicable

            
	 	 
	
              Nationalization,
                Insolvency or Delisting:

            	
              Cancellation
                and Payment (Calculation Agent Determination)

            
	 	 
	
              Additional
                Disruption Events:

            	 
	 	 
	
              (a)  Change
                in Law:

            	
              Applicable;
                provided
                that
                Section 12.9(a)(ii) of the Equity Definitions is hereby amended by
                (i)
                replacing the phrase “the interpretation” in the third line thereof with
                the phrase “or announcement or statement of the formal or informal
                interpretation” and (ii) immediately following the word “Transaction” in
                clause (X) thereof, adding the phrase “in the manner contemplated by the
                Hedging Party on the Trade Date”.

            

    

     

    
      
         

      

      
        6

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	
              (b)  Failure
                to Deliver

            	
              Applicable

            
	 	 
	
              (c)  Insolvency
                Filing:

            	
              Applicable

            
	 	 
	
              (d)  Hedging
                Disruption:

            	
              Applicable

            
	 	 
	
              (e)  Increased
                Cost of Hedging:

            	
              Applicable

            
	 	 
	
              (f)  Loss
                of Stock Borrow:

            	
              Applicable

            
	 	 
	
              Maximum
                Stock Loan Rate:

            	
              5%

            
	 	 
	
              Hedging
                Party:

            	
              Party
                A for all applicable Additional Disruption Events

            
	 	 
	
              Determining
                Party:

            	
              Party
                A for all applicable Additional Disruption Events

            
	 	 
	
              Non-Reliance:

            	
              Applicable

            
	 	 
	
              Agreements
                and Acknowledgments 

              Regarding
                Hedging Activities:

            	
              Applicable

            
	 	 
	
              Additional
                Acknowledgments:

            	
              Applicable

            
	 	 
	
              Additional
                Termination Events:

            	
              Applicable.
                The following will constitute an Additional Termination
                Event:

              (a)  Party
                B shall send Party A an Early Exercise Notice under the terms of
                the lower
                call option Transaction entered into herewith, and the sole Affected
                Party
                will be Party B. 

            
	 	 
	
              Additional
                Termination at Party B election:

            	
              Party
                B may elect at any time with advance written notice of thirty (30)
                Scheduled Trading Days to early terminate this Transaction; provided
                that that termination amount shall be determined by Calculation Agent
                in
                accordance with Section 6(e) of the Agreement where Party B is the
                sole
                affected party, and such amount shall be paid in cash on the scheduled
                termination date.

            
	 	 

    

    
      	3.  	
              Account
                Details:

            

    

     

    Party
      A
      Payment Instructions:

     

    To
      be
      provided by Party A.

     

    Party
      B
      Payment Instructions:

     

    To
      be
      provided by Party B.

     

    
      
         

      

      
        7

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    
      	4.  	
              Offices:

            

    

     

    The
      Office of Party A for the Transaction is:

     

    Capital
      Ventures International

    C/O
      Heights Capital Management, Inc.

    101
      California Street, Suite 3250

    San
      Francisco, CA 94111

     

    The
      Office of Party B for the Transaction is:

     

    TXCO
      Resources, Inc.

    777
      E.
      Sonterra Blvd., Suite 350

    San
      Antonio, TX 78258

     

    
      	5.  	
              Notices:
                For purposes of this Confirmation:

            

    

     

    
      	(a)  	
              Address
                for notices or communications to Party
                B:

            

    

     

    
      	
            	
              To:

            	
              TXCO
                Resources Inc.

              777
                E. Sonterra Blvd., Suite 350

              San
                Antonio, TX 78258

            
	 	 	
              Attn:

            
	 	 	
              Telephone:
                

            
	 	 	
              Facsimile:

            

    

     

    
      	(b)  	
              Address
                for notices or communications to Party
                A:

            

    

     

    
      	
               

            	
              To:

            	
              Capital
                Ventures International

              C/O
                Heights Capital Management, Inc.

              101
                California Street, Suite 3250

              San
                Francisco, CA 94111

            
	 	 	 
	 	 	
              Attention:
                Martin Kobinger

            
	 	 	
              Telephone:
                (415) 403-6500

            
	 	 	
              Facsimile:
                (415) 403-6525

            

    

     

    
      	 	 	
              with
                a copy to:

            
	 	 	 
	 	 	
              Paul,
                Hastings, Janofsky & Walker LLP

              1117
                S. California 94304-1106

              Attention:
                Robert Claassen

              Telephone:
                (650) 320-1884

              Facsimile:
                (650) 320-1900

            

    

     

    
      
         

      

      
        8

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

    

      	6.  	
              If
                any of the transactions contemplated by the Securities Purchase Agreement
                dated as of February 28, 2008 (the “Purchase
                Agreement”)
                among Party B and each
                of the Buyers specified therein relating to the sale of shares of
                Perpetual Convertible Preferred Stock (the “Preferred
                Shares”)
                of Party B, shall fail to close on the date specified therein for
                any
                reason, or any subsequent date allowed thereunder for postponements
                permitted under the terms thereof, the entirety of this Transaction
                shall
                terminate automatically and Party B shall be the sole Affected Party
                and
                this Transaction shall be the sole Affected Transaction and
                such termination shall be treated as an Additional Termination Event.
                For
                purposes of determining Loss in relation to any Additional Termination
                Events or otherwise, it shall be assumed that all conditions to the
                exercise of these Options have occurred.

            

       

    

    
      	7.  	
              Additional
                agreements, representations, warranties and
                covenants:

            

    

     

    
      	(a)  	
              In
                addition to the representations and warranties in the Agreement and
                those
                contained elsewhere herein, Party B represents and warrants to and
                for the
                benefit of, and agrees with, Party A as
                follows:

            

    

     

    (i)  In
      relation to the Transaction, Party B acknowledges its responsibilities under
      applicable federal securities laws, including without limitation Rule 10b-5
      under the Exchange Act. Party B represents and warrants on
      the
      Trade Date, (A) none of Party B and its officers and directors is aware of
      any
      material nonpublic information regarding Party B or the Shares and (b) all
      reports and other documents filed by Party B with the Securities and Exchange
      Commission pursuant to the Securities Exchange Act of 1934, as amended (the
      “Exchange
      Act”)
      when
      considered as a whole (with the more recent such reports and documents deemed
      to
      amend inconsistent statements contained in any earlier such reports and
      documents), do not contain any untrue statement of a material fact or omit
      to
      state any material fact required to be stated therein or necessary to make
      the
      statements therein, in the light of the circumstances in which they were made,
      not misleading.

     

    (ii)  Prior
      to
      the Trade Date, Party B shall deliver to Party A a resolution of Party B’s board
      of directors authorizing the Transaction and such other certificate or
      certificates as Party A shall reasonably request.

     

    (iii)  Party
      B
      is not entering into this Confirmation to create actual or apparent trading
      activity in the Shares (or any security convertible into or exchangeable for
      Shares) or to manipulate the price of the Shares (or any security convertible
      into or exchangeable for Shares) or otherwise in violation of the Exchange
      Act.

     

    (iv)  Party
      B
      is not, and after giving effect to the transactions contemplated hereby will
      not
      be, required to register as an “investment company” as such term is defined in
      the Investment Company Act of 1940, as amended.

     

    (v)  On
      any
      Expiration Date, Party B shall not, and shall cause its affiliates and
      affiliated purchasers (each as defined in Rule 10b-18 under the Exchange
      Act (“Rule
      10b-18”))
      not
      to, directly or indirectly (including, without limitation, by means of any
      cash-settled or other derivative instrument) purchase, offer to purchase, place
      any bid or limit order that would effect a purchase of, or commence any tender
      offer relating to, any Shares (or an equivalent interest, including a unit
      of
      beneficial interest in a trust or limited partnership or a depository share)
      or
      any security convertible into or exchangeable or exercisable for Shares, except
      through Party A.

     

    (vi)  On
      the
      Trade Date (A) the assets of Party B at their fair valuation exceed the
      liabilities of Party B, including contingent liabilities, (B) the capital of
      Party B is adequate to conduct the business of Party B and (C) Party B has
      the
      ability to pay its debts and obligations as such debts mature and does not
      intend to, or does not believe that it will, incur debt beyond its ability
      to
      pay as such debts mature.

     

    
      
         

      

      
        9

        
          

        

      

      
        UPPER
          CALL OPTION TRANSACTION

      

    

     

    (vii)  On
      the
      Effective Date, the Shares or securities that are convertible into, or
      exchangeable or exercisable for Shares, are not subject to a “restricted
      period,” as such term is defined in Regulation M (“Regulation
      M”)
      under
      the Exchange Act.

     

    (viii)  Any
      Shares, when issued and delivered in a Net Share Settlement of the Options
      or a
      Share Termination Alternative settlement in accordance with the terms
      of this Confirmation, will be duly authorized and validly issued, fully
      paid and nonassessable, and the issuance thereof will not be subject to any
      preemptive or similar rights.

     

    
      	(b)  	
              Each
                of Party A and Party B agrees and represents that it is an “eligible
                contract participant” as defined in Section 1a(12) of the U.S. Commodity
                Exchange Act, as amended.

