Document:

Exhibit 4.13

SENIOR SECURED CONVERTIBLE NOTE

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. 
THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE
AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS
THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF
THIS NOTE.

 

Wentworth Energy, Inc.

 

Senior
Secured Convertible Note

 

	
  

  Issuance Date: October 31, 2007

  	
   

  	
  Original
  Principal Amount: U.S. $5,000,000

  

 

FOR VALUE
RECEIVED, Wentworth Energy, Inc., an Oklahoma corporation
(the “Company”), hereby promises
to pay to CASTLERIGG MASTER INVESTMENTS LTD. or registered assigns (“Holder”) the amount set out above as the Original
Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the applicable Interest Rate (as defined herein)
from the date set out above as the Issuance Date (the “Issuance  Date”)
until the same becomes due and payable, whether upon an Interest Date (as
defined below), the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof).  This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”)
is one of an issue of Senior Secured Convertible Notes that, together with the
Other Notes (as defined in Section 29 below) (this Note and the Other Notes
collectively, the “Notes”) were
issued pursuant to the Securities Purchase Agreement (as defined in Section 29
below).  Certain capitalized terms used
herein are defined in Section 29.

(1)           PAYMENTS OF PRINCIPAL.  On the Maturity Date, the Company shall pay to the
Holder an amount in cash representing all outstanding Principal, accrued and
unpaid

 

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Interest and accrued and unpaid Late Charges, if any,
on such Principal and Interest.  The “Maturity
Date” shall be October 31, 2010,
as may be extended at the option of the Holder (i) in the event that, and for
so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant to
this Section 1) or any event shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of Default,
(ii) through the date that is ten (10) Business Days after the consummation of
a Change of Control in the event that a Change of Control is publicly announced
or a Change of Control Notice (as defined in Section 5(b)) is delivered prior
to the Maturity Date, and (iii) at any time while this Note is outstanding, by
prior written notice thereof by the Holder to the Company, to a date not later
than October 31, 2012 (as may be further extended pursuant to this Section 1).

 

(2)           INTEREST; INTEREST RATE.  (a) 
Interest on this Note shall commence accruing on April 1, 2008 and shall
be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)
day months and shall be payable in arrears for each Calendar Quarter on the
first day of the succeeding Calendar Quarter during the period beginning on
April 1, 2008 and ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being
July 1, 2008.  Interest shall
be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in shares of Common Stock (as defined below) (“Interest Shares”) so long as there has been
no Equity Conditions Failure; provided however, that the Company may, at its
option following notice to the Holder, pay Interest on any Interest Date in
cash (“Cash Interest”) or in a
combination of Cash Interest and Interest Shares.  The Company shall deliver a written notice
(each, an “Interest Election Notice”)
to each holder of the Notes on or prior to the Interest Notice Due Date (the
date such notice is delivered to all of the holders, the “Interest Notice Date”) which notice (1)
either (A) confirms that Interest to be paid on such Interest Date shall be
paid entirely in Interest Shares or (B) elects to pay Interest as Cash Interest
or a combination of Cash Interest and Interest Shares and specifies the amount
of Interest that shall be paid as Cash Interest and the amount of Interest, if
any, that shall be paid in Interest Shares and (2) subject to the penultimate
sentence in this Section 2(a), certifies that there has been no Equity Conditions
Failure; provided, however, that the Company shall not be entitled to pay any
portion of Interest on an Interest Date in Interest Shares in excess of the
Holder Pro Rata Amount of the applicable Volume Limitation.  If any portion of Interest for a particular
Interest Date shall be paid in Interest Shares, then the Company shall pay to
the Holder, in accordance with Section 2(b), a number of shares of Common Stock
equal to (x) the amount of Interest payable on the applicable Interest Date in
Interest Shares divided by (y) the applicable Interest Conversion Price.  Interest to be paid on an Interest Date in
Interest Shares shall be paid in a number of fully paid and nonassessable
shares of Common Stock (rounded to the nearest whole share).  If the Equity Conditions are not satisfied as
of the Interest Notice Due Date, then unless the Company has elected to pay
such Interest in cash, the Interest Election Notice shall indicate that unless
the Holder and the holders of the Other Notes waive the Equity Conditions, the
Interest shall be paid in cash.  If the
Equity Conditions were satisfied as of the Interest Notice Due Date but the
Equity Conditions are no longer satisfied at any time prior to the Interest
Date, the Company shall provide the Holder and the holders of the Other Notes a
subsequent notice to that effect indicating that unless the Holder and the
holder of the Other Notes waive the Equity Conditions prior to the Interest
Date, the Interest shall be paid in cash on the Interest Date.

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(b)           When any Interest Shares are to be paid on an Interest
Date, the Company shall (i) (A) provided that the Company’s transfer agent (the
“Transfer Agent”) is participating
in the Depository Trust Company (“DTC”)
Fast Automated Securities Transfer Program and such action is not prohibited by
applicable law or regulation or any applicable policy of DTC, credit such
aggregate number of Interest Shares to which the Holder shall be entitled to
the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system, or (B) if the foregoing shall not apply,
issue and deliver on the applicable Interest Date, to the address set forth in
the register maintained by the Company for such purpose pursuant to the
Securities Purchase Agreement or to such address as specified by the Holder in
writing to the Company at least two (2) Business Days prior to the applicable
Interest Date, a certificate, registered in the name of the Holder or its designee,
for the number of Interest Shares to which the Holder shall be entitled and
(ii) with respect to each Interest Date, pay to the Holder, in cash by wire
transfer of immediately available funds, the amount of any Cash Interest.  Notwithstanding the foregoing, the Company
shall not be entitled to pay Interest in Interest Shares and shall be required
to pay such Interest in cash as Cash Interest on the applicable Interest Date
if, unless waived in writing by the Holder and the holders of the Other Notes, there
has been an Equity Conditions Failure.

(c)           From and after the occurrence and
during the continuance of an Event of Default, the Interest Rate shall be
increased to fifteen percent (15.0%) per annum. 
In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated and unpaid
at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default.  The Company shall pay any and
all taxes that may be payable with respect to the issuance and delivery of
Interest Shares; provided that the Company shall not be required to pay
any tax that may be payable in respect of the issuance and delivery of any
Interest Shares to any Person other than the Holder or with respect to any
income tax due by the Holder with respect to such Interest Shares.

(3)           CONVERSION OF NOTES.  This Note shall be convertible into shares of
the Company’s common stock, par value $0.001 per share (the “Common Stock”), on the terms and conditions set forth in
this Section 3.

(a)           Conversion Right. 
Subject to the provisions of Section 3(d), at any time or times on or
after the Issuance Date, the Holder shall be entitled to convert any portion of
the outstanding and unpaid Conversion Amount (as defined below) into fully paid
and nonassessable shares of Common Stock in accordance with Section 3(c), at
the Conversion Rate (as defined below). 
The Company shall not issue any fraction of a share of Common Stock upon
any conversion.  If the issuance would
result in the issuance of a fraction of a share of Common Stock, the Company
shall round such fraction of a share of Common Stock up to the nearest whole
share.  The Company shall pay any and all
transfer, stamp and similar taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion Amount;
provided that the Company shall not be required to pay any tax that may
be payable in respect of the issuance and delivery of Common Stock to any
Person other than the Holder or with respect to any income tax due by the
Holder with respect to such Common Stock.

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(b)           Conversion Rate. 
The number of shares of Common Stock issuable upon conversion of any
Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x)
such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).

(i)            “Conversion Amount” means the
portion of the Principal to be converted, redeemed or otherwise with respect to
which this determination is being made.

(ii)           “Conversion Price” means, as of
any Conversion Date (as defined below) or other date of determination, $0.65
subject to adjustment as provided herein.

(c)           Mechanics of Conversion.

(i)            Optional Conversion.  To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 11:59 p.m., New York time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iii), surrender
this Note to a common carrier for delivery to the Company as soon as
practicable on or following such date (or an indemnification undertaking with respect
to this Note in the case of its loss, theft or destruction).  Accrued and unpaid Interest on any
Conversion Amount being converted up to and including the Conversion Date shall
be payable to the record holder of this Note on the Share Delivery Date (as
defined below) in Interest Shares so long as there has been no Equity
Conditions Failure; provided however, that the Company may, at its option
following notice to the Holder, pay Interest on any Share Delivery Date as Cash
Interest.  On or before the first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation (the “Conversion
Confirmation”) of receipt of such Conversion Notice to the
Holder and the Company’s Transfer Agent. 
Any Conversion Confirmation delivered by the Company shall (1) confirm
that any accrued and unpaid Interest on such Conversion Amount up to and
including the Conversion Date shall be paid on the Share Delivery Date in
Interest Shares or state that Interest shall be paid as Cash Interest and (2)
if the Company shall pay such Interest in Interest Shares, certify that there
has been no Equity Conditions Failure.  If Interest
shall be paid in Interest Shares, then the Company shall pay such Interest to
the Holder on the Share Delivery Date by delivering a number of shares of
Common Stock equal to (x) the amount of Interest payable on the applicable
Share Delivery Date divided by (y) the applicable Interest Conversion Price. On or before
the (3rd) third Trading Day following the date of delivery of a
Conversion Notice (the “Share Delivery  Date”), the Company
shall (I) (X) provided that the Transfer Agent is participating in the DTC Fast
Automated Securities Transfer Program, credit such aggregate number of shares
of Common Stock (including any Interest Shares) to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock (including any Interest Shares) to which the Holder shall be
entitled and (II) if the Company has elected to pay Cash Interest, pay to the
Holder in cash an amount equal to the accrued and unpaid Interest on the
Conversion Amount up to and including the Conversion Date.  If this Note is physically

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surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Trading Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 18(d)) representing the
outstanding Principal not converted.  The
Person or Persons entitled to receive the shares of Common Stock issuable upon
a conversion of this Note shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date.

(ii)           Company’s Failure to Timely Convert.  If the Company shall fail to issue a certificate to
the Holder or credit the Holder’s balance account with DTC, as applicable, for
the number of shares of Common Stock to which the Holder is entitled upon
conversion of any Conversion Amount on or prior to the date which is three (3)
Trading Days after the Conversion Date other than pursuant to limitations in
Section 3(d) hereof (a “Conversion Failure”), and if on or after such third (3rd) Trading
Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by the Holder of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within three (3)
Business Days after the Holder’s written request and in the Holder’s
discretion, either (A) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage commissions and other out of
pocket expenses, if any) for the shares of Common Stock so purchased (the “Buy-In
Price”), at which point the Company’s obligation to issue and deliver such
certificate or to credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon such Holder’s
conversion of any Conversion Amount shall terminate, or (B) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such Common Stock and pay cash to the Holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (1) such number of shares of
Common Stock, times (2) the Closing Bid Price on the Conversion Date.

(iii)          Registration; Book-Entry.  The Company shall maintain a register (the “Register”) for the recordation of the names
and addresses of the holders of each Note and the principal amount of the Notes
held by such holders (the “Registered Notes”).  The entries in the Register shall be
conclusive and binding for all purposes absent manifest error.  The Company and the holders of the Notes
shall treat each Person whose name is recorded in the Register as the owner of
a Note for all purposes, including, without limitation, the right to receive
payments of principal and interest hereunder, notwithstanding notice to the
contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt
of a request to assign or sell all or part of any Registered Note by a Holder,
the Company shall record the information contained therein in the Register and
issue one or more new Registered Notes in the same aggregate principal amount
as the principal amount of the surrendered Registered Note to the designated
assignee or transferee pursuant to Section 18. 
Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company
unless (A) the full Principal amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
this Note upon physical surrender of this Note. 
The Holder and the Company shall

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maintain records showing the Principal, Interest and
Late Charges, if any, converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holder and the Company, so as
not to require physical surrender of this Note upon conversion.

(iv)          Pro Rata Conversion; Disputes.  In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from each holder of Notes electing to have Notes converted on such date
a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. 
In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 23.

(d)           Limitations on Conversions.

(i)            Beneficial Ownership.  Notwithstanding any provision to the contrary
contained in this Note or any other Transaction Document, the Company shall not
effect any conversion of this Note, and the Holder of this Note shall not have
the right to convert any portion of this Note pursuant to Section 3(a) or
otherwise pursuant to this Note, to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates) would beneficially
own in excess of 4.99% (the “Maximum Percentage”) of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Note with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Note beneficially owned by the Holder
or any of its affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any Other Notes or warrants) subject to a limitation on conversion
or exercise analogous to the limitation contained herein beneficially owned by
the Holder or any of its affiliates. 
Except as set forth in the preceding sentence, for purposes of this
Section 3(d)(i), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the “1934
Act”).  For purposes of this Section
3(d)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company’s most recent Form 10-K, Form 10-KSB, Form 10-Q,
Form 10-QSB, Form 8-K or other public filing with the SEC, as the case may be
(y) a more recent public announcement by the Company or (z) any other notice by
the Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding.  For any reason at any
time, upon the written or oral request of the Holder, the Company shall within
one (1) Business Day confirm orally and in writing to the Holder the number of
shares of Common Stock then outstanding. 
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Company,

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including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock
was reported.

(ii)           Principal Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon conversion of this Note if the issuance of such
shares of Common Stock would exceed the aggregate number of shares of Common
Stock which the Company may issue upon conversion or exercise, as applicable,
of the Notes and Warrants without breaching the Company’s obligations under the
rules or regulations of any applicable Eligible Market (the “Exchange Cap”), except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by the
applicable rules of such Eligible Market for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Required Holders.  Until such approval or written opinion is
obtained, no initial purchaser of the Notes pursuant to the Securities Purchase
Agreement (each, a “Purchaser” and
collectively the “Purchasers”) shall be
issued in the aggregate, upon conversion or exercise or otherwise, as
applicable, of the Notes or the Warrants, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to such Purchaser
pursuant to the Securities Purchase Agreement on the Closing Date and the
denominator of which is the aggregate principal amount of all Notes and Warrants
issued to all of the Purchasers pursuant to the Securities Purchase Agreement
on the Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”).  In the event that any
Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the
transferee shall be allocated a pro rata portion of such Purchaser’s Exchange
Cap Allocation, and the restrictions of the prior sentence shall apply to such
transferee with respect to the portion of the Exchange Cap Allocation allocated
to such transferee.  In the event that
any holder of Notes shall convert all of such holder’s Notes into a number of
shares of Common Stock which, in the aggregate, is less than such holder’s
Exchange Cap Allocation, then the difference between such holder’s Exchange Cap
Allocation and the number of shares of Common Stock actually issued to such
holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.

