Document:

Unassociated Document

     

    THIS AGREEMENT RELATES TO AN OFFERING OF SECURITIES IN AN OFFSHORE
TRANSACTION TO PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATIONS UNDER
THE 1933 ACT) PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE “1933 ACT”), NONE OF THE SECURITIES TO WHICH THIS
AGREEMENT RELATES HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE
SECURITIES LAWS, AND, UNLESS SO REGISTERED, NONE MAY BE OFFERED OR SOLD,
DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED
HEREIN) EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S UNDER THE 1933
ACT, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE
WITH ALL APPLICABLE SECURITIES LAWS, IN ADDITION, HEDGING TRANSACTIONS INVOLVING
THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN ACCORDANCE WITH THE 1933
ACT.

    

    

    NOTE PURCHASE
AGREEMENT

    

    

    THIS NOTE PURCHASE AGREEMENT
(this “Agreement”) is
made and entered inot as of, but not necessarily on, the  day of
September, 2008, by and between Arkanova Acquisition
Corporation, a Delaware corporation (the “Company”), and the investor
indicated on the signature page hereof (the “Investor”).

    

    

    Background

    

    A. The
Company and the Investor are executing and delivering this Agreement in reliance
upon the exemptions from securities registration afforded by the provisions of
Regulation S (“Regulation
S”), as promulgated by the U.S. Securities and Exchange Commission under
the Securities Act of 1933, as amended; and

    

    B. The
Investor wishes to purchase from the Company, and the Company wishes to sell and
issue to the Investor, upon the terms and conditions stated in this Agreement,
one or more secured promissory notes (each, a “Note”) in the aggregate
principal amount set forth on the signature page hereof (the “Principal Amount”), bearing
interest at the rate of eight percent (8.0%) per annum, in the form attached
hereto as Annex “A”.  The Company is selling an aggregate of up to
Nine Million and No/100 United States Dollars ($9,000,000.00) principal amount
of promissory notes (the “Aggregate Offering”), of
which the Note is a part.

    

    

    Terms and
Conditions

    

    In
consideration of the mutual promises made herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

    

    1. Definitions. In
addition to those terms defined above and elsewhere in this Agreement, for the
purposes of this Agreement, the following terms shall have the meanings set
forth below:

    

    (a) “Affiliate” means, with
respect to any Person, any other Person which directly or indirectly through one
or more intermediaries Controls, is controlled by, or is under common control
with, such Person;

     

    
      
         

      

      
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    (b) “Business Day” means a day,
other than a Saturday or Sunday, on which banks in Houston, Texas, are open for
the general transaction of business;

    

    (c) “Company’s Knowledge” means
the actual knowledge of the executive officers (as defined in Rule 405 under the
1933 Act) of the Company;

    

    (d) “Control” (including the terms
“controlling”, “controlled by” or “under common control with”)
means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise;

    

    (e) “Guaranty” has the meaning set
forth in Section 2 hereof;

    

    (f) “Material Adverse Effect”
means a material adverse effect on (i) the assets, liabilities, results of
operations, condition (financial or otherwise), business, or prospects of the
Company and its Subsidiaries taken as a whole, or (ii) the ability of the
Company to perform its obligations under the Transaction Documents;

    

    (g) “Person” means an individual,
corporation, partnership, limited liability company, trust, business trust,
association, joint stock company, joint venture, sole proprietorship,
unincorporated organization, governmental authority or any other form of entity
not specifically listed herein;

    

    (h) “Pledge Agreement” has the
meaning set forth in Section 2 hereof;

    

    (i) “Purchase Price” means the
price paid for the Note set forth on the signature page hereof.  Wire instructions for the payment of
the Purchase Price are provided in Annex “B” attached
hereto;

    

    (j) “SEC” means the United States
Securities and Exchange Commission;

    

    (k) “Subsidiaries” means the
wholly-owned or majority owned subsidiaries of the Company;

    

    (l) “Transaction Documents” means
this Agreement, the Note, the Pledge Agreement and the Guaranty;

    

    (m) “1933 Act” means the
Securities Act of 1933, as amended, or any successor statute, and the rules and
regulations promulgated thereunder; and

    

    (n) “1934 Act”
means the Securities Exchange Act of 1934, as amended, or any successor statute,
and the rules and regulations promulgated thereunder.