            

    

     

    
      	(c)  	
              Each
                of Party A and Party B acknowledges that the offer and sale of the
                Transaction to it is intended to be exempt from registration under
                the
                Securities Act of 1933, as amended (the “Securities
                Act”),
                by virtue of Section 4(2) thereof. Accordingly, Party A represents
                and
                warrants to Party B that (i) it has the financial ability to bear
                the
                economic risk of its investment in the Transaction and is able to
                bear a
                total loss of its investment, (ii) it is an “accredited investor” as that
                term is defined in Regulation D as promulgated under the Securities
                Act,
                (iii) it is entering into the Transaction for its own account and
                without
                a view to the distribution or resale thereof, and (iv) the assignment,
                transfer or other disposition of the Transaction has not been and
                will not
                be registered under the Securities Act and is restricted under this
                Confirmation, the Securities Act and state securities
                laws.

            

    

     

    
      	(d)  	
              The
                parties hereto further agree and acknowledge (A) that this Confirmation
                is
                (i) a “securities contract,” as such term is defined in Section 741(7) of
                the Title 11 of the United States Code (the “Bankruptcy
                Code”),
                with respect to which each payment and delivery hereunder is a “settlement
                payment,” as such term is defined in Section 741(8) of the Bankruptcy
                Code, and (ii) a “swap agreement,” as such term is defined in Section
                101(53B) of the Bankruptcy Code, with respect to which each payment
                and
                delivery hereunder is a “transfer,” as such term is defined in Section
                101(54) of the Bankruptcy Code, and (B) that Party A is entitled
                to the
                protections afforded by, among other sections, Sections 362(b)(6),
                362(b)(17), 546(e), 546(g), 555 and 560 of the Bankruptcy
                Code.

            

    

     

    
      	8.  	
              Other
                Provisions:

            

    

     

    
      	(a)  	
              Alternative
                Calculations and Payment on Early Termination and on Certain Extraordinary
                Events.
                If Party B shall owe Party A any amount pursuant to Section 12.2,
                12.3,
                12.6, 12.7 or 12.9 of the Equity Definitions (except in the event
                of an
                Insolvency, a Nationalization, a Tender Offer or a Merger Event,
                in each
                case, in which the consideration or proceeds to be paid to holders
                of
                Shares consists solely of cash) or pursuant to Section 6(d)(ii) of
                the
                Agreement (except in the event of an Event of Default in which Party
                B is
                the Defaulting Party or a Termination Event in which Party B is the
                Affected Party, that resulted from an event or events within Party
                B’s
                control) (a “Payment
                Obligation”),
                Party B shall have the right, in its sole discretion, to satisfy
                any such
                Payment Obligation by the Share Termination Alternative (as defined
                below)
                by giving irrevocable telephonic notice to Party A, confirmed in
                writing
                within one Scheduled Trading Day, between the hours of 9:00 AM and
                12:00
                PM, New York City time, on the relevant Merger Date, Tender Offer
                Date,
                Announcement Date or Early Termination Date, as applicable (“Notice
                of Share Termination”).
                Upon such Notice of Share Termination, the following provisions shall
                apply on the Scheduled Trading Day immediately following the Merger
                Date,
                Tender Offer Date, Announcement Date or Early Termination Date, as
                applicable:

            

    

     

    
      
         

      

      
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              Share
                Termination Alternative:

            	
              Applicable
                and means that Party B shall deliver to Party A the Share Termination
                Delivery Property on the date on which the Payment Obligation would
                otherwise be due pursuant to Section 12.7 or 12.9 of the Equity
                Definitions or Section 6(d)(ii) of the Agreement, as applicable (the
                “Share
                Termination Payment Date”),
                in satisfaction of the Payment Obligation.

            
	 	 
	
              Share
                Termination Delivery Property:

            	
              A
                number of Share Termination Delivery Units, as calculated by the
                Calculation Agent, equal to the Payment Obligation divided by the
                Share
                Termination Unit Price. The Calculation Agent shall adjust the Share
                Termination Delivery Property by replacing any fractional portion
                of a
                security therein with an amount of cash equal to the value of such
                fractional security based on the values used to calculate the Share
                Termination Unit Price.

            
	 	 
	
              Share
                Termination Unit Price:

            	
              The
                value of property contained in one Share Termination Delivery Unit
                on the
                date such Share Termination Delivery Units are to be delivered as
                Share
                Termination Delivery Property, as determined by the Calculation Agent
                in
                its discretion by commercially reasonable means and notified by the
                Calculation Agent to Party B at the time of notification of the Payment
                Obligation.

            
	 	 
	
              Share
                Termination Delivery Unit:

            	
              In
                the case of a Termination Event, Event of Default or Delisting, one
                Share
                or, in the case of a Merger Event, a Tender Offer, a Nationalization
                or an
                Insolvency, a unit consisting of the number or amount of each type
                of
                property received by a holder of one Share (without consideration
                of any
                requirement to pay cash or other consideration in lieu of fractional
                amounts of any securities) in such Merger Event, Tender Offer,
                Nationalization or Insolvency. If such Merger Event, Tender Offer,
                Nationalization or Insolvency involves a choice of consideration
                to be
                received by holders, such holder shall be deemed to have elected
                to
                receive the maximum possible amount of cash.

            
	 	 
	
              Failure
                to Deliver:

            	
              Applicable

            
	 	 
	
              Other
                applicable provisions:

            	
              If
                Share Termination Alternative is applicable, the provisions of Sections
                9.8, 9.9, 9.10, 9.11 (except that the Representation and Agreement
                contained in Section 9.11 of the Equity Definitions shall be modified
                by
                excluding any representations therein relating to restrictions,
                obligations, limitations or requirements under applicable securities
                laws
                as a result of the fact that Seller is the issuer of the Shares)
                and 9.12
                of the Equity Definitions will be applicable, as if “Physical Settlement”
                were applicable and all references to “Shares” shall be read as references
                to “Share Termination Delivery
                Units”.

            

    

     

    
      
         

      

      
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                (b)

              	
                Registration/Private
                  Placement Procedures.
                  (i) If, in the reasonable judgment of Party A or Party B, based on
                  the advice of counsel, either (a) any securities of Party B or
                  its
                  affiliates comprising any Share Termination Delivery Units or (b)
                  any
                  Shares, in either case deliverable to Party A hereunder (any such
                  securities or Shares, “Delivered
                  Securities”)
                  would not be immediately freely transferable by Party A under
                  Rule 144 under the Securities Act without condition or restriction,
                  then the provisions set forth in this Section 8(b) shall apply. At
                  the election of Party B by notice to Party A within one Exchange
                  Business
                  Day after the relevant delivery obligation arises, but in any event
                  at
                  least one Exchange Business Day prior to the date on which such
                  delivery
                  obligation is due, either (A) all Delivered Securities, delivered by
                  Party B to Party A shall be covered by an effective registration
                  statement
                  of Party B for immediate resale by Party A (such registration statement
                  and the corresponding prospectus (the “Prospectus”)
                  (including, without limitation, any sections describing the plan
                  of
                  distribution) in form and content commercially reasonably satisfactory
                  to
                  Party A) or (B) Party B shall deliver additional Delivered Securities
                  so that the value of such Delivered Securities, as determined by
                  the
                  Calculation Agent to reflect an appropriate liquidity discount,
                  equals the
                  value of the number of Delivered Securities that would otherwise
                  be
                  deliverable if such Delivered Securities were freely tradeable
                  (without
                  prospectus delivery) upon receipt by Party A (such value, the
                  “Freely
                  Tradeable Value”);
                  provided
                  that Party B may not make the election described in this clause
                  (B) if, on
                  the date of its election, it has taken, or caused to be taken,
                  any action
                  that would make unavailable either the exemption pursuant to Section
                  4(2)
                  of the Securities Act for the delivery by Party B to Party A (or
                  any
                  affiliate designated by Party A) of the Delivered Securities or
                  the
                  exemption pursuant to Section 4(1) or Section 4(3) of the Securities
                  Act
                  for resales of the Delivered Securities by Party A (or any such
                  affiliate
                  of Party A). (For the avoidance of doubt, as used in this paragraph
                  (b)
                  only, the term “Party B” shall mean the issuer of the relevant securities,
                  as the context shall require.)

              

      

       

    

    (i)  If
      Party
      B makes the election described in clause (b)(i)(A) above:

     

    (A)  Party
      A
      (or an Affiliate of Party A designated by Party A) shall be afforded a
      reasonable opportunity to conduct a “due diligence” investigation with respect
      to Party B that is customary in scope for underwritten follow-on offerings
      of
      equity securities of companies of comparable size, maturity and lines of
      business; provided that if Party A is not reasonably satisfied with the results
      of the investigation described in this subclause (A) or Party B’s compliance
      with clause (b)(i)(A) above and subclause (ii)(B) below, then Party B shall
      be
      deemed to have made the election described in clause (b)(i)(B) above;
provided,
      however,
      that
      Party A has given Party B reasonable notice of its determination and provided
      Party B with reasonable opportunity to satisfy Party A’s concerns;
      and

     

    (B)  Party
      A
      (or an Affiliate of Party A designated by Party A) and Party B shall enter
      into
      an agreement (a “Registration
      Agreement”)
      on
      commercially reasonable terms in connection with the public resale of such
      Delivered Securities by Party A or such Affiliate substantially similar to
      underwriting agreements customary for underwritten follow-on offerings of equity
      securities of companies of comparable size, maturity and lines of business,
      in
      form and substance commercially reasonably satisfactory to Party A or such
      Affiliate and Party B, which Registration Agreement shall include, without
      limitation, provisions substantially similar to those contained in such
      underwriting agreements relating to the indemnification of, and contribution
      in
      connection with the liability of, Party A and its Affiliates and Party B, shall
      provide for the payment by Party B of all registration expenses in connection
      with such resale, including all registration costs and reasonable expenses
      of
      counsel for Party A, and shall provide for the delivery of accountants’ “comfort
      letters” to Party A or such Affiliate with respect to the financial statements
      and certain financial information contained in or incorporated by reference
      into
      the Prospectus as are customarily requested in comfort letters covering
      underwritten follow-on offers of equity securities of companies of comparable
      size, maturity and lines of business.