(4)           RIGHTS UPON EVENT OF DEFAULT.

(a)           Event of Default. 
Each of the following events shall constitute an “Event of Default”:

(i)            the failure of the applicable Registration Statement (as
defined in the Registration Rights Agreement) required to be filed pursuant to
the Registration Rights Agreement to be declared effective by the SEC on or
prior to the date that is seventy (70) days after the applicable Effectiveness
Deadline (as defined in the Registration Rights Agreement), or, while the
applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness
of the applicable Registration Statement lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to any holder of
the Notes for sale of all of such holder’s Registrable Securities (as defined
in the Registration Rights Agreement) subject to the

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applicable Registration Statement in accordance with
the terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of fifteen (15) consecutive days or for
more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

(ii)           the suspension from trading or failure of the Common Stock
to be listed on an Eligible Market for a period of five (5) consecutive Trading
Days or for more than an aggregate of ten (10) Trading Days in any 365-day
period;

(iii)          the Company’s (A) failure to cure a Conversion Failure by
delivery of the required number of shares of Common Stock within ten (10)
Business Days after the applicable Conversion Date or (B) notice, written or
oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is
tendered in accordance with the provisions of the Notes, other than pursuant to
Section 3(d);

(iv)          at any time following the tenth (10th)
consecutive Business Day that the Holder’s Authorized Share Allocation is less
than the number of shares of Common Stock that the Holder would be entitled to
receive upon a conversion of the full Conversion Amount of this Note (without
regard to any limitations on conversion set forth in Section 3(d) or
otherwise);

(v)           the Company’s failure to pay to the Holder any amount of
Principal, Redemption Price, Interest, Late Charges or other amounts when and
as due under this Note or any other Transaction Document (as defined in the
Securities Purchase Agreement) to which the Holder is a party, except, in the case
of a failure to pay Interest, Late Charges and other amounts when and as due,
in which case only if such failure continues for a period of at least five (5)
Business Days;

(vi)          any default under,
redemption of or acceleration prior to maturity of any Indebtedness of the
Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) which Indebtedness, individually or in the
aggregate, exceeds $250,000, other than with respect to any Other Notes;

(vii)         the Company or any of its Subsidiaries, pursuant to or
within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
state law for the relief of debtors (collectively, “Bankruptcy Law”), (A)
commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a
receiver, trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a general assignment for the benefit of its creditors or
(E) admits in writing that it is generally unable to pay its debts as they
become due;

(viii)        a court of competent jurisdiction enters
an order or decree under any Bankruptcy Law that (A) is for relief against the
Company or any of its Subsidiaries in an involuntary case, (B) appoints a
Custodian of the Company or any of its Subsidiaries for all or substantially
all of its property or (C) orders the liquidation of the Company or any of its

8

Subsidiaries and, in each case, such order or decree
is not dismissed or stayed within thirty (30) days of such entry;

(ix)           a final judgment or judgments for the payment of money
aggregating in excess of $250,000 are rendered against the Company or any of
its Subsidiaries and which judgments are not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $250,000 amount
set forth above so long as the Company provides the Holder a written statement
from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to the Holder) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;

(x)            the Company breaches any representation, warranty,
covenant or other term or condition of any Transaction Document, except, in the
case of a breach of a covenant or other term or condition of any Transaction
Document which is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days; provided that in the case of the
failure of the Company timely to file a Registration Statement required to be
filed pursuant to the Registration Rights Agreement, only if such failure
continues for seventy (70) days after the deadline for filing such Registration
Statement under the Registration Rights Agreement;

(xi)           any breach or failure in any respect to comply with
Section 14 of this Note, other than a breach of, or failure to comply with,
Section 14(c) with respect to a Lien for an amount less than $20,000 on
property or assets of the Company which Lien is removed within thirty (30) days
of the imposition thereof;

(xii)          any Event of Default (as defined in the Other Notes) occurs
with respect to any Other Notes; or

(xiii)         the SEC commences a formal
investigation or enforcement action of the Company and/or its Subsidiaries, or
a formal investigation or enforcement action of any of the then current
officers or directors of the Company that is related to the Company, its
Subsidiaries and/or the Common Stock or enters a consent or other order against
the Company and/or its Subsidiaries or any of the then current officers or
directors of the Company that is related to the Company, its Subsidiaries
and/or the Common Stock.

(b)           Redemption Right. 
Upon the occurrence of an Event of Default, the Company shall within one
(1) Business Day deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder.  At any
time after the earlier of the Holder’s receipt of an Event of Default Notice
and the Holder becoming aware of an Event of Default, the Holder may require
the Company to redeem all or any portion of this Note by delivering written
notice thereof (the “Event of Default Redemption Notice”) to the Company, which Event of Default Redemption Notice shall
indicate the portion of this Note the Holder is electing to redeem and, in the
case the Holder has not received an Event of Default Notice, the

9

Event of Default of which the Holder has become
aware; provided, however, that in connection with any Event of Default under
Section 4(a)(vi) hereunder, the Holder shall only have the right to require
redemption by the Company until a date that is thirty (30) days following the
day the default under such Indebtedness has been cured or is no longer
continuing or, in the event of any acceleration that has been rescinded, for
thirty (30) days after the date of such acceleration.  Each portion of this Note subject to
redemption by the Company pursuant to this Section 4(b) shall be redeemed by
the Company at a price equal to the greater of (i) the product of (A) the sum of the
Conversion Amount to be redeemed together with accrued and unpaid Interest with
respect to such Conversion Amount and accrued and unpaid Late Charges, if any,
with respect to such Conversion Amount and Interest and (B) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such
sum of the Conversion Amount together with accrued and unpaid Interest with
respect to such Conversion Amount and accrued and unpaid Late Charges, if any,
with respect to such Conversion Amount and Interest  in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the product
of (1) the Equity Value Redemption Premium and (2) the greater of (x) the
Closing Sale Price of the Common Stock on the date immediately preceding such
Event of Default, (y) the Closing Sale Price of the Common Stock on the date
immediately after such Event of Default and (z) the Closing Sale Price of the
Common Stock on the date the Holder delivers the Event of Default Redemption
Notice (the “Event of Default Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.  To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments.  The parties
hereto agree that in the event of the Company’s redemption of any portion of
the Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. 
Accordingly, any Redemption Premium due under this Section 4(b) is intended
by the parties to be, and shall be deemed, a reasonable estimate of the
Holder’s actual loss of its investment opportunity and not as a penalty.

(c)           Sale of Assets. 
In connection with any redemption required by Section 4(b) upon an Event
of Default of the type described in Section 4(a)(xiii) hereof, in the event the
Company does not have sufficient funds to pay the applicable Event of Default
Redemption Price, the Required Holders may require the Company to sell or
dispose of certain property or assets of the Company and its Subsidiaries, such
sale to be consummated for a sale price approved by the Required Holders.  Any such notice by the Required Holders shall
be made in writing and shall specify the property or assets such holders of
Notes are requiring to be sold.

(5)           RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF
CONTROL.

(a)           Assumption.  The Company shall not enter into or be party to a Fundamental
Transaction unless (i)  the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a) pursuant to written
agreements in form and substance reasonably satisfactory to the Required Holders
and approved by the Required Holders prior to

10

 

 

 

such Fundamental Transaction, including agreements
to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Notes, including,
without limitation, having a principal amount and interest rate equal to the
principal amounts and the interest rates of the Notes then outstanding held by
such holder, having similar conversion rights and having similar ranking to the
Notes, and satisfactory to the Required Holders and
(ii)  the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market (a “Public Successor Entity”).  Upon
the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company
under this Note with the same effect as if such Successor Entity had been named
as the Company herein.  Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon conversion or
redemption of this Note at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the
Company’s Common Stock (or other securities, cash, assets or other
property) issuable upon the conversion or
redemption of the Notes prior to such Fundamental Transaction, such shares of the publicly traded common stock (or
their equivalent) of the Successor Entity (including its Parent Entity), as
adjusted in accordance with the provisions of this Note.  The provisions of this Section shall
apply similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations on the conversion or redemption of
this Note.

(b)           Redemption Right. 
No sooner than fifteen (15) days nor later than ten (10) days prior to
the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of Control Notice”). 
At any time during the period beginning after the Holder’s receipt of a
Change of Control Notice and ending twenty (20) Trading Days after the date of
the consummation of such Change of Control, the Holder may require the Company
to redeem all or any portion of this Note by delivering written notice thereof
(“Change of
Control Redemption Notice”)
to the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in cash
at a price equal to the greater of (i) 150% of the sum of (x) the Conversion
Amount being redeemed and (y) the amount of any accrued but unpaid Interest on
such Conversion Amount being redeemed and accrued and unpaid Late Charges, if
any, with respect to such Conversion Amount and Interest through the date of
such redemption payment and (ii) the product of (x) the Equity Value Redemption
Premium and (y) the sum of (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the
aggregate cash consideration and the aggregate cash value of any non-cash
consideration per Common Share to be paid to the holders of the Common Shares
upon consummation of the Change of Control (any such non-cash consideration
consisting of marketable securities to be valued at the higher of the Closing
Sale Price of such securities as of the Trading Day immediately prior to, the
Closing Sale Price as of the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price of
the Common Stock immediately prior to the public announcement of such proposed
Change of Control) by (II) the Conversion Price plus (2) the amount of any
accrued but unpaid

11

Interest on such Conversion Amount being redeemed
and accrued and unpaid Late Charges, if any, with respect to such Conversion
Amount and Interest through the date of such redemption payment, (the “Change of Control Redemption Price”).  Redemptions required by this Section 5 shall
be made in accordance with the provisions of Section 12 and shall have priority
to payments to stockholders in connection with a Change of Control.  To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments. 
Notwithstanding anything to the contrary in this Section 5, but subject
to Section 3(d), until the Change of Control Redemption Price (together with
any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.  The parties hereto agree that
in the event of the Company’s redemption of any portion of the Note under this
Section 5(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder.  Accordingly, any Change
of Control redemption premium due under this Section 5(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

(6)           RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER
CORPORATE EVENTS.

(a)           Purchase Rights. 
If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
“Purchase
Rights”), then the
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which the Holder could have acquired if
the Holder had held the number of shares of Common Stock acquirable upon
complete conversion of this Note (without taking into account any limitations
or restrictions on the convertibility of this Note) immediately before the date
on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.

(b)           Other Corporate Events.  In addition to and not in substitution for
any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for shares of
Common Stock (a “Corporate Event”),
the Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, at the
Holder’s option, (i) in addition to the shares of Common Stock receivable upon
such conversion, such securities or other assets to which the Holder would have
been entitled with respect to such shares of Common Stock had such shares of
Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the
convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets
received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion rights
for the form of such consideration (as

12

opposed to shares of Common Stock) at a conversion
rate for such consideration commensurate with the Conversion Rate.  Provision made pursuant to the preceding sentence
shall be in a form and substance satisfactory to the Required Holders.  The provisions of this Section shall apply
similarly and equally to successive Corporate Events and shall be applied
without regard to any limitations on the conversion or redemption of this Note.

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a)           Adjustment of Conversion Price upon Issuance of Common
Stock.  If and whenever on or after
the Closing Date, the Company issues or sells, or in accordance with this
Section 7(a) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding for purposes of the provisions of
this Section 7(a) shares of Common Stock issued or sold or deemed to have been
issued or sold by the Company in connection with any Excluded Securities) for a
consideration per share (the “New Issuance Price”)
less than a price (the “Applicable Price”)
equal to the Conversion Price in effect immediately prior to such issue or sale
or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then immediately after such
Dilutive Issuance the Conversion Price then in effect shall be reduced to an
amount equal to the New Issuance Price. 
For purposes of determining the adjusted Conversion Price under this
Section 7(a), the following shall be applicable:

(i)            Issuance of Options.  If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share.  For purposes of this Section 7(a)(i), the “lowest
price per share for which one share of Common Stock is issuable upon the exercise
of any such Option or upon conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option” shall be equal to
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to any one share of Common Stock upon granting or
sale of the Option, upon exercise of the Option and upon conversion or exchange
or exercise of any Convertible Security issuable upon exercise of such
Option.  No further adjustment of the
Conversion Price shall be made upon the actual issuance of such share of Common
Stock or of such Convertible Securities upon the exercise of such Options or
upon the actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.

(ii)           Issuance of Convertible Securities.  If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one share
of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share.  For the purposes
of this Section 7(a)(ii), the “lowest price per share for which one share of

13

Common Stock is issuable
upon such conversion or exchange or exercise” shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange or exercise of such
Convertible Security.  No further adjustment
of the Conversion Price shall be made upon the actual issuance of such share of
Common Stock upon conversion or exchange or exercise of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is
made upon exercise of any Options for which adjustment of the Conversion Price
had been or are to be made pursuant to other provisions of this Section 7(a),
no further adjustment of the Conversion Price shall be made by reason of such
issue or sale.

(iii)          Change in Option Price or Rate of
Conversion.  If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock increases or decreases at any
time, the Conversion Price in effect at the time of such increase or decrease
shall be adjusted to the Conversion Price which would have been in effect at
such time had such Options or Convertible Securities provided for such
increased or decreased purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold.  For purposes of this Section 7(a)(iii),
if the terms of any Option or Convertible Security that was outstanding as of
the Closing Date are increased or decreased in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such increase or
decrease.  No adjustment shall be made if
such adjustment would result in an increase of the Conversion Price then in
effect.  A change that permits the holder
of an Option or Convertible Security to utilize a cashless exercise feature
shall not be deemed to decrease the consideration payable by the holder solely
by reason of the fact that the cashless exercise feature would result in a
reduction in cash consideration receivable by the Company.

(iv)          Calculation of Consideration
Received.  In case any Option is
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
will be deemed to have been issued for the difference of (x) the aggregate fair
market value of such Options and other securities issued or sold in such
integrated transaction, less (y) the fair market value of the securities other
than such Option, issued or sold in such transaction, and the other securities
issued or sold in such integrated transaction will be deemed to have been
issued or sold for the balance of the consideration received by the
Company.  If any shares of Common Stock
are issued or sold, or deemed to have been issued or sold, or provided for in
an Option or Convertible Security to be issued or sold for cash, the
consideration received or to be received therefor will be deemed to be the net
amount received by the Company therefor. 
If any shares of Common Stock are issued or sold, or provided for in an
Option or Convertible Security to be issued or sold for a consideration other
than cash, the amount of the consideration other than cash received or to be
received by the

14

Company will be the fair
value of such consideration, except where such consideration consists of
publicly traded securities, in which case the amount of consideration received
by the Company will be the Closing Sale Price of such securities on the date of
receipt.  If any shares of Common Stock
are issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such shares of
Common Stock.  Notwithstanding the
provisions of this Section 7(a)(iv), the purchase price provided for in an
Option, or the additional consideration, if any, paid or payable upon the
issue, conversion, exercise or exchange of any Convertible Securities, to the
extent paid or payable or converted or exercised pursuant to a cashless
exercise feature, shall not be deemed to be an issuance or sale of Common Stock
for consideration other than cash.  The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the Required Holders.  If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five
(5) Business Days after the tenth (10th) day following the Valuation
Event by an independent, reputable appraiser jointly selected by the Company
and the Required Holders.  The
determination of such appraiser shall be final and binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne by the Company.