     

    
      
         

      

      
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    2. Purchase and Sale of the
Notes; Security.  Subject to the terms and conditions of this
Agreement, on the Closing Date, the Company shall sell and issue to the
Investor, a Note in the Principal Amount in exchange for the Purchase Price. The
Company shall also pledge to the Investor, pursuant to terms of the form of
Pledge Agreement attached hereto as Annex “C”, a proportionate part of the
outstanding shares of the common stock of Prism Corporation, an Oklahoma
corporation that owns, by virtue of its ownership of all of the membership
interests in Provident Energy Associates of Montana, LLC, the Two Medicine Cut Bank Sand Unit in
Pondera and Glacier Counties, Montana, to secure payment of the
indebtedness evidenced by the Note (the “Security
Interest”).  The percentage of the issued and outstanding
shares of common stock of Prism Corporation that shall be pledged to the
Investor will be equal to the percentage that the Principal Amount is of the
Aggregate Offering.  As an indirect beneficiary of the Investor’s
purchase of the Note and as further security for payment of the indebtedness
evidenced by the Note, the Company’s parent, Arkanova Energy Corp., has agreed
to guarantee the payment of the Note by the execution and delivery to the
Investor at the Closing of the form of Guaranty attached hereto as Annex
“D”.

    

    3. Additional
Consideration.  As further inducement to the Investor to
purchase the Note, the Company shall deliver to the Investor at the time of
payment in full of the outstanding principal and interest on the Note and at the
election of the Investor, either (i) cash in an amount equal to five percent
(5%) of then principal balance of the Note; or (ii) such number of shares of the
common stock of the Company as shall be determined by dividing an amount equal
to five percent (5%) of the then principal balance of the Note by USD
$.50.

    

    4. Closing. There shall
be no formal closing ceremony with respect to the transactions contemplated by
this Agreement.   Instead, the parties shall execute and exchange
the Transaction Documents by facsimile and email and the closing of the
transactions contemplated by this Agreement shall be deemed to have occurred
(the “Closing”) on the
date (the “Closing
Date”) that the Company receives the Purchase Price in
full.  There may be multiple Closings of the Aggregate
Offering.

    

    5. Representations and
Warranties of the Company. The Company hereby represents and warrants to
the Investor that, except as set forth in any schedules delivered herewith
(collectively, the “Disclosure
Schedules”):

    

    (a) Organization, Good Standing
and Qualification. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to carry on
its business as now conducted and to own its properties. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property makes such qualification or leasing necessary unless the
failure to so qualify has not and could not reasonably be expected to have a
Material Adverse Effect.

    

    (b) Authorization. The
Company has full power and authority and, has taken all requisite action on the
part of the Company, its officers, directors and stockholders necessary for (i)
the authorization, execution and delivery of the Transaction Documents, (ii)
authorization of the performance of ail obligations of the Company hereunder or
thereunder, and (iii) the authorization, issuance and delivery of the
Note.  The Transaction Documents constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally.

    

    (c) Valid Issuance. The
Notes have been duly and validly authorized and, when issued and paid for
pursuant to this Agreement, shall be free and clear of all encumbrances and
restrictions (other than those created by the Investor), except for restrictions
on transfer set forth in the Transaction Documents or imposed by applicable
securities laws.

     

    
      
         

      

      
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    (d) Consents. The
execution, delivery and performance by the Company of the Transaction Documents,
and the offer, issuance and sale of the Notes require no consent of, action by
or in respect of, or filing with, any Person, governmental body, agency, or
official other than filings that have been made pursuant to applicable state
securities laws, and post-sale filings pursuant to applicable state and federal
securities laws which the Company undertakes to file within the applicable time
periods.