     

    
      
         

      

      
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    (ii)  If
      Party
      B makes or is deemed to make the election described in clause (b)(i)(B)
      above:

     

    (A)  All
      Delivered Securities shall be delivered to Party A (or any Affiliate of Party
      A
      designated by Party A) pursuant to the exception from the registration
      requirements of the Securities Act provided by Section 4(2)
      thereof;

     

    (B)  Party
      A
      (or an Affiliate of Party A designated by Party A) and any potential
      institutional purchaser of any such Delivered Securities from Party A or such
      Affiliate identified by Party A shall be afforded a commercially reasonable
      opportunity to conduct a due diligence investigation in compliance with
      applicable law with respect to Party B customary in scope for private placements
      of equity securities of companies of comparable size, maturity and lines of
      business (including, without limitation, the right to have made available to
      them for inspection all financial and other records, pertinent corporate
      documents and other information reasonably requested by them);

     

    (C)  Party
      A
      (or an Affiliate of Party A designated by Party A) and Party B shall enter
      into
      an agreement (a “Private
      Placement Agreement”)
      on
      commercially reasonable terms in connection with the private placement of such
      Delivered Securities by Party B to Party A or such Affiliate and the private
      resale of such shares by Party A or such Affiliate, substantially similar to
      private placement purchase agreements customary for private placements of equity
      securities of companies of comparable size, maturity and lines of business,
      in
      form and substance commercially reasonably satisfactory to Party A and Party
      B,
      which Private Placement Agreement shall include, without limitation, provisions
      substantially similar to those contained in such private placement purchase
      agreements relating to the indemnification of, and contribution in connection
      with the liability of, Party A and its Affiliates and Party B, shall provide
      for
      the payment by Party B of all expenses in connection with such resale, including
      all fees and expenses of counsel for Party A, shall contain representations,
      warranties and agreements of Party B reasonably necessary or advisable to
      establish and maintain the availability of an exemption from the registration
      requirements of the Securities Act for such resales, and shall use commercially
      reasonable efforts to provide for the delivery of accountants’ “comfort letters”
to Party A or such Affiliate with respect to the financial statements and
      certain financial information contained in or incorporated by reference into
      the
      offering memorandum prepared for the resale of such Shares as are customarily
      requested in comfort letters covering private placements of equity securities
      of
      companies of comparable size, maturity and lines of business;

     

    (D)  Party
      B
      agrees that any Delivered Securities so delivered to Party A, (i) may be
      transferred by and among Party A and its Affiliates, and Party B shall effect
      such transfer without any further action by Party A and (ii) after the minimum
      “holding period” under Rule 144(k) under the Securities Act has elapsed with
      respect to such Delivered Securities, Party B shall promptly remove, or cause
      the transfer agent for such Delivered Securities to remove, any legends
      referring to any such restrictions or requirements from such Delivered
      Securities upon delivery by Party A (or such Affiliate of Party A) to Party
      B or
      such transfer agent of seller’s and broker’s representation letters customarily
      delivered by Party A in connection with resales of restricted securities
      pursuant to Rule 144 under the Securities Act, without any further requirement
      for the delivery of any certificate, consent, agreement, opinion of counsel,
      notice or any other document, any transfer tax stamps or payment of any other
      amount or any other action by Party A (or such affiliate of Party A);
      and

     

    
      
         

      

      
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    (E)  Party
      B
      and Party A shall not take, or cause to be taken, any action that would make
      unavailable either the exemption pursuant to Section 4(2) of the Securities
      Act
      for the delivery by Party B to Party A (or any affiliate designated by Party
      A)
      of the Delivered Securities or the exemption pursuant to Section 4(1) or Section
      4(3) of the Securities Act for resales of the Delivered Securities by Party
      A
      (or any such affiliate of Party A).

     

    
      	(c)  	
              Make-whole.
                If (x) Party B elects to deliver Share Termination Delivery Units
                pursuant
                to Section 8(a) hereof or (y) Party B makes the election described
                in
                clause (b)(i)(B) of Section 8(b) hereof, then in either case Party
                A or
                its affiliate may sell such Shares or Share Termination Delivery
                Units, as
                the case may be, during a period (the “Resale
                Period”)
                commencing on the Exchange Business Day following delivery of such
                Shares
                or Share Termination Delivery Units, as the case may be, and ending
                on the
                Exchange Business Day on which Party A completes the sale of all
                such
                Shares or Share Termination Delivery Units, as the case may be, or
                a
                sufficient number of Shares or Share Termination Delivery Units,
                as the
                case may be, so that the realized net proceeds of such sales exceed
                the
                amount of the Payment Obligation (in the case of clause (x), or in
                the
                case that both clause (x) and clause (y) apply) or the Freely Tradeable
                Value (in the case that only clause (y) applies)(such amount of the
                Payment Obligation or Freely Tradeable Value, as the case may be,
                the
                “Required
                Proceeds”).
                If any of such delivered Shares or Share Termination Delivery Units
                remain
                after such realized net proceeds exceed the Required Proceeds, Party
                A
                shall return such remaining Shares or Share Termination Delivery
                Units to
                Party B. If the Required Proceeds exceed the realized net proceeds
                from
                such resale, Party B shall transfer to Party A by the open of the
                regular
                trading session on the Exchange on the Exchange Trading Day immediately
                following the last day of the Resale Period the amount of such excess
                (the
                “Additional
                Amount”)
                in cash or in a number of additional Shares (“Make-whole
                Shares”)
                in an amount that, based on the Relevant Price on the last day of
                the
                Resale Period (as if such day was the “Valuation Date” for purposes of
                computing such Relevant Price), has a dollar value equal to the Additional
                Amount. The Resale Period shall continue to enable the sale of the
                Make-whole Shares in the manner contemplated by this Section 8(c).
                This
                provision shall be applied successively until the Additional Amount
                is
                equal to zero, subject to Section
                8(g).

            

    

     

    
      	(d)  	
              Repurchase
                Notices.
                Party B shall, on any day on which Party B effects any repurchase
                of
                Shares, use its best efforts to promptly give Party A a written notice
                of
                such repurchase (a “Repurchase
                Notice”)
                on such day if, following such repurchase, the Notice Percentage
                as
                determined on such day is (i) greater than 8.9% and (ii) greater
                by 0.5%
                than the Notice Percentage included in the immediately preceding
                Repurchase Notice (or, in the case of the first such Repurchase Notice,
                greater than the Notice Percentage as of the date hereof). The
                “Notice
                Percentage”
                as of any day is the fraction, expressed as a percentage, the numerator
                of
                which is the Number of Shares and the denominator of which is the
                number
                of Shares outstanding on such day.

            

    

     

    
      	(e)  	
              Beneficial
                Ownership.
                Notwithstanding anything to the contrary in the Agreement or this
                Confirmation, in no event shall Party A be entitled to receive, or
                shall
                be deemed to receive, any Shares if, upon such receipt of such Shares,
                the
                “beneficial ownership” (within the meaning of Section 13 of the Exchange
                Act and the rules promulgated thereunder) of Shares by Party A or
                any
                entity that directly or indirectly controls Party A (collectively,
                “Party
                A Group”)
                would be equal to or greater than 9.9% or more of the outstanding
                Shares.
                If any delivery owed to Party A hereunder is not made, in whole or
                in
                part, as a result of this provision, Party B’s obligation to make such
                delivery shall not be extinguished and Party B shall make such delivery
                as
                promptly as practicable after, but in no event later than one Exchange
                Business Day after, Party A gives notice to Party B that such delivery
                would not result in Party A Group directly or indirectly so beneficially
                owning in excess of 9.9% of the outstanding
                Shares.

            

    

     

    
      
         

      

      
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      	(f)  	
              Limitations
                on Settlement by Party B.
                Notwithstanding anything herein or in the Agreement to the contrary,
                in no
                event shall Party B be required to deliver Shares in connection with
                the
                Transaction in excess of 1,921,164 Shares (the “Capped
                Number”)
                as adjusted from time to time for stock splits, combinations, stock
                dividend and similar transactions. Party B represents and warrants
                (which
                shall be deemed to be repeated on each day that the Transaction is
                outstanding) that the Capped Number is equal to or less than the
                number of
                authorized but unissued Shares of Party B that are not reserved for
                future
                issuance in connection with transactions in the Shares (other than
                the
                Transaction) on the date of the determination of the Capped Number
                (such
                Shares, the “Available
                Shares”).
                In the event Party B shall not have delivered the full number of
                Shares
                otherwise deliverable as a result of this Section 8(g) (the resulting
                deficit, the “Deficit
                Shares”),
                Party B shall be continually obligated to deliver, from time to time
                until
                the full number of Deficit Shares have been delivered pursuant to
                this
                paragraph, Shares when, and to the extent, that (i) Shares are
                repurchased, acquired or otherwise received by Party B or any of
                its
                subsidiaries after the Trade Date (whether or not in exchange for
                cash,
                fair value or any other consideration), (ii) authorized and unissued
                Shares reserved for issuance in respect of other transactions prior
                to
                such date which prior to the relevant date become no longer so reserved
                and (iii) Party B additionally authorizes unissued Shares that are
                not
                reserved for other transactions. Party B shall immediately notify
                Party A
                of the occurrence of any of the foregoing events (including the number
                of
                Shares subject to clause (i), (ii) or (iii) and the corresponding
                number
                of Shares to be delivered) and promptly deliver such Shares thereafter.
                Party B shall not take any action to decrease the number of Available
                Shares below the Capped Number.