(v)           Record Date.  If the Company takes a record of the holders
of Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date of
the issue or sale of the Common Stock deemed to have been issued or sold upon
the declaration of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be.

(b)           Adjustment of Conversion Price upon Subdivision or Combination
of Common Stock.  If the Company at
any time on or after the Closing Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision will be proportionately
reduced.  If the Company at any time on
or after the Closing Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.

(c)           Other Events. 
If any event occurs of the type contemplated by the provisions of this
Section 7 but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or
other rights with equity features), then the Company’s Board of Directors will
make an appropriate adjustment in the Conversion Price so as to protect the
rights of the Holder under this Note; provided that no

15

such adjustment will increase the Conversion Price
as otherwise determined pursuant to this Section 7.

(d)           Voluntary Adjustment by Company.  The Company may at any time during the
term of this Note reduce the then current Conversion Price to any amount and
for any period of time deemed appropriate by the Board of Directors.

(8)           RIGHT OF REDEMPTION BY HOLDER AND
COMPANY.

(a)           Holder’s Right of Mandatory Redemption.  Within fifteen (15) days after each
Triggering Date, the Holder shall have the right, in its sole discretion, with
the consent of the Required Holders as provided hereafter, to require that the
Company redeem a Principal amount of this Note equal to one-third (1/3) of the
Original Principal Amount of this Note plus accrued and unpaid Interest and
Late Charges, if any,
on such Principal and Interest (such amount, the “Holder Redemption Amount” and such election, the “Holder Optional Redemption”), by delivering written notice
thereof (such notice, a “Holder Optional
Redemption Notice”) no later than the fifteenth (15th) day after the
applicable Triggering Date (the date the Holder delivers such notice, the “Holder Optional Redemption Notice Date”).  The Company shall immediately, but no later
than one (1) Business Day after receiving the Holder Optional Redemption
Notice, forward to the holders of the Other Notes  by facsimile a copy of the Holder Optional
Redemption Notice and shall indicate (i) that if such holder  does not deliver written notice to the
Company within three (3) Business Days of receipt of such notice objecting to
the Holder Optional Redemption, such holder shall be deemed to have given its
consent to such Holder Optional Redemption and (ii) that if the consent of the
Required Holders is obtained with respect to such Holder Optional
Redemption,  the Company’s right to
redeem the Full Company Redemption Amount under Section 8(b) shall be
triggered.  The Holder agrees that it
will be deemed to have given its consent to any Holder Optional Redemption it
has initiated.  The Holder further
agrees, in the case of a Holder Optional Redemption initiated by any holder of
the Other Notes, that it will be deemed to have given its consent thereto if
the Holder fails to deliver its objection notice to the Company within three
(3) Business Days of receipt of such notice from the Company.  Within fifteen (15) days after the Holder
Optional Redemption Notice Date, the Company shall deliver to the Holder a
written notice (a “Company Redemption Notice”
and the date the Holder receives such written notice, the “Company Redemption Notice Date”) which
notice shall either (i) state that the Required Holders have not consented to
the Holder Optional Redemption, in which case the Holder Optional Redemption
and the Holder Optional Redemption Notice shall be null and void and of no
further force and effect or (ii) state that the Required Holders have consented
or are deemed to have consented to the Holder Optional Redemption, in which
case the Company Redemption Notice shall (A) state the date on which the Holder
Optional Redemption shall occur (the “Holder Optional Redemption
Date”) which date shall be no later than forty-five (45) days after
the Holder Optional Redemption Notice Date and (B) confirm (x) that the Company
shall redeem the Holder Redemption Amount at the Holder Optional Redemption
Price or (y) that the Company is making a Company Full Mandatory Redemption, in
which case, redemption of the Holder Redemption Amount shall be governed by the
terms of Section 8(b) below.  Each
Company Redemption Notice shall be irrevocable. 
Notwithstanding anything to the contrary in this Section 8(a), until the
Holder Optional Redemption Price is paid in full, the Holder Redemption Amount
may be converted, in whole or in part, by the Holder into shares of

16

Common Stock pursuant to Section 3.  All Conversion Amounts converted by the
Holder after the Company Redemption Notice Date shall reduce the Holder
Redemption Amount required to be redeemed on the applicable Holder Optional
Redemption Date.  Holder Optional
Redemptions made pursuant to this Section 8(a) shall be made in accordance with
Section 12.

(b)           Company’s Right of Mandatory Redemption.

(i)            Provided that there has been no
Equity Conditions Failure, the Company shall have the right to elect to redeem
(a “Company Partial Mandatory Redemption”)
a Principal amount of this Note equal to up to one-third (1/3) of the Original
Principal Amount of this Note plus accrued and unpaid Interest and Late
Charges, if any, on
such Principal and Interest (such elected amount, the “Partial Company Redemption Amount”) at the
Partial Company Redemption Price.  If the
Company elects to make the Company Partial Mandatory Redemption under this
clause (i), the Company must make the same election with respect to each of the
Other Notes (and analogous provisions under the Other Notes).

(ii)           Provided that no Event of Default has
occurred and is continuing and the Holder has elected to exercise its Holder
Optional Redemption pursuant to Section 8(a) above, then the Company shall have
the right to redeem (a “Company Full
Mandatory Redemption”) an amount equal to 100% of the outstanding
Principal of this Note, accrued and unpaid Interest and Late Charges, if any, on such Principal and Interest on this Note
plus any other amounts due and owing under this Note in its entirety (the “Full Company Redemption Amount,” and each
of the Partial Company Redemption Amount and the Full Company Redemption
Amount, a “Company Redemption
Amount”) at the Company Mandatory Redemption Price.

(iii)          The Company may exercise its
redemption rights under clause (i) or (ii) of this Section 8(b) by delivering a
written notice thereof no later than the fifteenth (15th) day after (A) the
applicable Triggering Date in the case of a Company Partial Mandatory
Redemption and (B) the Holder Optional Redemption Notice Date, in the case of a
Company Full Mandatory Redemption by confirmed facsimile and overnight courier
to all, but not less than all, of the holders of the Notes (the “Company Mandatory Redemption Notice” and
the date such notice is delivered to all the holders is referred to as the “Company Mandatory Redemption Notice Date”).  The Company Mandatory Redemption Notice shall
be irrevocable.  The Company Mandatory
Redemption Notice shall state (A) the date on which the Company Partial
Mandatory Redemption or Company Full Mandatory Redemption, as applicable, shall
occur (the “Company Mandatory Redemption Date”)
which date shall not be less than forty-five (45) days after the Company
Mandatory Redemption Notice Date and not more than a number of days as agreed
to by the Required Holders, in the case of a Company Partial Mandatory
Redemption and the Holder, in the case of a Company Full Mandatory Redemption,
(B) (x) that, pursuant to Section 8(b)(i) hereof, the Company elects to redeem
the Partial Company Redemption Amount at the Partial Company Redemption Price
or (y) that, pursuant to Section 8(b)(ii) hereof, (I) that the Company elects
to redeem the Full Company Redemption Amount at the Company Mandatory
Redemption Price on the Company Mandatory Redemption Date and (II) that in
connection with the Company Full Mandatory Redemption, the Series B Warrants
shall become exercisable as of the Company Mandatory Redemption Date in
accordance with their terms. 
Notwithstanding anything to the contrary in this Section 8(b), until

17

the Partial Company
Redemption Price or the Company Mandatory Redemption Price, as the case may be,
is paid in full, the Company Redemption Amount may be converted, in whole or in
part, by the Holder into shares of Common Stock pursuant to Section 3.  All Conversion Amounts converted by the
Holder after the Company Mandatory Redemption Notice Date shall reduce the
Company Redemption Amount required to be redeemed on the Company Mandatory
Redemption Date.  Redemptions made
pursuant to this Section 8(b) shall be made in accordance with Section 12.

(9)           SECURITY.  This Note and the Other Notes are secured to
the extent and in the manner set forth in the Security Documents (as defined in
the Securities Purchase Agreement).

(10)         NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation, Bylaws
or through any reorganization, transfer of assets, consolidation, merger,
scheme of arrangement, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Note, and will at all times in good faith carry out all of
the provisions of this Note and take all action as may be required to protect
the rights of the Holder of this Note.

(11)         RESERVATION OF AUTHORIZED SHARES.

(a)           Reservation. 
Immediately on and after the Closing Date, the Company shall reserve out
of its authorized and unissued a number of shares of Common Stock for each of
the Notes equal to 130% of the Conversion Rate with respect to the Conversion
Amount of each such Note as of the Closing Date and, for so long thereafter as
any of the Notes are outstanding, the Company shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 130% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding(without regard to
any limitations on conversions) (such applicable amount, the “Required Reserve Amount”). 
The initial number of shares of Common Stock reserved for conversions of
the Notes and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Notes based on the principal amount
of the Notes held by each holder at the 2007 Closing (as defined in the
Securities Purchase Agreement) or increase in the number of reserved shares, as
the case may be (the “Authorized Share Allocation”).  In the event that a
holder shall sell or otherwise transfer any of such holder’s Notes, each
transferee shall be allocated a pro rata portion of such holder’s Authorized
Share Allocation.  Any shares of Common
Stock reserved and allocated to any Person which ceases to hold any Notes shall
be allocated to the remaining holders of Notes, pro rata based on the principal
amount of the Notes then held by such holders.

(b)           Insufficient Authorized Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall immediately
take all action necessary to increase the Company’s authorized shares of Common
Stock to an amount

18

sufficient to allow the Company to reserve the
Required Reserve Amount for the Notes then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than sixty (60) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock.  In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.

(12)         REDEMPTIONS.

(a)           Mechanics. 
The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt
of the Holder’s Event of Default Redemption Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received at least one (1) Business Day prior to the consummation of such Change
of Control and within five (5) Business Days after the Company’s receipt of
such notice otherwise.  The Company
shall deliver (i) the applicable Company Mandatory Redemption Price to the
Holder on the Company Mandatory Redemption Date, and (ii) subject to the
provisions of Section 8, the applicable Holder Optional Redemption Price on the
applicable Holder Optional Redemption Date. 
In the event of a redemption of less than all of the Conversion Amount
of this Note, the Company shall promptly cause to be issued and delivered to
the Holder a new Note (in accordance with Section 18(d)) representing the
outstanding Principal which has not been redeemed.  In the event that the Company does not pay
the applicable Redemption Price to the Holder within the time period required,
at any time thereafter and until the Company pays such unpaid Redemption Price
in full, the Holder shall have the option, in lieu of redemption, to require
the Company to promptly return to the Holder all or any portion of this Note
representing the Conversion Amount that was submitted for redemption and for
which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid.  Upon the Company’s
receipt of such notice, (x) the applicable Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 18(d)) to the
Holder representing the sum of such Conversion Amount to be redeemed together
with accrued and unpaid Interest with respect to such Conversion Amount and
accrued and unpaid Late Charges with respect to such Conversion Amount and
Interest and (z) the Conversion Price of this Note or such new Notes shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the applicable Redemption Notice is voided and (B) the lowest Closing Bid
Price of the Common Stock during the period beginning on and including the date
on which the applicable Redemption Notice is delivered to the Company and
ending on and including the date on which the applicable Redemption Notice is
voided.  The Holder’s delivery of a
notice voiding a Redemption Notice and exercise of its rights following such
notice shall not affect the Company’s obligations to make any payments of Late
Charges which have accrued prior to the date of such notice with respect to the
Conversion Amount subject to such notice.

19

(b)           Redemption by Other Holders.  Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences
described in Section 4(b), Section 5(b) or Section 8 (each, an “Other Redemption Notice”), the Company shall immediately, but
no later than one (1) Business Day after its receipt thereof, forward to the
Holder by facsimile a copy of such notice. 
If the Company receives a Redemption Notice and one or more Other
Redemption Notices, during the seven (7) Business Day period beginning on and
including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s Redemption Notice and ending on and including the date
which is three (3) Business Days after the Company’s receipt of the Holder’s
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Redemption Notice and such Other
Redemption Notices received during such seven (7) Business Day period, then the
Company shall redeem a pro rata amount from each holder of the Notes (including
the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received
by the Company during such seven (7) Business Day period.

(13)         VOTING RIGHTS. 
The Holder shall have no voting rights as the holder of this Note,
except as required by law, including, but not limited to, the Oklahoma General
Corporation Act, and as expressly provided in this Note.

(14)         COVENANTS.  So
long as this Note is outstanding:

(a)           Rank.      All
payments due under this Note shall rank pari
passu with all Other Notes and no other Indebtedness of the Company
and its Subsidiaries shall be senior to the Indebtedness of the Company and its
Subsidiaries evidenced by this Note and the Other Notes other than Indebtedness
of any subsidiary of the Company that is non-recourse to the Company and any
other Subsidiary.

(b)           Incurrence of Indebtedness.  The Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than the Indebtedness evidenced by this Note and the Other Notes and
other Permitted Indebtedness.

(c)           Existence of Liens.  The Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by the Company or
any of its Subsidiaries (collectively, “Liens”) other
than Permitted Liens.

(d)           Restricted Payments.  The Company shall not, and
the Company shall not permit any of its Subsidiaries to, directly or
indirectly, redeem, defease, repurchase, repay or make any payments in respect
of, by the payment of cash or cash equivalents (in whole or in part, whether by
way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Permitted Indebtedness, whether by way of
payment in respect of principal of (or premium, if any) or interest on, such
Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event

20

 

 

 

constituting,
or that with the passage of time and without being cured would constitute, an
Event of Default has occurred and is continuing.

(e)           Restriction
on Redemption and Cash Dividends. 
Until all of the Notes have been converted, redeemed or otherwise
satisfied in accordance with their terms, the Company shall not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock without the prior express written consent of
the Required Holders; provided that the Company shall be entitled to make the
Excluded Distribution without the prior written consent of the Required Holders
(subject to the Company’s compliance with the Holder’s participation right set
forth in Section 15).