    

    (e) Use of Proceeds. The
proceeds of the sale of the Note hereunder shall be used by the Company for the
acquisition of the Two Medicine
Cut Bank Sand Unit in Pondera and Glacier Counties, Montana, including but not
limited to the oil and gas leases comprising same and the fixtures and
equipment used therewith, by purchasing all of the issued and outstanding
capital stock of Prism Corporation, and for general working capital purposes.
The proceeds of the sale of the Note hereunder will be held in escrow by Snell
Wylie & Tibbals, P.C., pending the closing of the purchase of the capital
stock of Prism Corporation by the Company, and if such closing does not occur by
September 30, 2008, then the proceeds shall be returned to the Investor within
five Business Days of such date.

    

    (f) No Conflict, Breach,
Violation or Default. The execution, delivery and performance of the
Transaction Documents by the Company and the issuance and sale of the Notes will
not conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under (i) the Company’s Certificate of
Incorporation or the Company’s Bylaws, both as in effect on the date hereof, or
(ii)(a) any statute, rule, regulation or order of any governmental agency or
body or any court, domestic or foreign, having jurisdiction over the Company or
any of its assets or properties, or (b) any agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of its
assets or properties is subject.

    

    (g) Litigation. To the
Company’s knowledge, there are no disputes or actions pending or threatened
against the Company or its properties.

    

    (h) No Directed Selling Efforts
or General Solicitation. Neither the Company nor any Person acting on its
behalf has conducted any general solicitation or general advertising (as those
terms are used in Regulation S) in connection with the offer or sale of any of
the Notes.

    

    (i) No Integrated
Offering. Neither the Company nor any of its Affiliates, nor any Person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any Company security or solicited any offers to buy any security, under
circumstances that would adversely affect reliance by the Company on Regulation
S for the exemption from registration for the transactions contemplated hereby
or would require registration of the Notes under the 1933 Act.

    

    (j) Private Placement.
The offer and sale of the Notes to the Investor as contemplated hereby is exempt
from the registration requirements of the 1933 Act.

    

    6. Representations and
Warranties of the Investor. The Investor hereby represents and warrants
to the Company that:

    

    (a) Power.  The
Investor has the necessary legal capacity (in the case of an individual person),
or has the power and authority (if other than an individual person) to execute
and deliver this Agreement and to perform such Investor’s obligations hereunder
and to consummate all of the transactions contemplated hereby, including but not
limited to, purchase of the Note.

     

    
      
         

      

      
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    (b) Binding
Obligation.  This Agreement has been duly executed and
delivered by the Investor and constitutes the legal, valid and binding
obligation of such Investor, enforceable against such Investor in accordance
with its terms, except as such enforceability may be limited by the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors’ rights generally.

    

    (c) Absence of Breaches and
Defaults.  The execution, delivery and performance by the
Investor of this Agreement and the consummation of the transactions contemplated
hereby do not breach or constitute a default under any loan or purchase
agreement, indenture, mortgage, deed of trust, lease, instrument, contract or
other agreement binding on or affecting either such Investor or any of his
property or assets, the breach of which, either individually or in the
aggregate, could reasonably be expected to have a material adverse effect on
such Investor.

    

    (d) Purchase Entirely for Own
Account. The Note to be received by such Investor hereunder will be
acquired for such Investor’s own account, not as nominee or agent, and not with
a view t the resale or distribution of any part thereof in
violation of the 1933 Act, and such Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same in
violation of the 1933 Act without prejudice, however, to such Investor’s right
at all times to sell or otherwise dispose of all or any part of such Note in
compliance with applicable federal and state securities laws. Nothing contained
herein shall be deemed a representation or warranty by such Investor to hold the
Note for any period of time. Such Investor is not a broker-dealer registered
with the SEC under the 1934 Act or an entity engaged in a business that would
require it to be so registered.

    

    (e) Investment
Experience. Such Investor acknowledges that it can bear the economic risk
and complete loss of its investment in the Notes and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment contemplated hereby.

    

    (f) Disclosure of
Information. Such Investor has had an opportunity to receive all
information related to the Company requested by it and to ask questions of and
receive answers from the Company regarding the Company, its business and the
terms and conditions of the offering of the Notes.