            

    

     

    
      	(g)  	
              Right
                to Extend.
                Party A may postpone any Exercise Date or any other date of valuation
                or
                delivery with respect to some or all of the relevant Options (in
                which
                event the Calculation Agent shall make appropriate adjustments to
                the
                Number of Shares to be Delivered with respect to one or more Components)
                for up to an aggregate number of thirty (30) Exchange Business Days,
                if
                Party A determines, in its reasonable discretion, that such extension
                is
                reasonably necessary or appropriate to preserve Party A’s hedging or hedge
                unwind activity hereunder in light of existing liquidity conditions
                or to
                enable Party A to effect purchases of Shares in connection with its
                hedging, hedge unwind or settlement activity hereunder in a manner
                that
                would, if Party A were Party B or an affiliated purchaser of Party
                B, be
                in compliance with applicable legal, regulatory or self-regulatory
                requirements, or with related policies and procedures applicable
                to Party
                A.

            

    

     

    
      	(h)  	
              Equity
                Rights.
                Party B intends that all documentation with respect to this Transaction
                is
                intended to qualify this Transaction as an equity instrument for
                purposes
                of SFAS 150 and EITF 00-19. Party A acknowledges and agrees that
                this
                Confirmation is not intended to convey to it rights with respect
                to the
                Transaction that are senior to the claims of common stockholders
                in the
                event of Party B’s bankruptcy. For the avoidance of doubt, the parties
                agree that the preceding sentence shall not apply at any time other
                than
                during Party B’s bankruptcy to any claim arising as a result of a breach
                by Party B of any of its obligations under this Confirmation or the
                Agreement. For the avoidance of doubt, the parties acknowledge that
                this
                Confirmation is not secured by any collateral that would otherwise
                secure
                the obligations of Party B hereinunder or pursuant to any other
                agreement.

            

    

     

    
      	(i)  	
              Transfer
                and Assignment.
                Party B may not transfer or assign its rights and obligations hereunder
                and under the Agreement without the prior written consent of Party
                A.
                Party A may transfer or assign its rights and obligations hereunder
                and
                under the Agreement, in whole or in part, at any time without the
                consent
                of Party B, subject to the restrictions set forth in the legend appearing
                at the top of this Confirmation.

            

    

     

    
      
         

      

      
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      	(j)  	
              Disclosure.
                Effective from the date of commencement of discussions concerning
                the
                Transaction, Party B and each of its employees, representatives,
                or other
                agents may disclose to any and all persons, without limitation of
                any
                kind, the tax treatment and tax structure of the Transaction and
                all
                materials of any kind (including opinions or other tax analyses)
                that are
                provided to Party B relating to such tax treatment and tax
                structure.

            

    

     

    
      	(k)  	
              Designation
                by Party A.
                Notwithstanding any other provision in this Confirmation to the contrary
                requiring or allowing Party A to purchase, sell, receive or deliver
                any
                Shares or other securities to or from Party B, Party A may designate
                any
                of its affiliates to purchase, sell, receive or deliver such Shares
                or
                other securities and otherwise to perform Party A’s obligations in respect
                of the Transaction and any such designee may assume such obligations.
                Party A shall be discharged of its obligations to Party B to the
                extent of
                any such performance.

            

    

     

    
      	(l)  	
              Additional
                Termination Event.
                If Party A reasonably determines that it is advisable to terminate
                a
                portion of the Transaction so that Party A’s hedging activities related to
                the Transaction will comply with applicable securities laws, rules
                or
                regulations, an Additional Termination Event shall occur in respect
                of
                which (1) Party B shall be the sole Affected Party and (2) the Transaction
                shall be the sole Affected
                Transaction.

            

    

     

    
      	(m)  	
              Opinion.
                Party B shall deliver to Party A an opinion of counsel, dated as
                of the
                Trade Date and reasonably acceptable to Party A in form and substance
                covering the matters specified in Annex I
                hereto.

            

    

     

    
      	(n)  	
              Waiver
                of Trial by Jury.
                 EACH
                OF PARTY B AND PARTY A HEREBY IRREVOCABLY WAIVES (ON ITS OWN BEHALF
                AND,
                TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS STOCKHOLDERS)
                ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
                (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
                RELATING
                TO THE TRANSACTION OR THE ACTIONS OF PARTY A OR ITS AFFILIATES OR
                PARTY B
                OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT
                HEREOF.

            

    

     

    
      	(o)  	
              Governing
                Law.
                THE AGREEMENT AND THIS CONFIRMATION AND ANY OTHER MATTERS ARISING
                OUT OF
                OR RELATING TO THE TRANSACTION OR THE ACTIONS OF PARTY A OR ITS AFFILIATES
                OR PARTY B OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR
                ENFORCEMENT HEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
                NEW YORK.
                THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION
                OF THE
                COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES COURT FOR THE
                SOUTHERN DISTRICT OF NEW YORK IN CONNECTION WITH ALL MATTERS RELATING
                HERETO AND WAIVE ANY OBJECTION TO THE LAYING OF VENUE IN, AND ANY
                CLAIM OF
                INCONVENIENT FORUM WITH RESPECT TO, THESE
                COURTS.

            

    

     

    Party
      B
      hereby agrees (a) to check this Confirmation carefully and immediately upon
      receipt so that errors or discrepancies can be promptly identified and rectified
      and (b) to confirm that the foregoing (in the exact form provided by Party
      A) correctly sets forth the terms of the agreement between Party A and Party
      B
      with respect to the Transaction, by manually signing this Confirmation or this
      page hereof as evidence of agreement to such terms and providing the other
      information requested herein and immediately returning an executed copy to
      Heights Capital Management, Inc., 101 California Street, Suite 3250, San
      Francisco, CA 94111, Facsimile (415) 403-6525. 

     

    
      
         

      

      
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    Please
      confirm that the foregoing correctly sets forth the terms of your agreement
      by
      signing and returning this Confirmation. 

    

    Very
      truly yours,

     

    CAPITAL
      VENTURES INTERNATIONAL

    BY:
      HEIGHTS CAPITAL MANAGEMENT, INC, 

    Its
      Authorized Agent

    (Party
      A)

     

    By:
      /s/
      Martin Kobinger  

    Name:
      Martin
      Kobinger

    Title:
      Investment Manager

     

    Agreed
      and Accepted By:

    

    TXCO
      RESOURCES INC.

    (Party
      B)

     

    By:
      /s/
      James E. Sigmon  

    James
      E.
      Sigmon

    President

     

    
      
         

      

      
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    Annex
      A

     

    For
      each Component of the Transaction, the Number of Options and Expiration Date
      are
      set forth below.

     

    
      	
              Component
                Number

            	
              Number
                of Options

            	
              Component
                Expiration Date

            
	
              1

            	
              320,194

            	
              October
                4, 2013

            
	
              2

            	
              320,194

            	
              April
                4, 2014

            
	
              3

            	
              320,194

            	
              October
                4, 2014

            

    

     

    
      
         

      

      
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    ANNEX
      I

     

    Matters
      to be covered in Opinion of Counsel to Party B 

     

    1.  Party
      B
      is validly existing as a corporation in good standing under the laws of the
      State of Delaware. 

     

    2.  Party
      B
      has the requisite corporate power and authority to enter into the Transaction
      (for purposes of this Annex 1, the “Agreement”)
      and to
      carry out the Transactions contemplated thereby. 

     

    3.  The
      execution and delivery by Party B of the Transaction, and the performance by
      Party B of its obligations under the Transaction, have been duly authorized
      by
      all necessary corporate action on the part of Party B. 

     

    4.  The
      Transaction has been duly authorized, executed and delivered by Party
      B.

     

    5.  No
      consent, approval or authorization of, or registration, filing or declaration
      with, any governmental or public body or authority is required in connection
      with the execution, delivery or performance by Party B of the Transaction.
      

     

    6.  The
      execution, delivery and performance by Party B of the Transaction and compliance
      by Party B with the terms and provisions thereof will not, whether with or
      without the giving of notice or lapse of time or both, result in a breach or
      violation of any of the terms and provisions of, or constitute a default under,
      (A) any material indenture, mortgage, deed of trust, loan, purchase or credit
      agreement, lease, corporate charter or by-laws, or any other agreement or
      instrument to which Party B or any subsidiary is bound or by which Party B
      or
      any subsidiary or any of their respective properties may be bound or affected,
      or (B) any Delaware or federal law, statute, rule, regulation or order or any
      judgment, order, writ or decree of any governmental agency or body or any court
      having jurisdiction over Party B or any of its properties. 

     

    7.  Neither
      Party B nor any subsidiary is an “investment company” or a company “controlled”
by an “investment company”, in each case within the meanings ascribed to such
      terms in the Investment Company Act of 1940, as amended, nor is Party B or
      any
      subsidiary subject to regulation under said Act. 

    

    
      
        
        

      

      
        19EXHIBIT
        10.3

       

      Lower
        Call Option Transaction

      

      April
        4,
        2008

       

      
        	
                To:
                  

              	
                TXCO
                  Resources, Inc.