(f)            Use
of Proceeds.  The Company will use the proceeds
from the sale of the Notes substantially as set forth on Schedule 4(d)
to the Securities Purchase Agreement.

(g)           Non Ordinary Course Capital
Expenditures.

(1)   The Company shall not make or commit or agree
to make, or permit any of its Subsidiaries to make or commit or agree to make,
any Capital Expenditure (by purchase or Capitalized Lease) not in the ordinary
course of its business (“Non Ordinary Course
Capital Expenditures”) without the prior written consent of the
Required Holders (which consent shall be in their sole discretion); provided,
that, it is understood that Capital Expenditures in connection with (i)
the drilling of any well-site, (ii) the purchase or lease of any real property,
or (iii) the purchase or lease of any asset with a fair market value in excess
of $50,000, shall be deemed to be Non Ordinary Course Capital Expenditures.

(2)   The Company shall obtain the written consent
of the Required Holders by sending to each Holder a notice (a “Non Ordinary Course Capital Expenditure Request”) setting
forth the material details of such Non Ordinary Course Capital
Expenditure.  If the Company is required
to disclose material, nonpublic information to the Holder in such Non Ordinary
Course Capital Expenditure Request, the Company shall, before delivering any
such Non Ordinary Course Capital Expenditure Request, first provide a notice (a
“Request To Give MNPI”) to each of the
Holders of the Notes stating that it seeks the consent required under this
Section 14(g) and that it is necessary to give such Holder material, nonpublic
information in connection with such consent. 
Such Request To Give MNPI shall only include information that the
Company does not deem to be material, nonpublic information.  The Holder shall have two (2) Trading Days
after receipt of a Request To Give MNPI to notify the Company of its election
to receive such material, nonpublic information or to decline to receive such
material, nonpublic information.  If the
Holder declines to receive such material, nonpublic information, (i) the Holder
shall state in such election whether it is consenting to the related Non
Ordinary Course Capital Expenditure or withholding its consent and (ii) the
Company shall not deliver such Non Ordinary Course Capital Expenditure Request
which contains material, nonpublic information to any Holder that so
declines.  If the Holder elects to
receive such material, nonpublic information, the Company may deliver to the
Holder such Non Ordinary Course Capital Expenditure Request.  If the Holder has not received a Request To
Give MNPI prior to receipt of a Non Ordinary Course Capital Expenditure
Request, the Holder may presume that all matters relating to such

21

Non Ordinary Course Capital Expenditure Request do not
constitute material, nonpublic information.

(3)   The Holder shall have twenty (20) Business
Days to respond to any Non Ordinary Course Capital Expenditure Request if such
request relates to a Non Ordinary Course Capital Expenditure proposed by the
Company and five (5) Business Days to respond to any Non Ordinary Course
Capital Expenditure Request if it relates to a Non Ordinary Course Capital
Expenditure proposed by a third party.

(4)   If the Company has delivered to the Holder
any material, nonpublic information in connection with this Section 14(g) and
the Holder delivers notice to the Company requesting to be cleansed of such
material, nonpublic information, the Company shall within five (5) Trading Days
of receipt of such notice, make a public disclosure (on a Current Report on
Form 8-K or otherwise) of such material, nonpublic information.

(15)         PARTICIPATION.  The Holder, as the holder of this Note, shall
be entitled to receive such dividends paid and distributions (including,
without limitation, with respect to the Excluded Distribution) made to the
holders of Common Stock to the same extent as if the Holder had converted this
Note into Common Stock (without regard to any limitations on conversion herein
or elsewhere) and had held such shares of Common Stock on the record date for
such dividends and distributions. 
Payments under the preceding sentence shall be made concurrently with
the dividend or distribution to the holders of Common Stock.

(16)         VOTE
TO ISSUE, OR CHANGE THE TERMS OF, NOTES. 
The affirmative vote at a meeting duly called for such purpose or the
written consent without a meeting of the Required Holders shall be required for
any amendment, modification or waiver to this Note or the Other Notes.  No such amendment, modification or waiver
shall be effective to the extent that it applies to less than all of the
holders of the Notes then outstanding. 
In no event shall any such amendment, modification or waiver be made to
this Note which would adversely affect the Holder without the written consent
of the Holder, provided that the Holder’s written consent shall not be required
for amendments, modifications or waivers to the provisions of Sections 11, 14
(other than Section 14(a)), 18 or 30 that are consented to in writing by the
Required Holders and that would not disproportionately adversely affect the
Holder.

(17)         TRANSFER.  This Note and any shares of Common Stock
issued upon conversion of this Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.

(18)         REISSUANCE
OF THIS NOTE.

(a)           Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with
Section 18(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the entire
outstanding Principal is being transferred, a new Note (in accordance with
Section 18(d)) to the Holder representing the outstanding Principal not being
transferred.  The

22

Holder
and any assignee, by acceptance of this Note, acknowledge and agree that, by
reason of the provisions of Section 3(c)(iii) following conversion or
redemption of any portion of this Note, the outstanding Principal represented
by this Note may be less than the Principal stated on the face of this Note.

(b)           Lost,
Stolen or Mutilated Note.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Note, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender
and cancellation of this Note, the Company shall execute and deliver to the
Holder a new Note (in accordance with Section 18(d)) representing the
outstanding Principal.

(c)           Note
Exchangeable for Different Denominations. 
This Note is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for a new Note or Notes (in accordance
with Section 18(d) and in principal amounts of at least $100,000) representing
in the aggregate the outstanding Principal of this Note, and each such new Note
will represent such portion of such outstanding Principal as is designated by
the Holder at the time of such surrender.

(d)           Issuance
of New Notes.  Whenever the Company
is required to issue a new Note pursuant to the terms of this Note, such new
Note (i) shall be of like tenor with this Note, (ii) shall represent, as
indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 18(a) or Section
18(c), the Principal designated by the Holder which, when added to the
principal represented by the other new Notes issued in connection with such
issuance, does not exceed the Principal remaining outstanding under this Note
immediately prior to such issuance of new Notes), (iii) shall have an issuance
date, as indicated on the face of such new Note, which is the same as the
Issuance Date of this Note, (iv) shall have the same rights and conditions as
this Note, and (v) shall represent accrued and unpaid Interest and Late
Charges, if any, on the Principal and Interest of this Note (or the applicable
proportionate amount thereof,  in the
case of a new Note being issued pursuant to Section 18(a) or Section 18(c)),
from the Issuance Date.

(19)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note and
any of the other Transaction Documents at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit the Holder’s right to pursue actual and consequential damages for
any failure by the Company to comply with the terms of this Note.  Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the Holder and shall not, except as
expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof).  The
Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such
breach may be inadequate.  The Company
therefore agrees that, in the event of any such breach or threatened breach,
the Holder shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

23

(20)         PAYMENT OF COLLECTION, ENFORCEMENT
AND OTHER COSTS.  If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise
takes action to collect amounts due under this Note or to enforce the
provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’
rights and involving a claim under this Note, then the Company shall pay the
costs incurred by the Holder for such collection, enforcement or action or in
connection with such bankruptcy, reorganization, receivership or other
proceeding, including, but not limited to, attorneys’ fees and disbursements.

(21)         CONSTRUCTION; HEADINGS.  This Note shall be deemed to be jointly
drafted by the Company and the Purchaser and shall not be construed against any
person as the drafter hereof.  The
headings of this Note are for convenience of reference and shall not form part
of, or affect the interpretation of, this Note.

(22)         FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other right,
power or privilege.

(23)         DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of (a) the Closing Bid Price, the Closing Sale Price or the
Weighted Average Price or (b) the arithmetic calculation of the Conversion Rate
or any Redemption Price or otherwise of number of shares of Common Stock
issuable to the Holder in connection with this Note, the Company shall submit
the disputed determinations or arithmetic calculations via facsimile within one
(1) Business Day of receipt, or deemed receipt, of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder.  If the Holder and the
Company are unable to agree upon such determination or calculation within one
(1) Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one (1) Business Day
submit via facsimile (a) the disputed determination of the Closing Bid Price,
the Closing Sale Price or the Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate, any Redemption
Price or the number of shares of Common Stock issuable to the Company’s
independent, outside accountant.  The
Company, at the Company’s expense, shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than five (5)
Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

(24)         NOTICES;
PAYMENTS.

(a)           Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore.  Without limiting the generality of the
foregoing, the

24

Company
will give written notice to the Holder (i) immediately upon any adjustment of
the Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty (20) days prior to the
date on which the Company closes its books or takes a record (A) with respect
to any dividend or distribution upon the Common Stock, (B) with respect to any
pro rata subscription offer to holders of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder.

(b)           Payments.  Whenever any payment of cash is to be made by
the Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such address
as previously provided to the Company in writing (which address, in the case of
the Purchaser, shall initially be as set forth on the Schedule of Buyers
attached to the Securities Purchase Agreement); provided that the Holder may
elect to receive a payment of cash via wire transfer of immediately available
funds by providing the Company with prior written notice setting out such
request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date.  Any amount of Principal or other amounts due
under the Transaction Documents, other than Interest, which is not paid when
due shall result in a late charge being incurred and payable by the Company in
an amount equal to interest on such amount at the rate of eighteen percent
(18%) per annum from the date such amount was due until the same is paid in
full (“Late Charge”).

(25)         CANCELLATION.  After all Principal, accrued Interest and
other amounts at any time owed on this Note have been paid in full, this Note
shall automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.

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

(27)         GOVERNING LAW.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any
other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. 
The Company hereby irrevocably submits to the jurisdiction of the state
and federal courts sitting in The City of New York, Borough of Manhattan, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient

25

forum or that the venue of such suit, action or
proceeding is improper.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.  Nothing
contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company’s obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder.  THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(28)         SEVERABILITY. If any provision
of this Note is prohibited by law or otherwise determined to be invalid or
unenforceable by a court of competent jurisdiction, the provision that would
otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the
invalidity or unenforceability of such provision shall not affect the validity
of the remaining provisions of this Note so long as this Note as so modified
continues to express, without material change, the original intentions of the
parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially
impair the respective expectations or reciprocal obligations of the parties or
the practical realization of the benefits that would otherwise be conferred
upon the parties.  The parties will endeavor
in good faith negotiations to replace the prohibited, invalid or unenforceable
provision(s) with a valid provision(s), the effect of which comes as close as
possible to that of the prohibited, invalid or unenforceable provision(s).

(29)         CERTAIN DEFINITIONS.  For purposes of this Note, the following
terms shall have the following meanings:

(a)           “Amended Notes” means the Amended and Restated Notes
(as defined in the Amendment Agreements) issued by the Company pursuant to the
Securities Purchase Agreement to the “Buyers” party thereto.

(b)           “Amendment  Agreement” means each Amendment 
Agreement, dated as of October 31, 2007, by and between the Company and
the “Buyer” party thereto.

(c)           “Amendment Agreements”
means, collectively, the Amendment Agreements, each dated as of October 31,
2007, by and between the Company and the “Buyer” party
thereto.

(d)           “Approved Stock Plan” means any employee benefit plan,
arrangement or other agreement which has been approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, consultant, officer or director for services provided
to the Company.

(e)           “Average Market Price” means, for any given
date, the lesser of (i) the arithmetic average of the Weighted Average Price of
the Common Stock on each of the twenty (20) consecutive Trading Days ending on
the Trading Day immediately prior to such

26

given
date (the “Measuring Period”),
(ii) the arithmetic average of the Weighted Average Price of the Common Stock on
each of the first five (5) consecutive Trading Days of the Measuring Period and
(iii) the arithmetic average of the Weighted Average Price of the Common Stock
on each of the last five (5) consecutive Trading Days of the Measuring Period;
provided, that all such determinations shall be appropriately adjusted for any
stock split, stock dividend, stock combination or other similar transaction
that proportionately decreases or increases the Common Stock during such
periods.

(f)            “Bloomberg” means Bloomberg Financial Markets.

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

(h)           “Calendar Quarter” means each of: the period beginning
on and including January 1 and ending on and including March 31; the period
beginning on and including April 1 and ending on and including June 30; the
period beginning on and including July 1 and ending on and including September
30; and the period beginning on and including October 1 and ending on and
including December 31.

(i)            “Capital Expenditures”
means, with respect to any Person for any period, the sum of (i) the
aggregate of all expenditures by such Person and its Subsidiaries during such
period that in accordance with GAAP are or should be included in “property,
plant and equipment” or in a similar fixed asset account on its balance sheet,
whether such expenditures are paid in cash or financed and including all
Capitalized Lease Obligations paid or payable during such period, and
(ii) to the extent not covered by clause (i) above, the aggregate of all
expenditures by such Person and its Subsidiaries during such period to acquire
by purchase or otherwise the business or fixed assets of, or the Capital Stock
of, any other Person.

(j)            “Capitalized Lease”
means, with respect to any Person, any lease of real or personal property by
such Person as lessee which is (i) required under GAAP to be capitalized
on the balance sheet of such Person or (ii) a transaction of a type
commonly known as a “synthetic lease” (i.e. a lease transaction that is
treated as an operating lease for accounting purposes but with respect to which
payments of rent are intended to be treated as payments of principal and
interest on a loan for Federal income tax purposes).

(k)           “Capitalized Lease
Obligations” means, with respect to any Person, obligations of such
Person and its Subsidiaries under Capitalized Leases, and, for purposes hereof,
the amount of any such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.

(l)            “Change of Control” means any Fundamental
Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of

27

directors (or their
equivalent if other than a corporation) of such entity or entities, or (ii)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company.

(m)          “Change of Control Consideration” means, for
any Change of Control, an amount, if any, equal to the sum of the aggregate
cash consideration and the aggregate cash value of any marketable securities
per share of Common Stock to be paid to the holders of the Common Stock upon
consummation of such Change of Control, with any such marketable securities to
be valued at the Closing Sale Price of such securities as of the Trading Day
following the public announcement of such proposed Change of Control.

(n)           “Closing Bid Price” and “Closing Sale Price” means, for any security as of any
date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). 
If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder.  If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 23.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

(o)           “Closing Date” means the “2007 Closing Date”, as defined in the Securities
Purchase Agreement.

(p)           “Company Mandatory Redemption Premium” means (i) 118.3%, if
the Company Full Mandatory Redemption is pursuant to the first Triggering Date
or (ii) 109.15%, if the Company Full Mandatory Redemption is pursuant to the
second Triggering Date.