    

    (g) No
Reliance.  The Investor has not relied upon the Company or its
directors and officers, or the Company’s legal counsel or advisors for
investment, legal or tax advice, including advice with respect to the hold
periods and resale restrictions imposed upon the Notes by the securities
legislation in the jurisdiction in which the Investor resides, and has, if
desired, in all cases sought the advice of the Investor’s own personal
investment advisor, legal counsel and tax advisors, and the Investor is either
experienced in or knowledgeable with regard to the affairs of the Company or,
either alone or with its professional advisors, is capable by reason of
knowledge and experience in financial and business matters in general, and
investments in particular, of evaluating the merits and risks of an investment
in the Notes, and it is able to bear the economic risk of an investment in the
Notes and can otherwise be reasonably assumed to have the capacity to protect
its own interest in connection with the investment.

    

    (h) Restricted
Securities. Such Investor understands that the Notes are characterized as
“restricted securities” under the U.S. federal securities laws and have not been
registered under the 1933 Act or under any state or “blue sky” laws of the
United States, and are being offered in a transaction not involving any public
offering within the meaning of the 1933 Act, and unless so registered, may not
be offered or sold in the United States or to U.S. Persons as defined in
Regulation S promulgated under the 1933 Act, and in each case only in accordance
with applicable securities laws.

     

    
      
         

      

      
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    (i) Further Representations and
Acknowledgements.  The Investor further represents and
acknowledges that:

    

    (i) The
Investor is not a “U.S. Person” as that term is defined in Regulation
S.

    

    (ii) The
Investor is located outside the United States.

    

    (iii) The
Investor is not aware of any advertisement of any of the Notes to be issued
hereunder.

    

    (iv) The
Investor will not acquire the Note as a result of, and will not itself engage
in, any “directed selling
efforts” (as defined in Regulation S under the 1933 Act) in the United
States in respect of the Notes which would include any activities undertaken for
the purpose of, or that could reasonably be expected to have the effect of,
conditioning the market in the United States for the resale of the Notes;
provided, however, that the Investor may sell or otherwise dispose of the Notes
pursuant to registration under the 1933 Act and any applicable state securities
laws or under an exemption from such registration requirements and as otherwise
provided herein.

    

    (v) The
Investor agrees that the Company will refuse to register any transfer of the
Notes not made in accordance with the provisions of Regulation S, pursuant to an
effective registration statement under the 1933 Act or pursuant to an available
exemption from the registration requirements of the 1933 Act and in accordance
with applicable state securities laws.

    

    (vi) The
Investor understands and agrees that offers and sales of any Note prior to the
expiration of a period of one year after the date of transfer of the Notes (the
“Distribution Compliance
Period”), shall only be made in compliance with the safe harbor
provisions set forth in Regulation S, pursuant to the registration provisions of
the 1933 Act or an exemption therefrom, and that all offers and sales after the
Distribution Compliance Period shall be made only in compliance with the registration provisions of the 1933 Act or an exemption therefrom
and in each case only in accordance with all applicable securities
laws.

    

    (j) No Hedging
Transactions.  The Investor understands and agrees not to
engage in any hedging transactions involving the Notes prior to the end of the
Distribution Compliance Period unless such transactions are in compliance with
the provisions of the 1933 Act.

    

    (k) Restrictions on
Transfer.  The Investor hereby acknowledges and agrees to the
Company making a notation on its records or giving instructions to the registrar
and transfer agent of the Company in order to implement the restrictions on
transfer set forth and described herein.

     

    
      
         

      

      
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    (l) Legends. It is
understood that, except as provided below, certificates evidencing the Notes
will bear the following or any similar legend, as well as the legend required by
any state authority if required in connection with the issuance of sale of the
Notes:

    

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “U.S. SECURITIES ACT”) OR OTHER
APPLICABLE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH THE PROVISIONS OF
REGULATIONS S, RULE 901 THROUGH RULE 905, AND PRELIMINARY NOTES UNDER THE U.S.
SECURITIES ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE U.S. SECURITIES ACT OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT
BE CONDUCTED UNLESS IN COMPLIANCE WITH THE U.S. SECURITIES ACT.

    

    (m) No General
Solicitation. Such Investor did not learn of the investment in the Notes
as a result of any public advertising or general solicitation.