              

      

      777
        E.
        Sonterra Blvd., Suite 350

      San
        Antonio, TX 78258

      Attention:
        James E. Sigmon, President 

       

      
        	
                From:

              	
                Capital
                  Ventures International 

              

      

      By:
        Heights Capital Management, Inc., Its Authorized Agent

      101
        California Street, Suite 3250

      San
        Francisco, CA 94111

      Attention:
        Martin Kobinger

      
        
          

        

      

       

      Ladies
        and Gentlemen:

       

      The
        purpose of this letter agreement (this “Confirmation”)
        is to
        confirm the terms and conditions of the Transaction entered into between
        Capital
        Ventures International (“Party
        A”)
        and
        TXCO Resources, Inc. (“Party
        B”)
        on the
        Trade Date specified below (the “Transaction”).
        This
        Confirmation constitutes a “Confirmation” as referred to in the Agreement
        specified below. 

       

      	1.  	
              This
                Confirmation is subject to, and incorporates, the definitions and
                provisions of the 2000 ISDA Definitions (including the Annex thereto)
                (the
                “2000
                Definitions”)
                and the definitions and provisions of the 2002 ISDA Equity Derivatives
                Definitions (the “Equity
                Definitions”,
                and together with the 2000 Definitions, the “Definitions”),
                in each case as published by the International Swaps and Derivatives
                Association, Inc. (“ISDA”).
                In the event of any inconsistency between the 2000 Definitions and
                the
                Equity Definitions, the Equity Definitions will govern. 

               

              
                This
                  Confirmation evidences a complete and binding agreement between
                  Party A
                  and Party B as to the terms of the Transaction to which this Confirmation
                  relates. The parties may agree to negotiate an agreement in the
                  form of
                  the ISDA Form. Until any such time, this Confirmation, together
                  with all
                  other documents referring to the ISDA Form (each a “Confirmation”)
                  confirming Transactions entered into between us (notwithstanding
                  anything
                  to the contrary in a Confirmation), shall supplement, form a part
                  of, and
                  be subject to an agreement in the form of the ISDA Form as if we
                  had
                  executed an agreement in such form (but without any election in
                  the
                  Schedule) on the Trade Date of the first such Transaction between
                  us. This
                  Confirmation shall be subject to an agreement (the “Agreement”)
                  in the form of the 2002 ISDA Master Agreement (the “ISDA
                  Form”)
                  as if Party A and Party B had executed an agreement in such form
                  (without
                  any Schedule but with the elections set forth in this Confirmation,
                  it
                  being understood the “Cross-Default” shall not apply to this Transaction).
                  For the avoidance of doubt, the Transaction shall be the only transaction
                  under the Agreement.

                 

                All
                  provisions contained in, or incorporated by reference to, the Agreement
                  will govern this Confirmation except as expressly modified herein.
                  In the
                  event of any inconsistency between this Confirmation and either
                  the
                  Definitions or the Agreement, this Confirmation shall
                  govern.

              

            

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      	2.  	
              The
                general terms relating to the Transaction are as
                follows:

            

      

      
        	
                Option
                  Style:

              	
                European,
                  subject to the automatic early exercise provisions described
                  below.

              
	 	 
	
                Option
                  Seller:

              	
                Party
                  A

              
	 	 
	
                Option
                  Buyer:

              	
                Party
                  B

              
	 	 
	
                Option
                  Multiple Exercise:

              	
                Not
                  Applicable

              
	 	 
	
                Strike
                  Price:

              	
                $14.48
                  

              
	 	 
	
                Trade
                  Date:

              	
                April
                  4, 2008

              
	 	 
	
                Effective
                  Date:

              	
                April
                  4, 2008

              
	 	 
	
                Option
                  Type:

              	
                Call

              
	 	 
	
                Issuer:

              	
                TXCO
                  Resources, Inc.

              
	 	 
	
                Shares:

              	
                The
                  shares of common stock of the Issuer, par value $0.01 per Share
                  (Ticker
                  Symbol: TXCO)

              
	 	 
	
                Number
                  of Options:

              	
                960,582
                  less any Early Exercise Options.

              
	 	 
	
                Option
                  Entitlement:

              	
                One
                  Share per Option

              
	 	 
	
                Market
                  Disruption Event:

              	
                Section
                  6.3(a) of the Equity Definitions is hereby amended by replacing
                  clause
                  (ii) thereof in its entirety with the following: “(ii) an Exchange
                  Disruption, or” and inserting immediately following clause (iii) thereof
                  the following: “; in each case that the Calculation Agent determines is
                  material.”

              
	 	 
	
                Relevant
                  Price:

              	
                VWAP
                  Price

              
	 	 
	
                VWAP
                  Price:

              	
                The
                  “Volume Weighted Average Price” per Share on such day, as displayed on
                  Bloomberg Page “TXCO UQ<equity>AQR” (or any successor thereto) for
                  the Issuer with respect to the period from 9:30 a.m. to 4:00 p.m.
                  (New
                  York City time) on such day, as determined by the Calculation Agent.
                  If no
                  price at such time is available, or there is a Market Disruption
                  Event on
                  such Expiration Date, the Calculation Agent shall determine the
                  VWAP Price
                  in a commercially reasonable
                  manner.

              

      

       

      
        
          
          

        

        
          2

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      
        	
                Premium:

              	
                $
                  5,442,017

              
	 	 
	
                Premium
                  Payment Date:

              	
                Effective
                  Date

              
	 	 
	
                Exchange:

              	
                The
                  Nasdaq Global Market

              
	 	 
	
                Related
                  Exchange:

              	
                Any
                  exchange on which options or futures on the relevant Shares are
                  traded.

              
	 	 
	
                Clearance
                  System:

              	
                DTC

              
	 	 
	
                Calculation
                  Agent:

              	
                Party
                  A. Whenever the Calculation Agent acts or makes a determination,
                  it will
                  do so in good faith and in a commercially reasonable manner consistent
                  with its obligations under the Equity Definitions. 

              
	 	 
	
                Procedure
                  for Exercise:

              	 
	 	 
	
                Expiration
                  Time:

              	
                The
                  close of trading on the Exchange

              
	 	 
	
                Expiration
                  Date:

              	
                Each
                  of the thirty (30) consecutive Scheduled Trading Days (the “Scheduled
                  Expiration Period”)
                  occurring immediately prior to April 4, 2013 or such earlier date
                  specified by Party B in a written notice to Party A at least ten
                  (10)
                  calendar days prior to the Scheduled Expiration Period (an “Early
                  Exercise Notice”);
                  provided
                  that if Party A receives notice that any of the Preferred Shares
                  are
                  converted prior to the tenth (10th) calendar day prior to the Scheduled
                  Expiration Period (an “Early
                  Exercise Event”),
                  the Expiration Date with respect to a number of Options equal to
                  the
                  product of (x) the number of Preferred Shares converted and (y)
                  the
                  conversion rate then applicable to the Preferred Shares, (such
                  Options
                  being referred to herein as “Early
                  Exercise Options”)
                  shall occur on each of the thirty (30) consecutive Scheduled Trading
                  Days
                  occurring after the tenth (10th) calendar day after Party A receives
                  notice of such event, or such earlier date after the Early Exercise
                  Event
                  that the Calculation Agent shall deem appropriate. If any Expiration
                  Date
                  shall not be an Exchange Business Day, such Expiration Date shall
                  be
                  postponed to the immediately succeeding Exchange Business Day and
                  the
                  corresponding Expiration Date for each subsequent Daily Number
                  of Options
                  shall be moved back an equal number of Exchange Business Days reflecting
                  such postponement.

              

      

       

      
        
          
          

        

        
          3

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      
        	
                Daily
                  Number of Options:

              	
                One
                  thirtieth (1/30th) of the Number of Options; provided
                  that with respect to any Expiration Date resulting from an Early
                  Exercise
                  Event, one thirtieth (1/30th) of such Early Exercise
                  Options.

              
	 	 
	
                Automatic
                  Exercise:

              	
                Applicable

              
	 	 
	
                Settlement
                  Terms:

              	 
	 	 
	
                Settlement
                  Method Election:

              	
                Applicable;
                  provided
                  that (i) any such election shall apply to all Exercise Dates (in
                  accordance with the terms below) and may be for Cash Settlement
                  or Net
                  Share Settlement; (ii) references to “Physical Settlement” in Section 7.1
                  of the Equity Definitions shall be replaced by references to “Net Share
                  Settlement”; and (iii) Party B may elect Cash Settlement only if Party B
                  represents and warrants to Party A in writing on the date of such
                  election
                  that, as of such date, Party B is not aware of any material nonpublic
                  information concerning itself or the Shares and is electing Cash
                  Settlement in good faith and not as part of a plan or scheme to
                  evade
                  compliance with the federal securities laws. At any time prior
                  to making a
                  Settlement Method Election, Party B may, without the consent of
                  Party A,
                  amend this Confirmation by notice to Party A to eliminate Party
                  B’s right
                  to elect Cash Settlement.

              
	 	 
	
                Electing
                  Party

              	
                Party
                  B

              
	 	 
	
                Settlement
                  Method Election Date

              	
                The
                  30th Scheduled Trading Day preceding the first Expiration
                  Date

              
	 	 
	
                Default
                  Settlement Method

              	
                Net
                  Share Settlement

              
	 	 
	
                Settlement
                  Date:

              	
                For
                  all Daily Number Options exercised or deemed exercised on each
                  Expiration
                  Date, the third Exchange Business Day following the final Expiration
                  Date.