(q)           “Company Mandatory Redemption Price” means a price equal to
the sum of (i) the applicable Holder Redemption Amount as to which the Company
elected the Company Full Mandatory Redemption and (ii) the Company Mandatory
Redemption Premium multiplied by the Company Put Amount.

28

(r)            “Company Put Amount” means the difference between (i) the
outstanding Principal amount under this Note plus all accrued and unpaid
Interest and Late Charges, if any, on such Principal and Interest plus any
other amounts due and owing under this Note and (ii) the applicable Holder Redemption
Amount as to which the Company elected the Company Full Mandatory Redemption.

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

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

(u)           “Eligible Market” means the Principal
Market, The New York Stock Exchange, Inc., the American Stock Exchange, the
Nasdaq National Market or The Nasdaq Capital Market, or any market that is a
successor to any of the foregoing.

(v)           “Equity Conditions” means that each of the
following conditions is satisfied:  (i)
on each day during the period beginning six (6) month prior to the applicable
date of determination (but in any event not prior to the Closing Date) and
ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”),
either (x) any Registration Statement required to be filed during the Equity
Conditions Measuring Period pursuant to the Registration Rights Agreement shall
be filed during the Equity Conditions Measuring Period, and any Registration
Statement required to be effective during the Equity Conditions Measuring
Period pursuant to the Registration Rights Agreement shall be effective and
available for the resale of the Registrable Securities required to be covered
thereunder in accordance with the terms of the Registration Rights Agreement
and there shall not have been any Grace Periods (as defined in the Registration
Rights Agreement or (y) all of the Registrable Securities required to be
covered by the Registration Statements required to be effective during the
Equity Conditions Measuring Period pursuant to the Registration Rights
Agreement shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws; (ii) on
each day during the Equity Conditions Measuring Period, the Common Stock is
designated for quotation on the Principal Market or any other Eligible Market
and shall not have been suspended from trading on such exchange or market
(other than suspensions of not more than five (5) days provided that no such
suspensions have occurred in the thirty (30) days immediately prior to the
applicable date of determination) nor shall delisting or suspension by such
exchange or market been threatened or pending either (A) in writing by such
exchange or market or (B) by falling below the then effective minimum listing
maintenance requirements of such exchange or market; (iii) during the Equity
Conditions Measuring Period, the Company shall have delivered shares of Common
Stock upon conversion of the Notes and upon exercise of the Warrants to the
holders on a timely basis as set forth in Section 3(c)(ii) hereof (and
analogous provisions under the Other Notes) and Section 1(a) of the Warrants
other

29

than
pursuant to the limitations in Section 3(d) hereof and analogous provisions
under the Other Notes and Warrants; (iv) any applicable shares of Common Stock
to be issued in connection with the event requiring determination may be issued
in full without violating Section 3(d) hereof and the rules or regulations of
the Principal Market or any applicable Eligible Market; (v) the Company shall
not have failed to timely make any payments within five (5) Business Days of
when such payment is due pursuant to any Transaction Document; (vi) during the
Equity Conditions Measuring Period, there shall not have occurred either (A)
the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated, or (B) an
Event of Default or (C) an event that with the passage of time or giving of
notice would constitute an Event of Default; (vii) the Company shall have no
knowledge of any fact that would cause (x) the Registration Statements required
pursuant to the Registration Rights Agreement not to be effective and available
for the resale of the Registrable Securities required to be covered thereunder
in accordance with the terms of the Registration Rights Agreement or (y) any
shares of Common Stock issuable upon conversion of the Notes and shares of
Common Stock issuable upon exercise of the Warrants not to be eligible for sale
without restriction pursuant to Rule 144(k) and any applicable state securities
laws; (viii) the Company otherwise shall have been in material compliance with
and shall not have materially breached any provision, covenant, representation
or warranty of any Transaction Document and (ix) if required by the terms of
the Securities Purchase Agreement, the Company shall have obtained the
Stockholder Approval on or before the applicable Stockholder Meeting Deadline
(as defined in the Securities Purchase Agreement).

(w)          “Equity Conditions Failure” means that (i)
on any day during the period commencing ten (10) Trading Days prior to the
applicable Interest Notice Date through the applicable Interest Date, (ii) on
any day during the period commencing ten (10) Trading Days prior to the
applicable Conversion Date through the applicable Share Delivery Date, or (iii)
on any day during the period commencing ten (10) Trading Days prior to the
applicable Company Mandatory Redemption Notice Date through the applicable
Company Mandatory Redemption Date, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

(x)            “Equity Value Redemption Premium” means for
any Change of Control Notice or Event of Default Notice, as applicable,
delivered or required to be delivered in connection with a Change of Control or
Event of Default, as applicable, 130%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration equals
or exceeds 200% of the Conversion Price then in effect, then the Equity Value
Redemption Premium shall equal 120%.

(y)           “Excluded Distribution” means the
distribution by the Company pro rata to its then-existing shareholders of not
more than 200,000 shares of common stock (subject to proportional adjustment
with respect to any subdivision or combination thereof) of Redrock Energy, Inc.
(f/k/a Redrock Oil Sands, Inc.)(“Redrock Energy”)  in connection with the registration of common stock (or the
issuance thereof) of Redrock Energy under the 1933 Act and/or the 1934 Act and
the listing of the common stock of Redrock Energy on a national securities
exchange or market or the OTC Bulletin Board.

(z)            “Excluded Securities” means any Common Stock issued or
issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion
of the Notes or

30

 

the exercise of the Warrants; (iii) in connection with the payment of any
Interest Shares on the Notes; (iv) upon exercise of any Options or
Convertible Securities which are outstanding, or that are subject to a written
agreement as to their issuance that is listed on a schedule to the Securities
Purchase Agreement, (v) in an amount not to exceed 250,000 shares of
Common Stock in the aggregate pursuant to a judgment or settlement in connection
with (i) the PIN Financial Matter or (ii) the UOS Energy Matter including,
without limitation, Common Stock issuable pursuant to Options granted or
Convertible Securities issued pursuant to such judgment or settlement; and (vi)
otherwise pursuant to a written agreement that is listed on a schedule to the
Securities Purchase Agreement, provided that the terms of conversion price,
exchange price, exercise or other purchase price is not reduced, and the number
of shares of Common Stock issued or issuable is not increased, by virtue of any
amendment, modification or change to such Options or Convertible Securities or
written agreements after the Closing Date.

(aa)         “Fundamental Transaction”
means that the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person or Persons, or (ii) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of the Company
to another Person, or (iii) allow another Person (other than
the Holder) to make a purchase, tender or exchange offer that is accepted by
the holders of more than 50% of the outstanding shares of Voting Stock (not including any shares of Voting Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person
whereby such other Person acquires more than the 50% of the
outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making
or party to, such stock purchase agreement or other business
combination), or (v) reorganize, recapitalize
or reclassify its Common Stock or (vi) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company; provided, however, that a Fundamental Transaction
shall not include any of the transactions above if entered into in order to
consummate a Company Full Mandatory Redemption.

(bb)         “GAAP” means
United States generally accepted accounting principles, consistently applied.

(cc)         “Holder Optional Redemption
Price” means an amount in cash equal to 100% of the Holder
Redemption Amount.

(dd)         “Holder Pro Rata Amount”
means a fraction (i) the numerator of which is the Principal amount of this
Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued pursuant to the Securities Purchase
Agreement on the Closing Date.

(ee)         “Indebtedness”
of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the

31

deferred purchase price of property or services,
including (without limitation) “capital leases” in accordance with GAAP (other
than trade payables entered into in the ordinary course of business), (iii) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(v) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with
respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with GAAP, consistently applied for the
periods covered thereby, is classified as a capital lease, (vii) all
indebtedness referred to in clauses (i) through (vi) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment
of such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i)
through (vii) above.

(ff)           “Interest Conversion
Price” means, with respect to any Interest Date or Conversion Date,
that price which shall be the lower of (i) the applicable Conversion Price and
(ii) the price computed as 82.5% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the five (5) consecutive Trading
Days ending on the Trading Day immediately preceding the applicable Interest
Date or Share Delivery Date, as applicable (each, an “Interest Measuring Period”).  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction that proportionately decreases or increases the Common
Stock during the applicable Interest Measuring Period.

(gg)         “Interest Notice Due Date”
means the tenth (10th) Trading Day prior to the
applicable Interest Date.

(hh)         “Interest
Rate” means, 9.15% per annum,
subject to adjustment as set forth in Section 2(c) hereof.

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

(jj)             “Other Notes” means the Other New Notes and
the Amended Notes.

(kk)         “Other New Notes”
means the other New Notes (as defined in the Amendment Agreements) issued to
the Other Buyers (as defined in the Amendment Agreements) on October 31, 2007
pursuant to the Securities Purchase Agreement.

32

(ll)           “Parent Entity”
of a Person means an entity that,
directly or indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

(mm)       “Partial Company Redemption
Price” means an amount in cash equal to 100% of the Partial Company
Redemption Amount.

(nn)         “Permitted Indebtedness” means (i) Indebtedness evidenced by
this Note and the Other Notes; (ii) Indebtedness described on Schedule 3(s) to
the Securities Purchase Agreement; (iii) Indebtedness evidenced by surety
bonds, bids, statutory obligations, performance bonds, and similar obligations
(exclusive of obligations for the payment of borrowed money) obtained by the
Company and its Subsidiaries in the ordinary course of business for the purpose
of satisfying federal, state and/or local legal requirements for owning or
operating oil and gas properties; (iv) Indebtedness incurred solely for the
purpose of financing the acquisition or lease of any Equipment (as defined in
the Security Agreement) by the Company or any of its Subsidiaries, including
Capital Lease Obligations with no recourse other than to such Equipment; (v) Indebtedness
(A) the repayment of which has been subordinated to the payment of the Notes on
terms and conditions acceptable to the Buyers, including with regard to
interest payments and repayment of principal, (B) which does not mature or
otherwise require or permit redemption or repayment prior to or on the 91st day after the
Maturity Date of any Notes then outstanding; and (C) which is not secured by
any assets of the Company or any of its Subsidiaries; (vi) Indebtedness solely
between the Company and/or one of its domestic Subsidiaries, on the one hand,
and the Company and/or one of its domestic Subsidiaries, on the other which
Indebtedness is not secured by any assets of the Company or any of its
Subsidiaries, provided that (x) in each case a majority of the equity of any
such domestic Subsidiary is directly or indirectly owned by the Company, such
domestic Subsidiary is controlled by the Company and such domestic Subsidiary
has executed a guaranty in the form of the Guaranty and a security agreement in
the form of the Security Agreement and (y) any such loan shall be evidenced by
an intercompany note that is pledged by the Company or its Subsidiary, as
applicable, as Collateral (as defined in the Security Agreement) pursuant to
the Security Documents (as defined in the Securities Purchase Agreement); (vii)
reimbursement obligations in respect of letters of credit issued for the
account of the Company or any of its Subsidiaries for the purpose of securing
performance obligations of the Company or its Subsidiaries incurred in the
ordinary course of business so long as the aggregate face amount of all such
letters of credit does not exceed $250,000 at any one time; and (viii)
renewals, extensions and refinancing of any Indebtedness described in clauses
(i) or (iv) of this subsection.

(oo)         “Permitted Liens”
means (i) any Lien for taxes or other governmental charges not yet due or
delinquent or being contested in good faith by appropriate proceedings for
which adequate reserves have been established in accordance with GAAP; (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP; (iii) Liens arising in the
ordinary course of business in favor of carriers, warehousemen, mechanics,
materialmen and landlords or other similar Liens imposed by law, which remain
payable without

33

penalty or which are being contested in good faith
by appropriate proceedings; (iv) Liens arising in the ordinary course of
business in connection with worker’s compensation, unemployment compensation
and other types of social security or Liens consisting of cash collateral
securing the Company’s or any of its Subsidiaries’ performance of surety bonds,
bids, statutory obligations, performance bonds and similar obligations
(exclusive of obligations for the payment of borrowed money) described in
clause (iii) of the definition of Permitted Indebtedness and, in each case, for
which the Company maintains adequate reserves to the extent required by and in
accordance with GAAP, (v) Liens consisting of cash collateral securing the Company’s
or its Subsidiaries’ reimbursement obligations under letters of credit
permitted by clause (iv) of the definition of Permitted Indebtedness; (vi)
Liens (A) upon or in any Equipment (as defined in the Security Agreement)
acquired or held by the Company or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition or lease of such equipment, including
Capital Lease Obligations and purchase money indebtedness, or (B) existing on
such equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment; (vii) Liens existing to secure indebtedness of the
Company and its Subsidiaries in the amounts owing to YA Global Investments,
L.P. (f/k/a Cornell Capital Partners, L.P.) as of the Closing Date; (viii)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (vi) and (vii)
above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal
amount of the Indebtedness being extended, renewed or refinanced does not
increase; (ix) leases or subleases and licenses and sublicenses granted to
others in the ordinary course of the Company’s or any of its Subsidiaries’
business, not interfering in any material respect with the business of the
Company and its Subsidiaries taken as a whole; (x) easements, rights of way,
restrictions, minor defects or irregularities in title and other similar Liens
arising in the ordinary course of business and not materially detracting from
the value of the property subject thereto and not interfering in any material
respect with the ordinary conduct of the business of the Company or any of its
Subsidiaries; (xi) in respect of real properties owned or leased by the Company
or any of its Subsidiaries, royalties, overriding royalties and other burdens
of record; (xii) Liens granted to operators pursuant to operating agreements
entered into in the ordinary course of business; (xiii) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payments
of custom duties in connection with the importation of goods; (xiv) Liens
arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Section 4(a)(ix); (xv) Liens arising
solely by virtue of any statutory or common law provision relating to banker’s
liens, rights of set-off or similar rights and remedies and burdening only
deposit accounts or other funds maintained with a creditor depository
institution; and (xvi) Liens created in favor of the holders of the Notes and
the Collateral Agent pursuant to the Security Documents.

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

(qq)         “PIN Financial Matter”  means the matter pending in the US District Court, Southern
District of New York (06 CV 2779) against the Company by PIN

34

Financial LLC claiming a commission for introduction
to Cornell Capital, which has been aggressively denied and disputed by both
Wentworth and Cornell Capital.

(rr)           “Principal Market”
means the OTC Bulletin Board.

(ss)         “Redemption Notices”
means, collectively, the Event of Default Redemption Notice, the Change of
Control Redemption Notice, the Holder Optional Redemption Notice, the Company
Redemption Notice and the Company Mandatory Redemption Notice, each of the
foregoing, individually, a Redemption Notice.