    

    (n) Brokers and Finders.
No Person will have, as a result of the transactions contemplated by the
Transaction Documents, any valid right, interest or claim against or upon the
Company or an Investor for any commission, fee or other compensation pursuant to
any agreement, arrangement or understanding entered into by or on behalf of such
Investor.

    

    7. Conditions to
Closing:

    

    (a) Conditions to the Investor’s
Obligations.  The obligation of the Investor to purchase the
Notes at the Closing is subject to the fulfillment to such Investor’s
satisfaction, on or prior to the Closing Date, of the following conditions, any
of which may be waived by the Investor:

    

    (i) The
representations and warranties made by the Company in Section 4. hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
Warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 4 hereof not
qualified as to materiality shall be true and correct in all material respects
at all times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct in all
material respects as of such earlier date. The Company shall have performed in
all material respects all obligations and conditions herein required to be
performed or observed by it on or prior to the Closing Date.

    

    (ii) The
Company shall have obtained any and all consents, permits, approvals,
registrations and waivers necessary or appropriate for consummation of the
purchase and sale of the Notes, and the consummation of the other transactions
contemplated by the Transaction Documents, all of which shall be in full force
and effect.

     

    
      
         

      

      
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    (iii) No
judgment, writ, order, injunction, award or decree of or by any court, or judge,
justice or magistrate, including any bankruptcy court or judge, or any order of
or by any governmental authority, shall have been issued, and no action or
proceeding shall have been instituted by any governmental authority, enjoining
or preventing the consummation of the transactions contemplated hereby or in the
other Transaction Documents.

     

    (b) Conditions to Obligations of
the Company. The Company’s obligation to sell and issue the Notes at the
Closing is subject to the fulfillment to the satisfaction of the Company on or
prior to the Closing Date of the following conditions, any of which may be
waived by the Company:

    

    (i) The
representations and warranties made by the Investor in Section 5 hereof shall be
true and correct in all respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investor shall have
performed in all material respects all obligations and conditions herein
required to be performed or observed by them on or prior to the Closing
Date.

    

    (ii) The
Investor shall have paid the Purchase Price to the Company.

    

    (c) Termination of Obligations
to Effect Closing; Effects.

    

    (i) The
obligations of the Company, on the one hand, and the Investor, on the other
hand, to effect the Closing shall terminate as follows:

    

    (A) Upon the
mutual written consent of the Company and the Investor;

    

    (B) By the
Company if any of the conditions set forth in Paragraph 6(b) shall have become
incapable of fulfillment, and shall not have been waived by the
Company;

    

    (C) By an
Investor (with respect to itself only) if any of the conditions set forth in
Paragraph 6(a) shall have become incapable of fulfillment, and shall not have
been waived by the Investor; or

    

    (D) By either
the Company or the Investor if the Closing has not occurred on or prior to
September 30, 2008;

    

    provided,
however, that, except in the case of clause (i) above, the party seeking to
terminate its obligation to effect the Closing shall not then be in breach of
any of its representations, warranties, covenants or agreements contained in
this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.

    

    8. Covenants and Agreements of
the Company:

    

    (a) Reports. The Company
will furnish to the Investor and/or their assignees such information relating to
the Company and its Subsidiaries as from time to time may reasonably be
requested by the Investor and/or their assignees; provided, however, that the
Company shall not disclose material nonpublic information to the Investor, or to
advisors to or representatives of the Investor, unless prior to disclosure of
such information the Company identifies such information as being material
nonpublic information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such material
nonpublic information for review and the Investor wishing to obtain such
information enters into an appropriate confidentiality agreement with the
Company with respect thereto.

     

    
      
         

      

      
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    (b) No Conflicting
Agreements. The Company will not take any action, enter into any
agreement or make any commitment that would conflict or interfere in any
material respect with the Company’s obligations to the Investor under the
Transaction Documents.

    

    (c) Compliance with Laws.
The Company will comply in all material respects with all applicable laws,
rules, regulations, orders and decrees of all governmental
authorities.