              
	 	 
	
                Cash
                  Settlement

              	
                If
                  Cash Settlement applies, then, notwithstanding any contrary terms
                  of
                  Article 8 of the Equity Definitions, for any Daily Number of Options
                  exercised or deemed exercised on any Exercise Date, Party A shall
                  pay, on
                  the Settlement Date, the Cash Settlement Amount to Party B. The
                  Cash
                  Settlement Amount shall be determined as follows:

                 

                (i)
                  If the Settlement Price is less than or equal to the Strike Price,
                  then
                  the Cash Settlement Amount shall equal zero.

                 

                (ii)
                  If the Settlement Price is greater than the Strike Price, then
                  the Cash
                  Settlement Amount shall equal the product of (i) the Daily Number
                  of
                  Options, (ii) the Option Entitlement and (iii) the Settlement Price
                  minus
                  the Strike Price.

              

      

       

      
        
          
          

        

        
          4

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      
        	
                Net
                  Share Settlement:

              	
                On
                  the Settlement Date, Party A shall deliver to Party B a number
                  of whole
                  Shares equal to the Number of Shares to be Delivered and will pay
                  to Party
                  B the Fractional Share Amount, if any.

              
	 	 
	
                Number
                  of Shares to be Delivered:

              	
                The
                  Cash Settlement Amount (determined as if Cash Settlement were applicable)
                  divided by
                  the Settlement Price, rounded down to the nearest whole
                  number.

              
	 	 
	
                Cash
                  Settlement Payment Date:

              	
                For
                  all Daily Number of Options exercised or deemed exercised on each
                  Exercise
                  Date, the third Exchange Business Day following the final Expiration
                  Date.

              
	 	 
	
                Settlement
                  Currency:

              	
                USD

              
	 	 
	
                Settlement
                  Price:

              	
                For
                  any Daily Number of Options, the VWAP Price of the Shares on the
                  relevant
                  Expiration Date determined by Calculation Agent at the Expiration
                  Time on
                  the relevant Expiration Date for such Daily Number of Options.
                  If no price
                  at such time is available, or there is a Market Disruption Event
                  on such
                  Expiration Date, the Calculation Agent shall determine the Settlement
                  Price in a commercially reasonable manner. 

              
	 	 
	
                Failure
                  to Deliver:

              	
                Applicable

              
	 	 
	
                Other
                  Applicable Provisions:

              	
                To
                  the extent Party A is obligated to deliver Shares hereunder, the
                  provisions of Sections 9.1(c), 9.8, 9.9, 9.10, 9.11 (except that
                  the
                  Representation and Agreement contained in Section 9.11 of the Equity
                  Definitions shall be modified by excluding any representations
                  therein
                  relating to restrictions, obligations, limitations or requirements
                  under
                  applicable securities laws as a result of the fact that Party B
                  is the
                  issuer of the Shares) and 9.12 of the Equity Definitions will be
                  applicable as if “Physical Settlement” applied to the
                  Transaction.

              

      

       

      
        
          
          

        

        
          5

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      
        	
                Restricted
                  Certificated Shares:

              	
                Notwithstanding
                  anything to the contrary in the Equity Definitions, Party A may
                  deliver,
                  in whole or in part, any Shares required to be delivered to Party
                  B
                  hereunder in the form of restricted securities under the Securities
                  Act
                  (as defined below) and/or in certificated form in lieu of delivery
                  through
                  the Clearance System. With respect to any such certificated Shares,
                  the
                  Representation and Agreement contained in Section 9.11 of the Equity
                  Definitions shall be modified by deleting the remainder of the
                  provision
                  after the word “encumbrance” in the fourth line
                  thereof.

              
	 	 
	
                Adjustments:

              	 
	 	 
	
                Method
                  of Adjustment:

              	
                Calculation
                  Agent Adjustment

              
	 	 
	
                Extraordinary
                  Dividend:

              	
                Any
                  dividend or distribution that has an ex-dividend date occurring
                  on or
                  after the Trade Date and on or prior to the date on which Party
                  A
                  satisfies all of its delivery obligations hereunder; provided
                  that no regular or periodic dividend on any of Party B’s outstanding
                  preferred stock (including the Preferred Shares) shall be an Extraordinary
                  Dividend.

              
	 	 
	
                Extraordinary
                  Events:

              	 
	 	 
	
                Consequences
                  of Merger Events and Tender Offers:

              	 
	 	 
	
                (a)
                  Share-for-Share:

              	
                Modified
                  Calculation Agent Adjustment, or at Party A’s election, Cancellation and
                  Payment (Calculation Agent Determination)

              
	 	 
	
                (b)
                  Share-for-Other:

              	
                Cancellation
                  and Payment (Calculation Agent Determination)

              
	 	 
	
                (c)
                  Share-for-Combined:

              	
                Component
                  Adjustment, or at Party A’s election, Cancellation and Payment
                  (Calculation Agent Determination)

              
	 	 
	
                Tender
                  Offer:

              	
                Applicable

              

      

       

      
        
          
          

        

        
          6

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      
        	
                Delisting,
                  Nationalization or Insolvency:

              	
                Cancellation
                  and Payment (Calculation Agent Determination)

              
	 	 
	
                Additional
                  Disruption Events:

              	 

      

       

      
        	
                (a)
                  Change in Law:

              	
                Applicable;
                  provided
                  that Section 12.9(a)(ii) of the Equity Definitions is hereby amended
                  by
                  (i) replacing the phrase “the interpretation” in the third line thereof
                  with the phrase “or announcement or statement of the formal or informal
                  interpretation” and (ii) immediately following the word “Transaction” in
                  clause (X) thereof, adding the phrase “in the manner contemplated by the
                  Hedging Party on the Trade Date”.

              
	 	 
	
                (b)
                  Failure to Deliver:

              	
                Applicable

              
	 	 
	
                (c)
                  Insolvency Filing:

              	
                Applicable

              
	 	 
	
                (d)
                  Hedging Disruption:

              	
                Applicable

              
	 	 
	
                (e)
                  Increased Cost of Hedging: 

              	
                Applicable

              
	 	 
	
                (f)
                  Loss of Stock Borrow: 

              	
                Not
                  Applicable

              
	 	 
	
                Hedging
                  Party:

              	
                For
                  all applicable Additional Disruption Events, Party A

              
	 	 
	
                Determining
                  Party:

              	
                For
                  all applicable Additional Disruption Events, Party A

              
	 	 
	
                Non-Reliance:

              	
                Applicable

              
	 	 
	
                Agreements
                  and Acknowledgments Regarding Hedging Activities:

              	
                Applicable

              
	 	 
	
                Additional
                  Acknowledgments:

              	
                Applicable

              
	 	 
	
                Additional
                  Termination Events:

              	
                Applicable.
                  The following will constitute an Additional Termination
                  Event:

                 

                (a)
                  Such other events specified in this Confirmation as being Additional
                  Termination Events. 

                 

                For
                  the purpose of the foregoing Termination Event, the sole Affected
                  Party
                  will be Party B. 

              
	 	 
	
                Conversion
                  Notice

              	
                In
                  the event Party B shall elect a mandatory conversion of some or
                  all of its
                  Perpetual Convertible Preferred Stock pursuant to Article 2(d)(viii)
                  of
                  the Certificate of Designation, or if Party B receives a conversion
                  notice
                  under Section 2(b) of the Certificate of Designation, Party B shall
                  promptly notify Party A in writing of such event, and in any event
                  no
                  later than 2 Exchange Trading Days after such election or receipt
                  of such
                  conversion notice.

              

      

       

      
        
          
          

        

        
          7

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      	3.  	
              If
                any of the transactions contemplated by the Securities Purchase Agreement
                dated as of February 28, 2008 (the “Purchase
                Agreement”)
                among Party B and each
                of the Buyers specified therein relating to the sale of Perpetual
                Convertible Preferred Stock (the “Preferred
                Shares”)
                of Party B, shall fail to close on the date specified therein for
                any
                reason, or any subsequent date allowed thereunder for postponements
                permitted under the terms thereof , the entirety of this Transaction
                shall
                terminate automatically and Party B shall be the sole Affected Party
                and
                this Transaction shall be the sole Affected Transaction and
                such termination shall be treated as an Additional Termination
                Event.

            

       

      	4.  	
              Calculations
                and Payment on Early Termination and on Certain Extraordinary
                Events.
                If
                Party A shall owe Party B any amount pursuant to Sections 12.2, 12.3,
                12.6, 12.7 or 12.9 of the Equity Definitions (except in the event
                of a
                Merger Event, Tender Offer, Insolvency or a Nationalization, in each
                case,
                in which the consideration or proceeds to be paid to holders of Shares
                consists solely of cash) or pursuant to Section 6(d)(ii) of the Agreement
                (except in the event of an Event of Default in which Party B is the
                Defaulting Party or a Termination Event in which Party B is the Affected
                Party, that resulted from an event or events within Party B’s control) (a
                “Payment
                Obligation”),
                Party B shall have the right, in its sole discretion, to require
                Party A
                to satisfy any such Payment Obligation by the Share Termination
                Alternative (as defined below) by giving irrevocable telephonic notice
                to
                Party A, confirmed in writing within one Scheduled Trading Day, between
                the hours of 9:00 A.M. and 12:00 P.M. New York City time on the relevant
                Merger Date, Tender Offer Date, Announcement Date or Early Termination
                Date, as applicable (“Notice
                of Share Termination”).
                Upon such Notice of Share Termination, the following provisions shall
                apply on the Scheduled Trading Day immediately following the relevant
                Merger Date, Tender Offer Date, Announcement Date or Early Termination
                Date, as applicable:

            

      

      
        	
                Share
                  Termination Alternative: 

              	
                Applicable
                  and means that Party A shall deliver to Party B the Share Termination
                  Delivery Property on the date on which the Payment Obligation would
                  otherwise be due pursuant to Section 12.7 or 12.9 of the Equity
                  Definitions or Section 6(d)(ii) of the Agreement, as applicable
                  (the
                  “Share
                  Termination Payment Date”),
                  in satisfaction of the Payment Obligation. 