(tt)           “Redemption Premium”
means (i) in the case of the Events of Default described in Section 4(a)(i) -
(vi) and (ix) - (xii), (A) 125%, if the Event of Default occurs on or before
the first (1st) anniversary of the Closing Date, (B) 120%, if the Event of
Default occurs after the first (1st) anniversary of the Closing Date and on or
before the second (2nd) anniversary of the Closing Date, and (C) 115%, if the
Event of Default occurs after the second (2nd) anniversary of the Closing Date,
(ii) in the case of the Events of Default described in Section 4(a)(vii) -
(viii), 100% or (iii) in the case of the Event of Default described in Section
4(a)(xiii), 200%.

(uu)         “Redemption Prices”
means, collectively, the Event of Default Redemption Price, the Change of
Control Redemption Price, the Holder Optional Redemption Price, the Partial
Company Redemption Price, and the Company Mandatory Redemption Price, each of
the foregoing, individually, a Redemption Price.

(vv)         “Registration Rights Agreement” means that certain Amended and Restated Registration Rights Agreement
dated as of October 31, 2007 by and among the Company and the buyers party
thereto, the same may be amended, modified or supplemented from time to time.

(ww)       “Required Holders”
means the holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then outstanding.

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

(yy)         “Securities Purchase Agreement” means that certain securities purchase agreement, dated as of
July 24, 2006, by and among the Company and the “Buyers” party thereto, as
amended on or prior to the date hereof (including as amended by the Amendment
Agreements), and as the same may be further amended, modified or supplemented
from time to time.

(zz)          “Series B Warrants”
means the “Amended and Restated
Series B Warrants” and the “New Series B Warrant”, as each of the those terms are
defined in the Securities Purchase Agreement.

(aaa)       “Successor Entity”
means the Person, which may be the
Company, formed by, resulting from or surviving any Fundamental Transaction or
the Person with which such Fundamental Transaction shall have been made, provided
that if such Person is

35

not a publicly traded
entity whose common stock or equivalent equity security is quoted or listed for
trading on an Eligible Market, Successor Entity shall mean such Person’s Parent
Entity.

(bbb)      “Trading Day”
means any day on which the Common Stock is traded on the Principal Market, or,
if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which
the Common Stock is then traded; provided that “Trading Day” shall not include
any day on which the Common Stock is scheduled to trade on such exchange or
market for less than 4.5 hours or any day that the Common Stock is suspended
from trading during the final hour of trading on such exchange or market (or if
such exchange or market does not designate in advance the closing time of
trading on such exchange or market, then during the hour ending at 4:00:00
p.m., New York Time).

(i)            “Trading Price”
means, for any given date, the arithmetic average of the Weighted Average Price
of the Common Stock during the five (5) consecutive Trading Day period ending
on the Trading Day immediately prior to such given date, as appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction that proportionately decreases or increases the Common
Stock during such period.

(ii)           “Triggering Date”
means each of October 31, 2008 and October 31, 2009.

(iii)          “UOS Energy Matter”
means, the matter pending in the Superior Court of California, County of Los
Angeles, West District (SC09064) against the Company and others by UOS Energy,
LLC relating to the Company’s refusal to purchase certain tar sands leases in
Utah in consideration of 1,000,000 shares of Common Stock.

(ccc)       “Volume
Limitation” means 15% of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Stock on the Principal Market over the
twenty (20) consecutive Trading Day period immediately prior to the applicable
Interest Notice Date.

(ddd)      “Voting Stock” of a Person means
capital stock of such Person of the class or classes pursuant to which the holders
thereof have the general voting power to elect, or the general power to
appoint, at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

(eee)       “Warrants” has
the meaning ascribed to such term in the Securities Purchase Agreement, and
shall include all warrants issued in exchange therefor or replacement thereof.

(fff)         “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading) as reported by
Bloomberg through its “Volume at Price” functions, or, if the foregoing does
not

36

apply, the dollar volume-weighted average price of
such security in the over-the-counter market on the electronic bulletin board
for such security during the period beginning at 9:30:01 a.m., New York Time
(or such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security
as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.).  If the Weighted
Average Price cannot be calculated for a security on a particular date on any
of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and
the Holder.  If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 23.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

(30) DISCLOSURE. Upon receipt or delivery by
the Company of any notice in accordance with the terms of this Note, unless the
Company has in good faith determined that the matters relating to such notice
do not constitute material, nonpublic information relating to the Company or
its Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, nonpublic information on a
Current Report on Form 8-K or otherwise. 
In the event that the Company believes that a notice contains material,
nonpublic information relating to the Company or its Subsidiaries, the Company
so shall indicate to such Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

37

 

IN
WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.

 

	
   

  	
  WENTWORTH ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Punao

  
	
   

  	
   

  	
  Name: John Punao

  
	
   

  	
   

  	
  Title: Chief Executive
  Officer

  

 

 

38

 

EXHIBIT
I

WENTWORTH ENERGY, INC.

CONVERSION NOTICE

Reference is made to
the  Senior Secured Convertible Note (the
“Note”) issued to the undersigned by
Wentworth Energy, Inc. (the “Company”).  In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock par value
$0.001 per share (the “Common Stock”)
of the Company, as of the date specified below.

	
  Date of Conversion:

  	
   

  
	
   

  
	
  Aggregate Conversion Amount to be converted:

  	
   

  
	
   

  
	
  Please confirm the following information:

  
	
   

  
	
  Conversion Price:

  	
   

  
	
   

  
	
  Number of shares of Common Stock to be issued:

  	
   

  
	
   

  
	
  Please issue the Common Stock into which the Conversion Amount of the
  Note is being converted in the following name and to the following address:

  
	
   

  
	
  Issue to:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  
	
  Facsimile Number:

  	
   

  
	
   

  
	
  Authorization:

  	
   

  
	
   

  
	
  By:

  	
   

  
	
   

  
	
  Title:

  	
   

  
	
   

  
	
  Dated:

  	
   

  
	
   

  
	
  Account Number:

  	
   

  
	
    (if electronic book entry transfer)

  
	
   

  
	
  Transaction Code Number:

  	
   

  
	
    (if electronic book entry transfer)

  
											

 

39

ACKNOWLEDGMENT

The Company hereby
acknowledges this Conversion Notice and hereby directs Empire Stock Transfer Inc. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
July 24, 2006 from the Company and acknowledged and agreed to by Empire Stock Transfer Inc, as amended.

 

	
   

  	
  WENTWORTH ENERGY, INC.

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

40Exhibit 4.14

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISEABLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS.  THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM
REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

WENTWORTH
ENERGY, INC.

AMENDED
AND RESTATED SERIES A WARRANT TO PURCHASE COMMON STOCK

 

Warrant
No.: ARA-   

Number
of Shares of Common Stock: [                          ]

 

Original
Issuance Date:  July 25, 2006

Exchanged
for Amended and Restated Warrant

with
Issuance Date:  October 31, 2007 (“Issuance Date”)

 

Wentworth
Energy, Inc., an Oklahoma corporation, (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, [Insert Name of Buyer], the
registered holder hereof, or its permitted assigns (the “Holder”), is entitled, subject to the terms
set forth below, to purchase from the Company, at the Exercise Price (as defined
below) then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to purchase Common Stock issued in exchange, transfer
or replacement hereof, the “Warrant”),
at any time or times on or after the Issuance Date, but not after 11:59 p.m.,
New York Time, on the Expiration Date (as defined below), [                                         ]
fully paid nonassessable shares of Common Stock (as defined below)  (the “Warrant
Shares”).  Except as otherwise
defined herein, capitalized terms in this Warrant shall have the meanings set
forth in Section 16.  This Amended and
Restated Warrant is one of the Warrants to Purchase Common Stock (including new
warrants and amended and restated warrants) issued pursuant to the Securities
Purchase Agreement, as amended by those certain Amendment Agreements, each
dated as of October 31, 2007 (the “Amendment
Agreements”), by and between the Company and respective buyer party
thereto (this Warrant, together with all of the other Amended and Restated
Warrants and the New Warrants (each as defined in the Amendment Agreements),
the “SPA Warrants”) and amends,
supplements, modifies and completely restates and supersedes that certain
warrant of this same series, previously issued pursuant to the 2006 Securities
Purchase Agreement (the “Existing

 

 

 

Warrant”), issued by the Company to the Holder (or a
predecessor holder) for the exercise of [                     ]
shares of Common Stock, but shall not, except as specifically amended hereby or
as set forth in the Amendment Agreements, constitute a release, satisfaction or
novation of any of the obligations under the Existing Warrant.

1.     EXERCISE OF WARRANT.

(a)           Mechanics of Exercise.  Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)),
this Warrant may be exercised by the Holder on any day on or after the Issuance
Date in whole or in part, by (i) delivery of a written notice, in the form
attached hereto as Exhibit A (the “Exercise
Notice”), of the Holder’s election to exercise this Warrant and
(ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (the “Aggregate
Exercise Price”) in cash or wire transfer of immediately available
funds or (B) by notifying the Company that this Warrant is being exercised
pursuant to a Cashless Exercise (as defined in Section 1(d)).  The Holder shall not be required to deliver
the original Warrant in order to effect an exercise hereunder.  Execution and delivery of the Exercise Notice
with respect to less than all of the Warrant Shares shall have the same effect
as cancellation of the original Warrant and issuance of a new Warrant
evidencing the right to purchase the remaining number of Warrant Shares.  On or before the first Business Day following
the date on which the Company has received each of the Exercise Notice and the
Aggregate Exercise Price (or notice of a Cashless Exercise) (the “Exercise Delivery Documents”), the Company
shall transmit by facsimile an acknowledgment of confirmation of receipt of the
Exercise Delivery Documents to the Holder and the Company’s transfer agent (the
“Transfer Agent”).  On or before the third Business Day following
the date on which the Company has received all of the Exercise Delivery
Documents (the “Share Delivery Date”),
the Company shall (X) provided that the Transfer Agent is participating in The
Depository Trust Company (“DTC”)
Fast Automated Securities Transfer Program, upon the request of the Holder,
credit such aggregate number of shares of Common Stock to which the Holder is
entitled pursuant to such exercise to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system, or (Y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, deliver to be received no later than the Share Delivery Date,
to the address as specified in the Exercise Notice, a certificate, registered
in the Company’s share register in the name of the Holder or its designee, for
the number of shares of Common Stock to which the Holder is entitled pursuant
to such exercise.  Upon delivery of the
Exercise Notice and Aggregate Exercise Price referred to in clause (ii)(A)
above or notification to the Company of a Cashless Exercise referred to in
Section 1(d), the Holder shall be deemed for all corporate purposes to have
become the holder of record of the Warrant Shares with respect to which this
Warrant has been exercised, irrespective of the date of delivery of the
certificates evidencing such Warrant Shares. 
If this Warrant is submitted in connection with any exercise pursuant to
this Section 1(a) and the number of Warrant Shares represented by this Warrant
submitted for exercise is greater than the number of Warrant Shares being
acquired upon an exercise, then the Company shall as soon as practicable and in
no event later than three Business Days after any exercise and at its own
expense, issue a new Warrant (in accordance with Section 7(d)) representing the
right to purchase the number of Warrant Shares purchasable immediately prior to
such exercise under this Warrant, less the number of Warrant Shares with

 

 

2

 

respect to which this
Warrant is exercised.  No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but
rather the number of shares of Common Stock to be issued shall be rounded up to
the nearest whole number.  The Company
shall pay any and all taxes (excluding income taxes, franchise taxes or similar
taxes levied on the earnings, profits or the like of the Holder) which may be
payable with respect to the issuance and delivery of Warrant Shares upon exercise
of this Warrant.

(b)           Exercise Price.  For purposes of this Warrant, “Exercise Price” means $0.001, subject to
adjustment as provided herein.

(c)           Company’s Failure to Timely
Deliver Securities. If
the Company shall fail for any reason or for no reason to issue to the Holder
within three (3) Trading Days of receipt of the Exercise Delivery Documents, a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such shares of Common Stock on the Company’s share register
or to credit the Holder’s balance account with DTC for such number of shares of
Common Stock to which the Holder is entitled upon the Holder’s exercise of this
Warrant, then, in addition to all other remedies available to the Holder, the
Company shall pay in cash to the Holder on each day after such third  Business Day that the issuance of such
shares of Common Stock is not timely effected an amount equal to 1.5% of the
product of (A) the sum of the number of shares of Common Stock not issued to
the Holder on a timely basis and to which the Holder is entitled and (B) the
Closing Sale Price of the shares of Common Stock on the Trading Day immediately
preceding the last possible date which the Company could have issued such
shares of Common Stock to the Holder without violating Section 1(a).  In addition, if within three (3) Trading
Days after the Company’s receipt of the facsimile copy of an Exercise Notice
the Company shall fail to issue and deliver a certificate to the Holder and
register such shares of Common Stock on the Company’s share register or credit
the Holder’s balance account with DTC for the number of shares of Common Stock
to which the Holder is entitled upon such holder’s exercise hereunder, and if
on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within
three Business Days after the Holder’s request and in the Holder’s discretion,
either (i) pay cash to the Holder in an amount equal to the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of Common
Stock so purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such certificate (and to
issue such shares of Common Stock) or credit such Holder’s balance account with
DTC shall terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such shares of Common Stock
or credit such Holder’s balance account with DTC and pay cash to the Holder in
an amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on the
date of exercise.

(d)           Cashless Exercise.  Notwithstanding
anything contained herein to the contrary, if a Registration Statement (as
defined in the Registration Rights Agreement) covering the Warrant Shares that
are the subject of the Exercise Notice (the “Unavailable
Warrant Shares”) is not available for the resale of such Unavailable
Warrant Shares, the Holder may, in its sole discretion, exercise this Warrant
in whole or in part and, in lieu of making the cash payment

 

3

 

otherwise contemplated to be
made to the Company upon such exercise in payment of the Aggregate Exercise
Price, elect instead to receive upon such exercise the “Net Number” of shares
of Common Stock determined according to the following formula (a “Cashless Exercise”):

	
  Net Number = 

  	
  (A
  x B) - (A x C)

  
	
   

  	
  B

  

 

                For purposes of the foregoing formula:

A= the total number of
shares with respect to which this Warrant is then being exercised.

B= the Closing Sale Price of
the shares of Common Stock (as reported by Bloomberg) on the date immediately
preceding the date of the Exercise Notice.

C= the Exercise Price then
in effect for the applicable Warrant Shares at the time of such exercise.

(e)           Disputes.  In
the case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 13.

(f)            Limitations on Exercises.

(i)            Beneficial Ownership.  Notwithstanding any provision to the contrary
contained in this Warrant or any other Transaction Document, the Company shall
not effect the exercise of this Warrant, and the Holder shall not have the
right to exercise this Warrant, to the extent that after giving effect to such
exercise, such Person (together with such Person’s affiliates) would
beneficially own in excess of 4.99% of the shares of Common Stock outstanding
immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the
aggregate number of shares of Common Stock beneficially owned by such Person
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude shares of Common Stock which would be
issuable upon (A) exercise of the remaining, unexercised portion of this Warrant
beneficially owned by such Person and its affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company beneficially owned by such Person and its affiliates (including,
without limitation, any convertible notes or convertible preferred stock or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein.  Except as
set forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with

 

4

 

Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).  For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (1) the Company’s
most recent Form 10-K, 10-KSB, Form 10-Q, 10-QSB, Current Report on Form 8-K or
other public filing with the Securities and Exchange Commission, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or the Transfer Agent setting forth the number of shares
of Common Stock outstanding.  For any
reason at any time, upon the written or oral request of the Holder, the Company
shall within one (1) Business Day confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the SPA Securities and the SPA
Warrants, by the Holder and its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.

(ii)           Principal Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon exercise of this Warrant or conversion of SPA
Securities and no Buyer (as defined in the Securities Purchase Agreement) or
Holder shall be entitled to receive any shares of Common Stock if the issuance
of such shares of Common Stock would exceed that number of shares of Common
Stock which the Company may issue upon exercise or conversion, as applicable,
of the SPA Warrants and SPA Securities or otherwise without breaching the
Company’s obligations under the rules or regulations of any applicable Eligible
Market (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its shareholders as required by the applicable rules of
the Eligible Market for issuances of shares of Common Stock in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders. 
Until such approval or written opinion is obtained, no Buyer or Holder
shall be issued in the aggregate, upon exercise or conversion, as applicable,
of any SPA Warrants or SPA Securities, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the total number of shares of Common Stock underlying the
SPA Warrants issued to such Buyer or Holder (or its predecessor interest) as of
the Closing Date and the denominator of which is the aggregate number of shares
of Common Stock underlying the SPA Warrants and the SPA Securities issued to
the Buyers as of the Closing Date (with respect to each Holder, the “Exchange Cap Allocation”).  In the event that any Holder shall sell or
otherwise transfer any of such Holder’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Holder’s Exchange Cap Allocation,

 

5

 

and the restrictions of the
prior sentence shall apply to such transferee with respect to the portion of
the Exchange Cap Allocation allocated to such transferee.  In the event that any holder of SPA Warrants
shall exercise all of such holder’s SPA Warrants into a number of shares of
Common Stock which, in the aggregate, is less than such holder’s Exchange Cap
Allocation, then the difference between such holder’s Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such holder shall
be allocated to the respective Exchange Cap Allocations of the remaining
holders of SPA Warrants on a pro rata basis in proportion to the shares of
Common Stock underlying the SPA Warrants then held by each such holder.  In the event that the Company is prohibited
from issuing any Warrant Shares for which an Exercise Notice has been received
as a result of the operation of this Section 1(f)(ii), the Company shall pay
cash in exchange for cancellation of such Warrant Shares, at a price per
Warrant Share equal to the difference between the Closing Sale Price and the
Exercise Price as of the date of the attempted exercise.

2.             ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES.  The Exercise Price and the
number of Warrant Shares shall be adjusted from time to time as follows:

(a)           Adjustment upon Issuance of Shares of Common Stock.  If and whenever on or after the Closing Date
the Company issues or sells, or in accordance with this Section 2 is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company)
for a consideration per share (the “New Issuance Price”)
less than the Exercise Price (the “Applicable
Price”) in effect immediately prior to such issue or sale or deemed
issuance or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the
Exercise Price then in effect shall be reduced to an amount equal to the New
Issuance Price.  Upon each such
adjustment of the Exercise Price hereunder, the number of Warrant Shares shall
be adjusted to the number of shares of Common Stock determined by multiplying
the Exercise Price in effect immediately prior to such adjustment by the number
of Warrant Shares acquirable upon exercise of this Warrant immediately prior to
such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment. 
Notwithstanding any provision to the contrary contained in this Warrant,
the provisions of this Section 2 shall not apply with respect to the issuance
or sale or deemed issuance or sale of shares of Common Stock in connection with
any Excluded Securities. For purposes of determining the adjusted Exercise
Price under this Section 2(a), the following shall be applicable:

(i)            Issuance of Options.  If the Company in any manner grants any
Options and the lowest price per share for which one share of shares of Common
Stock is issuable upon the exercise of any such Option or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of
any such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time

 

6

 

of the granting or sale of
such Option for such price per share. 
For purposes of this Section 2(a)(i), the “lowest price per share for
which one share of shares of Common Stock is issuable upon exercise of such
Options or upon conversion, exercise or exchange of such Convertible
Securities” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
shares of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. 
No further adjustment of the Exercise Price or number of Warrant Shares shall
be made upon the actual issuance of such shares of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such shares of Common Stock upon conversion, exercise or exchange
of such Convertible Securities.

(ii)           Issuance of Convertible Securities.  If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one share
of shares of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share.  For the purposes
of this Section 2(a)(ii), the “lowest price per share for which one share of
shares of Common Stock is issuable upon the conversion, exercise or exchange”
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to one share of shares of
Common Stock upon the issuance or sale of the Convertible Security and upon
conversion, exercise or exchange of such Convertible Security.  No further adjustment of the Exercise Price
or number of Warrant Shares shall be made upon the actual issuance of such
shares of Common Stock upon conversion, exercise or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of this
Warrant has been or is to be made pursuant to other provisions of this Section
2(a), no further adjustment of the Exercise Price or number of Warrant Shares
shall be made by reason of such issue or sale.

(iii)          Change in Option Price or Rate of
Conversion.  If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exercisable or exchangeable for shares of Common Stock increases or decreases
at any time, the Exercise Price and the number of Warrant Shares in effect at
the time of such increase or decrease shall be adjusted to the Exercise Price
and the number of Warrant Shares which would have been in effect at such time
had such Options or

 

7

 

Convertible Securities
provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be, at
the time initially granted, issued or sold. 
For purposes of this Section 2(a)(iii), if the terms of any Option or
Convertible Security that were outstanding as of the Issuance Date are increased
or decreased in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the shares of Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such increase or decrease.  No adjustment pursuant to this Section
2(a)(iii) shall be made if such adjustment would result in an increase of the
Exercise Price then in effect or a decrease in the number of Warrant Shares.  A change that permits the holder of an Option
or Convertible Security to utilize a cashless exercise feature shall not be
deemed to decrease the consideration payable by the holder solely by reason of
the fact that the cashless exercise feature would result in a reduction in cash
consideration receivable by the Company.

(iv)          Calculation of Consideration
Received.  In case any
Option is issued in connection with the issue or sale of other securities of
the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto, such Options will be deemed to have been
issued for the difference of (x) the aggregate fair market value of such
Options and other securities issued or sold in such integrated transaction,
less (y) the fair market value of the securities other than such Option, issued
or sold in such transaction, and the other securities issued or sold in such
integrated transaction will be deemed to have been issued or sold for the
balance of the consideration received by the Company.  If any shares
of Common Stock are issued or sold or deemed to have been issued or sold, or
provided for in an Option or Convertible Security to be issued or sold for
cash, the consideration received or to be received therefor will be deemed to
be the net amount received by the Company therefor.  If any shares of Common Stock, are issued or
sold or provided for in an Option or Convertible Security to be issued or sold
for a consideration other than cash, the amount of such consideration received
or to be received by the Company will be the fair value of such consideration,
except where such consideration consists of publicly traded securities, in
which case the amount of consideration received by the Company will be the
Closing Sale Price of such security on the date of receipt.  If any shares of Common Stock are issued to
the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of consideration therefor will
be deemed to be the fair value of such portion of the net assets and business
of the non-surviving entity as is attributable to such shares of Common
Stock.  Notwithstanding the provisions of
this Section 2(a)(iv), the purchase price provided for in an Option, or the
additional consideration, if any, paid or payable upon the issue, conversion,
exercise

 

8

 

or exchange of any
Convertible Securities, to the extent paid or payable or converted or exercised
pursuant to a cashless exercise feature, shall not be deemed to be an issuance
or sale of Common Stock for consideration other than cash.  The fair value of any consideration other
than cash or publicly traded securities will be determined jointly by the Company
and the Required Holders.  If such parties
are unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders.  The determination of
such appraiser shall be final and binding upon all parties absent manifest
error and the fees and expenses of such appraiser shall be borne by the
Company.

(v)           Record Date.  If the Company takes a record of the holders
of shares of Common Stock for the purpose of entitling them (A) to receive
a dividend or other distribution payable in shares of Common Stock, Options or
in Convertible Securities or (B) to subscribe for or purchase shares of
Common Stock, Options or Convertible Securities, then such record date will be
deemed to be the date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.

(b)           Adjustment upon Subdivision or Combination of shares of
Common Stock.  If the Company at any
time on or after the Closing Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced
and the number of Warrant Shares will be proportionately increased.  If the Company at any time on or after the
Closing Date combines (by combination, reverse stock split or otherwise) one or
more classes of its outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination will
be proportionately increased and the number of Warrant Shares will be
proportionately decreased.  Any
adjustment under this Section 2(b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

(c)           Other Events. 
If any event occurs of the type contemplated by the provisions of this
Section 2 but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or
other rights with equity features), then the Company’s Board of Directors will
make an appropriate adjustment in the Exercise Price and the number of Warrant
Shares so as to protect the rights of the Holder; provided that no such
adjustment pursuant to this Section 2(c) will increase the Exercise Price or
decrease the number of Warrant Shares as otherwise determined pursuant to this
Section 2.

 

9

 

(d)           Adjustment Upon Event of Default.  Upon the occurrence of an Event of Default
(as defined in the SPA Securities), when any of the SPA Securities are
outstanding, the Exercise Price shall be reset to the lower of (A) the Exercise
Price then in effect and (B) the Average Market Price of the Common Stock;
provided, however, that no such adjustment pursuant to this Section 2(d) will
increase the Exercise Price.  Upon each
such adjustment of the Exercise Price hereunder, the number of Warrant Shares
shall be adjusted to the number of shares of Common Stock determined by
multiplying the Exercise Price in effect immediately prior to such adjustment
by the number of Warrant Shares acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the
Exercise Price resulting from such adjustment. 
Any adjustment under this Section 2(d) shall become effective at the
close of business on the date immediately after such Event of Default.

3.           RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) other than the Excluded 
Distribution (as defined in the SPA Securities) (a “Distribution”), at any time after the
Issuance Date, then, in each such case:

(a)           any Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
shares of Common Stock entitled to receive the Distribution shall be reduced,
effective as of the close of business on such record date, to a price
determined by multiplying such Exercise Price by a fraction of which (i) the
numerator shall be the Closing Bid Price of the shares of Common Stock on the
Trading Day immediately preceding such record date minus the value of the
Distribution (as determined in good faith by the Company’s Board of Directors)
applicable to one share of shares of Common Stock, and (ii) the denominator
shall be the Closing Bid Price of the shares of Common Stock on the Trading Day
immediately preceding such record date; and

 

(b)           the number of Warrant Shares shall be increased to a
number of shares equal to the number of shares of Common Stock obtainable
immediately prior to the close of business on the record date fixed for the
determination of holders of shares of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the
immediately preceding paragraph (a); provided that in the event that the
Distribution is of shares of common stock (“Other
Shares of Common Stock”) of a company whose common shares are traded
on a national securities exchange or a national automated quotation system,
then the Holder may elect to receive a warrant to purchase Other Shares of
Common Stock in lieu of an increase in the number of Warrant Shares, the terms
of which shall be identical to those of this Warrant, except that such warrant
shall be exercisable into the number of shares of Other Shares of Common Stock
that would have been payable to the Holder pursuant to the Distribution had the
Holder exercised this Warrant immediately prior to such record date and with an
aggregate exercise price equal to the product of the amount by which the
exercise price of this Warrant was decreased with respect to the Distribution
pursuant to the terms of the immediately preceding

 

 

10

 

 

paragraph (a) and the number
of Warrant Shares calculated in accordance with the first part of this
paragraph (b).

4.                                       PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a)           Purchase Rights. 
In addition to any adjustments pursuant to Section 2 above, if at any
time the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete exercise
of this Warrant (without regard to any limitations on the exercise of this
Warrant) immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.

(b)           Fundamental Transactions.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section (4)(b) pursuant to written agreements in form and
substance satisfactory to the Required Holders and approved by the Required
Holders prior to such Fundamental Transaction, including agreements to deliver
to each holder of Warrants in exchange for
such Warrants a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Warrant, including, without limitation, an adjusted
exercise price equal to the value for the shares of Common Stock reflected by
the terms of such Fundamental Transaction, and exercisable for a corresponding
number of shares of capital stock equivalent to the shares of Common Stock
acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market.  Upon the occurrence of any Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Warrant referring
to the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of
the Company under this Warrant with the same effect as if such Successor Entity
had been named as the Company herein.  Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation
of the Fundamental Transaction, in lieu of the shares of the Common Stock (or other
securities, cash, assets or other property) purchasable
upon the exercise of the Warrant
prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or
any other property whatsoever (including warrants or other purchase or
subscription rights) which the Holder would have been entitled to receive upon
the happening of such Fundamental Transaction had this Warrant been converted immediately prior
to such Fundamental Transaction, as adjusted in accordance with the provisions
of this Warrant.  In addition to and not in
substitution for any

 

 

11

 

other rights hereunder,
prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other
assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate
provision to insure that the Holder will thereafter have the right to receive
upon an exercise of this Warrant at any time
after the consummation of the Fundamental Transaction but prior to the
Expiration Date, in lieu of the shares of the
Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to
such Fundamental Transaction, such
shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder
would have been entitled to receive upon the happening of such Fundamental
Transaction had the Warrant been exercised immediately prior to such
Fundamental Transaction.  Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the Required Holders.  The provisions of this Section shall apply
similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied without regard to any limitations on the exercise
of this Warrant.

(c)           Notwithstanding the
foregoing and the provisions of Section 4(b) above, in the event of a
Fundamental Transaction, if the Holder has not exercised the Warrant in full
prior to the consummation of the Fundamental Transaction, then the Holder shall have the right to
require such Successor Entity to purchase this Warrant from
the Holder by paying to the Holder, simultaneously with the consummation of the
Fundamental Transaction and in lieu of the warrant referred to in Section 4(b),
cash in an amount equal to the value of the remaining unexercised portion of
this Warrant on the date of such consummation, which value shall be determined by
use of the Black and Scholes Option Pricing Model.