              
	 	 
	
                Share
                  Termination Delivery

              	 
	
                Property:
                  

              	
                A
                  number of Share Termination Delivery Units, as calculated by the
                  Calculation Agent, equal to the Payment Obligation divided by the
                  Share
                  Termination Unit Price. The Calculation Agent shall adjust the
                  Share
                  Termination Delivery Property by replacing any fractional portion
                  of a
                  security therein with an amount of cash equal to the value of such
                  fractional security based on the values used to calculate the Share
                  Termination Unit Price. 

              
	 	 
	
                Share
                  Termination Unit Price: 

              	
                The
                  value of property contained in one Share Termination Delivery Unit
                  on the
                  date such Share Termination Delivery Units are to be delivered
                  as Share
                  Termination Delivery Property, as determined by the Calculation
                  Agent by
                  commercially reasonable means and notified by the Calculation Agent
                  to
                  Party A at the time of notification of the Payment Obligation.
                  

              

      

       

      
        
          
          

        

        
          8

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

         

      

      
        	
                Share
                  Termination Delivery

              	 
	
                Unit:
                  

              	
                In
                  the case of a Termination Event, Event of Default or Delisting,
                  one Share
                  or, in the case of a Merger Event, a Tender Offer, an Insolvency
                  or
                  Nationalization, a unit consisting of the number or amount of each
                  type of
                  property received by a holder of one Share (without consideration
                  of any
                  requirement to pay cash or other consideration in lieu of fractional
                  amounts of any securities) in such Merger Event, Tender Offer,
                  Insolvency
                  or Nationalization. If such Merger Event, Tender Offer, Insolvency
                  or
                  Nationalization involves a choice of consideration to be received
                  by
                  holders, such holder shall be deemed to have elected to receive
                  the
                  maximum possible amount of cash.

              
	 	 
	
                Failure
                  to Deliver: 

              	
                Applicable

              
	 	 
	
                Other
                  applicable provisions: 

              	
                If
                  Share Termination Alternative is applicable, the provisions of
                  Sections
                  9.8, 9.9, 9.10, 9.11 and 9.12 of the Equity Definitions will be
                  applicable
                  as if “Physical Settlement” were applicable, except that all references to
                  “Shares” shall be read as references to “Share Termination Delivery
                  Units”; provided
                  that the Representation and Agreement contained in Section 9.11
                  of the
                  Equity Definitions shall be modified by excluding any representations
                  therein relating to restrictions, obligations, limitations or requirements
                  under applicable securities laws as a result of the fact that Party
                  B is
                  the issuer of any Share Termination Delivery Units (or any part
                  thereof).

              

      

       

      	5.  	
              Additional
                Agreements, Representations and
                Covenants:

            

       

      	(a)  	
              Party
                B hereby represents and warrants to Party A, on each day from the
                Trade
                Date to and including the business day following the date on which
                Party A
                is able to initially complete a hedge of its position created by
                this
                Transaction, that Party B has publicly disclosed all material information
                necessary for Party B to be able to purchase or sell Shares in compliance
                with applicable federal securities laws and that it has publicly
                disclosed
                all material information with respect to its condition (financial
                or
                otherwise). 

            

       

      	(b)  	
              If
                Party B would be obligated to receive cash from Party A pursuant
                to the
                terms of this Agreement for any reason without having had the right
                to
                elect to receive Shares in satisfaction of such payment obligation,
                then
                Party B may elect that Party A deliver to Party B a number of Shares
                having a cash value equal to the amount of such payment obligation
                (such
                number of Shares to be delivered to be determined by the Calculation
                Agent
                acting in a commercially reasonable manner to determine the number
                of
                Shares that could be purchased over a reasonable period of time with
                the
                cash equivalent of such payment obligation). Settlement relating
                to any
                delivery of Shares pursuant to this paragraph (b) shall occur within
                a
                reasonable period of time. 

            

       

      	(c)  	
              Party
                B shall deliver to the Party A an opinion or opinions of counsel
                with
                respect to the matters set forth on Annex 1 hereto on or before the
                Effective Date. 

            

       

      	(d)  	
              In
                addition to the representations and warranties in the Agreement and
                those
                contained elsewhere herein, Party B represents and warrants to and
                for the
                benefit of, and agrees with, Party A as
                follows:

            

       

      
        
          
          

        

        
          9

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

      

      (i) (A)
        On
        the Effective Date, the Shares or securities that are convertible into, or
        exchangeable or exercisable for Shares, are not, and shall not be, subject
        to a
“restricted period,” as such term is defined in Regulation M (“Regulation
        M”)
        under
        the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”)
        and
        (B) Party B shall not engage in any “distribution,” as such term is defined in
        Regulation M, other than a distribution meeting the requirements of the
        exceptions set forth in sections 101(b)(10) and 102(b)(7) of Regulation M,
        until
        the second Exchange Business Day immediately following the Trade
        Date.

       

      (ii) Party
        B
        is not entering into this Confirmation to create actual or apparent trading
        activity in the Shares (or any security convertible into or exchangeable
        for
        Shares) or to manipulate the price of the Shares (or any security convertible
        into or exchangeable for Shares) or otherwise in violation of the Exchange
        Act.

       

      (iii) Without
        limiting the generality of Section 3(a)(iii) of the Agreement, the Transaction
        will not violate Rule 13e-1 or Rule 13e-4 under the Exchange Act.

      

      (iv) Prior
        to
        the Effective Date, Party B shall deliver to Party A a resolution of Party
        B’s
        board of directors authorizing the Transaction and such other certificate
        or
        certificates as Party A shall reasonably request.

       

      (v) Party
        B
        is not, and after giving effect to the transactions contemplated hereby will
        not
        be, required to register as an “investment company” as such term is defined in
        the Investment Company Act of 1940, as amended.

       

      (vi) On
        the
        Trade Date (A) the assets of Party B at their fair valuation exceed the
        liabilities of Party B, including contingent liabilities, (B) the capital
        of
        Party B is adequate to conduct the business of Party B and (C) Party B has
        the
        ability to pay its debts and obligations as such debts mature and does not
        intend to, or does not believe that it will, incur debt beyond its ability
        to
        pay as such debts mature.

       

      (vii) Party
        B
        acknowledges its responsibilities under applicable federal securities laws,
        including without limitation Rule 10b-5 under the Exchange Act, in relation
        to
        the Transaction.

       

      	(e)  	
              Each
                of Party A and Party B agrees and represents that it is an “eligible
                contract participant” as defined in Section 1a(12) of the U.S. Commodity
                Exchange Act, as amended. The parties hereto further agree and acknowledge
                (A) that this Confirmation is (i) a “securities contract,” as such term is
                defined in Section 741(7) of the Bankruptcy Code, with respect to
                which
                each payment and delivery hereunder is a “settlement payment,” as such
                term is defined in Section 741(8) of the Bankruptcy Code, and (ii)
                a “swap
                agreement,” as such term is defined in Section 101(53B) of the Bankruptcy
                Code, with respect to which each payment and delivery hereunder is
                a
                “transfer,” as such term is defined in Section 101(54) of the Bankruptcy
                Code, and (B) that Party A is entitled to the protections afforded
                by,
                among other sections, Sections 362(b)(6), 362(b)(17), 546(e), 546(g),
                555
                and 560 of the Bankruptcy Code. 

            

       

      	(f)  	
              Party
                B intends that all documentation with respect to this Transaction
                is
                intended to qualify this Transaction as an equity instrument for
                purposes
                of SFAS 150 and EITF 00-19. Party A acknowledges and agrees that
                this
                Confirmation is not intended to convey to it rights with respect
                to the
                Transaction that are senior to the claims of common stockholders
                in the
                event of Party B’s bankruptcy. For the avoidance of doubt, the parties
                agree that the preceding sentence shall not apply at any time other
                than
                during Party B’s bankruptcy to any claim arising as a result of a breach
                by Party B of any of its obligations under this Confirmation or the
                Agreement. 

            

       

      
        
          
          

        

        
          10

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      	6.  	
              Staggered
                Settlement:

            

       

      If
        Party
        A determines reasonably and in good faith that the sum of (i) the number
        of
        Shares required to be delivered to Party B hereunder on any Cash
        Settlement
        Payment Date, and (ii) any other Shares beneficially owned by Party A, would
        exceed 9.9%
        of
        all outstanding Shares, then Party A may, by notice to Party B on or prior
        to
        such Cash Settlement Payment Date (a “Nominal
        Settlement Date”),
        elect
        to deliver the Shares comprising the related Cash Settlement Amount (in the
        case
        of Net Share Settlement) on two or more dates (each, a “Staggered
        Settlement Date”)
        as
        follows: 

       

      	(a)  	
              in
                such notice, Party A will specify to Party B the related Staggered
                Settlement Dates (the first of which will be such Nominal Settlement
                Date
                and the last of which will be no later than the twentieth (20th)
                Exchange
                Business Day following such Nominal Settlement Date) and the number
                of
                Shares that it will deliver on each Staggered Settlement Date;
                

            

       

      	(b)  	
              the
                aggregate number of Shares that Party A will deliver to Party B hereunder
                on all such Staggered Settlement Dates will equal the number of Shares
                that Party A would otherwise be required to deliver on such Nominal
                Settlement Date; and 

            

       

      	(c)  	
              if
                the Net Share Settlement terms set forth above were to apply on the
                Nominal Settlement Date, then the Net Share Settlement terms will
                apply on
                each Staggered Settlement Date, except that the Shares comprising
                the Cash
                Settlement Amount will be allocated among such Staggered Settlement
                Dates
                as specified by Party A in the notice referred to in clause (a) above.
                

            

       

      Notwithstanding
        anything herein to the contrary, Party A shall be entitled to deliver Shares
        to
        Party B from time to time prior to the date on which Party A would be obligated
        to deliver them to Party B pursuant to the Net Share Settlement terms set
        forth
        above, and Party B agrees to credit all such early deliveries against Party
        A’s
        obligations hereunder in the direct order in which such obligations arise.
        To
        the extent Party A receives or is entitled to receive any distribution or
        payment in respect of Shares by reason of Party A’s being a holder of record of
        such Shares on any date after the Nominal Settlement Date which Party A would
        have delivered to Party B on such Nominal Settlement Date but for the provisions
        of this Section 6, Party A shall deliver such distribution or payment to
        Party B
        at the time Party A delivers the related Shares to Party B in accordance
        with
        this Section 6, if such distribution or payment has already been received
        by
        Party A at such time, or within a reasonable period of time following Party
        A’s
        receipt of the distribution or payment, if such distribution or payment has
        not
        already been received by Party A at the time Party A delivers the related
        Shares
        to Party B in accordance with this Section 6. 

       

      	7.  	
              Transfer.
                Party
                B shall not transfer or assign its rights or obligations hereunder
                and
                under the Agreement without the prior written consent of Party A.
                Party A
                may transfer or assign without Party B’s consent its rights and
                obligations hereunder and under the Agreement, in whole or in
                part.

            

       

      	8.  	
              Disposition
                of Hedge Shares.
                Party B hereby agrees that if, in the good faith reasonable judgment
                of
                Party A or Issuer, based on the advice of counsel, the Shares (the
                “Hedge
                Shares”)
                acquired by Party A for the purpose of hedging its obligations pursuant
                to
                the Transaction
                cannot be sold in the public market by Party A without registration
                under
                the Securities Act, Party B shall, at its election: (i) in order
                to allow
                Party A to sell the Hedge Shares in a registered offering, make available
                to Party A an effective registration statement under the Securities
                Act to
                cover the resale of such Hedge Shares and (A) enter into an agreement,
                in
                form and substance satisfactory to Party A, substantially in the
                form of
                an underwriting agreement for underwritten follow-on offerings of
                equity
                securities of companies of comparable size, maturity and lines of
                business, (B) provide accountant’s “comfort” letters in customary form for
                underwritten follow-on offerings of equity securities of companies
                of
                comparable size, maturity and lines of business, (C) provide disclosure
                opinions of nationally recognized outside counsel to Party B as are
                customarily requested in connection with underwritten follow-on offers
                of
                equity securities of companies of comparable size, maturity and lines
                of
                business, (D) provide other customary opinions, certificates and
                closing
                documents customary in form for underwritten follow-on offers of
                equity
                securities of companies of comparable size, maturity and lines of
                business
                and (E) afford Party A a reasonable opportunity to conduct a “due
                diligence” investigation with respect to Party B customary in scope for
                underwritten follow-on offers of equity securities of companies of
                comparable size, maturity and lines of business; provided,
                however, that
                if Party A, in its sole discretion, is not satisfied with access
                to due
                diligence materials, the results of its due diligence investigation,
                or
                the procedures and documentation for the registered offering referred
                to
                above, then clause (ii) of this Section 8(c) shall apply; provided
                that Party A has given the Party B reasonable notice of its determination
                and provided the Party B with reasonable opportunity to satisfy Party
                A’s
                concerns;
                (ii) in order to allow Party A to sell the Hedge Shares in a private
                placement enter into a private placement agreement substantially
                similar
                to private placement purchase agreements customary for private placements
                of equity securities of companies of comparable size, maturity and
                lines
                of business, in form and substance reasonably satisfactory to Party
                A,
                including customary representations, covenants, blue sky and other
                governmental filings and/or registrations, indemnities to Party A,
                due
                diligence rights (for Party A or any designated buyer of the Hedge
                Shares
                from Party A), opinions and certificates and such other documentation
                as
                is customary for private placements agreements, all reasonably acceptable
                to Party A (in which case, the Calculation Agent shall make any
                adjustments to the terms of the Transaction that are necessary, in
                its
                reasonable judgment, to compensate Party A for any discount from
                the
                public market price of the Shares incurred on the sale of Hedge Shares
                in
                a private placement). 

            

       

      
        
          
          

        

        
          11

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

        

      

       

      	9.  	
              Account
                Details: 

            

      

      
        	
                Payments
                  to Party A:

              	
                To
                  be provided in writing upon request

              
	 	 
	
                Payments
                  to Party B:

              	
                To
                  be advised in writing upon request

              
	 	 
	
                Deliveries
                  to Party B:

              	
                To
                  be advised in writing upon request

              

      

       

      	10.  	
              Waiver
                of Jury Trial. EACH
                OF PARTY B AND PARTY A HEREBY IRREVOCABLY WAIVES (ON ITS OWN BEHALF
                AND,
                TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS STOCKHOLDERS)
                ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
                (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
                RELATING
                TO THE TRANSACTION OR THE ACTIONS OF PARTY B OR ITS AFFILIATES OR
                PARTY A
                OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT
                HEREOF 

            

       

      	11.  	
              Governing
                Law. THE AGREEMENT AND THIS CONFIRMATION AND ANY OTHER MATTERS ARISING
                OUT
                OF OR RELATING TO THE TRANSACTION OR THE ACTIONS OF PARTY B OR ITS
                AFFILIATES OR PARTY A OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE
                OR
                ENFORCEMENT HEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
                NEW YORK.
                THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION
                OF THE
                COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES COURT FOR THE
                SOUTHERN DISTRICT OF NEW YORK IN CONNECTION WITH ALL MATTERS RELATING
                HERETO AND WAIVE ANY OBJECTION TO THE LAYING OF VENUE IN, AND ANY
                CLAIM OF
                INCONVENIENT FORUM WITH RESPECT TO, THESE COURTS.

            

       

      
        
          
             

          

          
          

        

        
          12

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

          
          

        

      

       

      Please
        confirm that the foregoing correctly sets forth the terms of your agreement
        by
        signing and returning this Confirmation. 

       

      Very
        truly yours,

       

      CAPITAL
        VENTURES INTERNATIONAL

      BY:
        HEIGHTS CAPITAL MANAGEMENT, INC, 

      Its
        Authorized Agent

      (Party
        A)

      

      
        	
                By:

              	
                /s/
                  Martin Kobinger

              
	
                Name:

              	
                Martin
                  Kobinger

              
	
                Title:

              	
                Investment
                  Manager

              

      

       

      Confirmed
        as of the date first written above: 

       

      TXCO
        RESOURCES INC.

      (Party
        B)

      

      
        	
                By:

              	
                /s/
                  James E. Sigmon

              
	
                Name:

              	
                James
                  E. Sigmon

              
	
                Title:

              	
                President

              

      

       

      
        
          
            Signature
              Page of Lower Call Option Transaction

          

          
          

        

        
          13

          
            

          

        

        
          LOWER
            CALL OPTION TRANSACTION

          
          

        

      

       

      ANNEX
        I

       

      Matters
        to be covered in Opinion of Counsel to Party B 

       

      1.  Party
        B
        is validly existing as a corporation in good standing under the laws of the
        State of Delaware. 

       

      2.  Party
        B
        has the requisite corporate power and authority to enter into the Transaction
        (for purposes of this Annex 1, the “Agreement”)
        and to
        carry out the Transactions contemplated thereby. 

       

      3.  The
        execution and delivery by Party B of the Transaction, and the performance
        by
        Party B of its obligations under the Transaction, have been duly authorized
        by
        all necessary corporate action on the part of Party B. 

       

      4.  The
        Transaction has been duly authorized, executed and delivered by Party
        B.

       

      5.  No
        consent, approval or authorization of, or registration, filing or declaration
        with, any governmental or public body or authority is required in connection
        with the execution, delivery or performance by Party B of the Transaction.
        

       

      6.  The
        execution, delivery and performance by Party B of the Transaction and compliance
        by Party B with the terms and provisions thereof will not, whether with or
        without the giving of notice or lapse of time or both, result in a breach
        or
        violation of any of the terms and provisions of, or constitute a default
        under,
        (A) any material indenture, mortgage, deed of trust, loan, purchase or credit
        agreement, lease, corporate charter or by-laws, or any other agreement or
        instrument to which Party B or any subsidiary is bound or by which Party
        B or
        any subsidiary or any of their respective properties may be bound or affected,
        or (B) any Delaware or federal law, statute, rule, regulation or order or
        any
        judgment, order, writ or decree of any governmental agency or body or any
        court
        having jurisdiction over Party B or any of its properties. 

       

      7.  Neither
        Party B nor any subsidiary is an “investment company” or a company “controlled”
by an “investment company”, in each case within the meanings ascribed to such
        terms in the Investment Company Act of 1940, as amended, nor is Party B or
        any
        subsidiary subject to regulation under said Act. 

       

      
        
          
          

        

        
          14

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