5.                                       WARRANT HOLDER
NOT DEEMED A STOCKHOLDER. 
Except as otherwise specifically provided herein, the Holder, solely in
such Person’s capacity as a holder of this Warrant, shall not be entitled to
vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the Holder, solely in such Person’s capacity as the
Holder of this Warrant, any of the rights of a shareholder of the Company or
any right to vote, give or withhold consent to any corporate action (whether
any reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance to the Holder of
the Warrant Shares which such Person is then entitled to receive upon the due
exercise of this Warrant.  In addition,
nothing contained in this Warrant shall be construed as imposing any
liabilities on the Holder to purchase any securities (upon exercise of this
Warrant or otherwise) or as a shareholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.  Notwithstanding this Section 5, the Company
shall provide the Holder with copies of the same notices and other information
given to the shareholders of the Company generally, contemporaneously with the
giving thereof to the shareholders.

6.                                       NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation, Bylaws
or through any reorganization, transfer of assets, consolidation, merger,
scheme of arrangement, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or

 

12

 

performance
of any of the terms of this Warrant, and will at all times in good faith carry
out all the provisions of this Warrant and take all action as may be required
to protect the rights of the Holder. 
Without limiting the generality of the foregoing, the Company
(i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as any of the SPA Warrants are outstanding, promptly take
all action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
exercise of the SPA Warrants, 130% of the number of shares of Common Stock as
shall from time to time be necessary to effect the exercise of the SPA Warrants
then outstanding (without regard to any limitations on exercise).

7.                                       REISSUANCE OF
WARRANTS.

(a)           Transfer of Warrant.  If this Warrant is to be transferred, the
Holder shall surrender this Warrant to the Company, whereupon the Company will
forthwith issue and deliver upon the order of the Holder a new Warrant (in
accordance with Section 7(d)), registered as the Holder may request, representing
the right to purchase the number of Warrant Shares being transferred by the
Holder and, if less then the total number of Warrant Shares then underlying
this Warrant is being transferred, a new Warrant (in accordance with Section
7(d)) to the Holder representing the right to purchase the number of Warrant
Shares not being transferred.

(b)           Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the Warrant
Shares then underlying this Warrant.

(c)           Exchangeable for Multiple Warrants.  This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a
new Warrant or Warrants (in accordance with Section 7(d)) representing in the
aggregate the right to purchase the number of Warrant Shares then underlying
this Warrant, and each such new Warrant will represent the right to purchase
such portion of such Warrant Shares as is designated by the Holder at the time
of such surrender; provided, however, that no Warrants for fractional shares of
Common Stock shall be given.

(d)           Issuance of New Warrants.  Whenever the Company is required to issue a
new Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall
be of like tenor with this Warrant, (ii) shall represent, as indicated on the
face of such new Warrant, the right to purchase the Warrant Shares then
underlying this Warrant (or in the case of a new Warrant being issued pursuant
to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder
which, when added to the number of shares of Common Stock underlying the other

 

13

 

new Warrants issued in
connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an issuance date, as indicated
on the face of such new Warrant which is the same as the Issuance Date, and
(iv) shall have the same rights and conditions as this Warrant.

8.                                       NOTICES.  Whenever notice is required to be given under
this Warrant, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Warrant, including
in reasonable detail a description of such action and the reason
therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) immediately upon any adjustment of the Exercise Price, setting forth in
reasonable detail, and certifying, the calculation of such adjustment and (ii)
at least fifteen days prior to the date on which the Company closes its books
or takes a record (A) with respect to any dividend or distribution upon the
shares of Common Stock, (B) with respect to any grants, issuances or sales of
any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property to holders of shares of Common Stock or (C) for
determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

9.                                       AMENDMENT AND
WAIVER.  Except as otherwise provided
herein, the provisions of this Warrant may be amended, modified or waived and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the Required Holders; provided that no such action may
increase the exercise price of any SPA Warrant or decrease the number of shares
or class of stock obtainable upon exercise of any SPA Warrant without the
written consent of the Holder.  No such
amendment shall be effective to the extent that it applies to less than all of
the holders of the SPA Warrants then outstanding.  In no event shall any amendment, modification
or waiver be made to this Warrant which would adversely affect the Holder
without the written consent of the Holder.

10.                                 GOVERNING LAW.  This Warrant shall be governed by and construed
and enforced in accor­dance with, and all questions concerning the
construction, validity, interpretation and performance of this Warrant shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.

11.                                 SEVERABILITY. If any
provision of this Warrant is prohibited by law or otherwise determined to be
invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Warrant so long as this Warrant as
so modified continues to express, without material change, the original intentions
of the parties as to the subject matter hereof and the prohibited nature,
invalidity or unenforceability of the provision(s) in question does not
substantially impair the

 

14

 

respective expectations or
reciprocal obligations of the parties or the practical realization of the
benefits that would otherwise be conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

12.                                 CONSTRUCTION;
HEADINGS.  This
Warrant shall be deemed to be jointly drafted by the Company and all the Buyers
and shall not be construed against any person as the drafter hereof.  The headings of this Warrant are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Warrant.

13.                                 DISPUTE
RESOLUTION.  In the case
of a dispute as to the determination of the Exercise Price or the arithmetic
calculation of the Warrant Shares, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case
may be, to the Holder.  If the Holder and
the Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such
disputed determination or arithmetic calculation being submitted to the Holder,
then the Company shall, within two Business Days submit via facsimile (a) the
disputed determination of the Exercise Price to an independent, reputable
investment bank selected by the Company and approved by the Holder  or (b) the disputed arithmetic calculation of
the Warrant Shares to the Company’s independent, outside accountant.  The Company shall cause at its expense the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
ten Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

14.                                 REMEDIES, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall
be cumulative and in addition to all other remedies available under this Warrant
and the other Transaction Documents, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the right of the Holder to pursue actual damages for any failure by the
Company to comply with the terms of this Warrant.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that
the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

15.                                 TRANSFER.  This Warrant may be offered for sale, sold,
transferred or assigned without the consent of the Company, except as may
otherwise be required by Section 2(g) of the Securities Purchase Agreement.

16.                                 CERTAIN DEFINITIONS.  For purposes of this Warrant, the following
terms shall have the following meanings:

 

15

 

(a)           “Approved Stock Plan”
means any employee benefit plan, arrangement or other agreement which has been
approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, consultant, officer or
director for services provided to the Company.

(b)           “Average Market Price”
means, for any given date, the lesser of (i) the arithmetic average of the
Weighted Average Price of the Common Stock on each of the twenty (20)
consecutive Trading Days ending on the Trading Day immediately prior to such
given date (the “Measuring Period”),
(ii) the arithmetic average of the Weighted Average Price of the Common Stock
on each of the first five (5) consecutive Trading Days of the Measuring Period
and (iii) the arithmetic average of the Weighted Average Price of the Common
Stock on each of the last five (5) consecutive Trading Days of the Measuring
Period ; provided, that all such determinations shall be appropriately adjusted
for any stock split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common Stock during
such periods.

(c)           “Bloomberg”
means Bloomberg Financial Markets.

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

(e)           “Closing Bid Price”
and “Closing Sale Price” means,
for any security as of any date, the last closing bid price and last closing
trade price, respectively, for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing bid
price or last trade price, respectively, of such security on the principal
securities exchange or trading market where such security is listed or traded
as reported by Bloomberg, or if the foregoing do not apply, the last closing
bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no closing bid price or last trade price, respectively, is
reported for such security by Bloomberg, the average of the bid prices, or the
ask prices, respectively, of any market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.).  If the Closing Bid Price or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as
the case may be, of such security on such date shall be the fair market value
as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 13.  All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

 

 

16

 

 

 

(f)            “Closing Date”
means the “2007 Closing Date”, as defined in the Securities Purchase Agreement.

(g)           “Common
Stock” means (i) the Company’s shares of Common Stock, par
value $.001 per share, and (ii) any share capital into which such Common
Stock shall have been changed or any share capital resulting from a
reclassification of such Common Stock.

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

(i)            “Eligible Market”
means the Principal Market, the American Stock Exchange, The New York Stock
Exchange, Inc., the Nasdaq National Market or The Nasdaq Capital Market, or any
market that is a successor to any of the foregoing.

(j)            “Excluded Securities” means any
Common Stock issued or issuable: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the SPA Securities or the exercise of the SPA
Warrants issued pursuant to the Securities Purchase Agreement; (iii) in connection with the payment of any
Interest Shares on the SPA Securities; (iv) upon exercise of any
Options or Convertible Securities which are outstanding, or that are subject to
a written agreement as to their issuance listed on a schedule to the Securities Purchase
Agreement; (v) in an amount not to exceed 250,000 shares of Common Stock in the
aggregate pursuant to a judgment or settlement in connection with (i) the PIN
Financial Matter, or (ii) the UOS Energy Matter, including, without limitation,
Common Stock issuable pursuant to Options granted or Convertible Securities
issued pursuant to such judgment or settlement; and (vi) otherwise pursuant
to a written agreement that is listed on a schedule to the Securities Purchase
Agreement, provided that the terms of conversion price, exchange price,
exercise or other purchase price is not reduced, and the number of shares of
Common Stock issued or issuable is not increased, by virtue of any amendment,
modification or change to such Options, Convertible Securities or written
agreements after the Closing Date.

(k)           “Expiration Date”
means the date eighty-four (84) months after the Closing Date or, if such date
falls on a day other than a Business Day or on which trading does not take
place on the Principal Market (a “Holiday”),
the next date that is not a Holiday.

(l)            “Fundamental
Transaction” means that the Company shall directly
or indirectly, in one or more related transactions, (i) consolidate or merge
with or into (whether or not the Company is the surviving corporation)
another Person or Persons, or (ii) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of the Company
to another Person, or (iii) allow another Person (other then
the Holder) to make a purchase, tender or exchange offer that is accepted by
the holders of more than 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another
Person whereby such other Person acquires

 

 

17

 

more than 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other
Person or other Persons making or party to, or associated or affiliated with
the other Persons making or party to, such stock purchase agreement or other
business combination), or (v) reorganize, recapitalize or
reclassify its Common Stock, or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act), become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common Stock, provided,
however, that “Fundamental Transaction” shall not include any of the
transactions described above if entered into in order to consummate a Company
Full Mandatory Redemption (as such term is defined in the SPA Securities).

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

(n)           “Parent Entity”
of a Person means an entity that,
directly or indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

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

(p)           “PIN Financial Matter”  means the matter pending in the US District Court, Southern
District of New York (06 CV 2779) against the Company by PIN Financial LLC
claiming a commission for introduction to Cornell Capital Partners, L.P., which
has been aggressively denied and disputed by both Wentworth and Cornell
Capital.

(q)           “Principal Market”
means the OTC Bulletin Board.

(r)            “Registration Rights
Agreement” means that certain Amended and Restated Registration
Rights Agreement, dated as of October 31, 2007, by and among the Company and
the Buyers, as the same may be amended, modified or supplemented from time to
time, relating to, among other things, the registration of the resale of the
Common Stock issuable upon conversion of the SPA Securities.

(s)           “Required Holders”
means the holders of the SPA Warrants representing at least a majority of
shares of Common Stock underlying the SPA Warrants then outstanding.

(t)            “Securities Purchase
Agreement” means the 2006 Securities Purchase Agreement, as amended
on or prior to the date hereof (including as amended by the Amendment
Agreements), and as the same may be further amended, modified or supplemented
from time to time.

 

18

 

(u)           “SPA Securities”
means the Notes as defined in and issued pursuant to the Securities Purchase
Agreement.

(v)           “Successor Entity”
means the Person, which may be the
Company, formed by, resulting from or surviving any Fundamental Transaction or
the Person with which such Fundamental Transaction shall have been made,
provided that if such Person is not a publicly traded entity whose
common stock or equivalent equity security is quoted or listed for trading on
an Eligible Market, Successor Entity shall mean such Person’s Parent Entity.

(w)          “Trading Day”
means any day on which the Common Stock is traded on the Principal Market, or,
if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which
the Common Stock is then traded; provided that “Trading Day” shall not include
any day on which the Common Stock is scheduled to trade on such exchange or
market for less than 4.5 hours or any day that the Common Stock is suspended
from trading during the final hour of trading on such exchange or market (or if
such exchange or market does not designate in advance the closing time of
trading on such exchange or market, then during the hour ending at 4:00:00
p.m., New York Time).

(x)            “Trading Price”
means, for any given date, the arithmetic average of the Weighted Average Price
of the Common Stock during the five (5) consecutive Trading Day period ending
on the Trading Day immediately prior to such given date, as appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common Stock during
such period.

(y)           “Transaction Document”
has the meaning set forth in the Securities Purchase Agreement.

(z)            “2006 Securities
Purchase Agreement” means that certain Securities Purchase
Agreement, dated as of July 24, 2006, by and among the Company and the Buyers,
prior to giving effect to any amendment or other modification thereto.

(aa)         “UOS Energy Matter”
means, the matter pending in the Superior Court of California, County of Los
Angeles, West District (SC09064) against the Company and others by UOS Energy,
LLC relating to the Company’s refusal to purchase certain tar sands leases in
Utah in consideration of 1,000,000 shares of Common Stock.

(bb)         “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of

19

 

trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces
is the official close of trading) as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest closing bid price and the lowest closing
ask price of any of the market makers for such security as reported in the
“pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.).  If the Weighted Average Price
cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall
be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 13.  All such determinations are to be
appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during the applicable calculation period.

 

[Signature
Page Follows]

 

 

20

 

                IN WITNESS WHEREOF, the Company
has caused this Warrant to Purchase Common Stock to be duly executed as of the
Issuance Date set out above.

 

 

	
  WENTWORTH
  ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  
	
  Name:

  
	
  Title:

  

 

 

 

 

EXHIBIT A

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

WENTWORTH
ENERGY, INC.

 

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

 

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

 

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

 

                                                                ____________    a “Cashless Exercise” with respect to
_______________ Warrant Shares.

 

 

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

 

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

 

 

Date: _______________ __, ______

 

                                                                                

  Name of Registered Holder

 

	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

 

 

ACKNOWLEDGMENT

                The Company hereby acknowledges
this Exercise Notice and hereby directs Empire Stock Transfer Inc. to issue the
above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated July 24, 2006 from the Company and
acknowledged and agreed to by Empire Stock Transfer Inc, as amended.

 

	
  WENTWORTH
  ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

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