    

    (d) Security Interest.
The Company shall cooperate with the Investor in all reasonable respects in
connection with the establishment and maintenance of the Security
Interest.  The Company agrees to execute such further documents and
instruments and to take such further actions as may be reasonably necessary to
carry out the purposes and intent of the Security
Agreement.  The Company shall be responsible for the payment of all
costs and expenses reasonably incurred by Investor in connection with the
preparation of any documents, instruments or agreements required to create or
perfect the Security Interest and for all filing fees related
thereto.

    

    (e) Termination of
Covenants. The provisions of Sections 8(a), (b), (c) and (d) above shall
terminate and be of no further force and effect on the date on which the
Company’s obligations under the Note terminate.

    

    9. Survival and
Indemnification:

    

    (a) Survival. The
representations, warranties, covenants and agreements contained in this
Agreement shall survive the Closing of the transactions contemplated by this
Agreement until the repayment in full of the Note.

    

    (b) Indemnification. The
Company agrees to indemnify and hold harmless each Investor and its Affiliates
and their respective directors, officers, employees and agents from and against
any and all losses, claims, damages, liabilities and expenses (including without
limitation reasonable attorney fees and disbursements and other expenses
incurred in connection with investigating, preparing or defending any action,
claim or proceeding, pending or threatened and the costs of enforcement thereof)
(collectively, “Losses”) to which such Person
may become subject as a result of any breach of representation, warranty,
covenant or agreement made by or to be performed on the part of the Company
under the Transaction Documents, and will reimburse any such Person for all such
amounts as they are incurred by such Person.

    

    (c) Conduct
of Indemnification Proceedings. Promptly after receipt by a Person (the
“Indemnified Person”)
of notice of any demand, claim or circumstances which would or might give rise
to a claim or the commencement of any action, proceeding or investigation in
respect of which indemnity may be sought pursuant to Section 8(b), such
Indemnified Person shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Person, and shall assume the payment of all
fees and expenses; provided, however, that the failure of any Indemnified Person
so to notify the Company shall not relieve the Company of its obligations
hereunder except to the extent that the Company is materially prejudiced by such
failure to notify. In any such proceeding, any Indemnified Person shall have the
right to retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such Indemnified Person unless: (i) the Company and the
Indemnified Person shall have mutually agreed to the retention of such counsel;
or (ii) in the reasonable judgment of counsel to such Indemnified Person
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them.  The Company
shall not be liable for any settlement of any proceeding effected without its
written consent, which consent shall not he unreasonably withheld, but if
settled with such consent, or if there be a final judgment for the plaintiff,
the Company shall indemnify and hold harmless such Indemnified Person from and
against any loss or liability (to the extent stated above) by reason of such
settlement or judgment.  Without the prior written consent of the
Indemnified Person, which consent shall not be unreasonably withheld, the
Company shall not effect any settlement of any pending or threatened proceeding
in respect of which any Indemnified Person is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Person
from all liability arising out of such proceeding.

     

    
      
         

      

      
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    10. Miscellaneous.  The
following miscellaneous provisions shall apply to this Agreement:

    

    (a) Successors and
Assigns. This Agreement may not be assigned by a party hereto without the
prior written consent of the Company or the Investor, as applicable, provided,
however, that an investor may assign its rights and delegate its duties
hereunder in whole or in part to an Affiliate or to a third party acquiring the
Notes in a private transaction without the prior written consent of the Company,
after notice duly given by such Investor to the Company.  The
provisions of this Agreement shall inure to the benefit of and be binding upon
the respective permitted successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

    

    (b) Counterparts: Faxes.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.  This Agreement may also be executed via facsimile,
which shall be deemed an original.

    

    (c) Titles and Subtitles.
The titles and subtitles used in this Agreement are used for convenience only
and are not to be considered in construing or interpreting this
Agreement.

    

    (d) Notices. Unless
otherwise provided, any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given as hereinafter
described (i) if given by personal delivery, then such notice shall be deemed
given upon such delivery, (ii) if given by telex or telecopier, then such notice
shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be
deemed given upon the earlier of (A) receipt of such notice by the recipient or
(B) three days after such notice is deposited in first class mail, postage
prepaid, and (iv) if given by an internationally recognized overnight air
courier, then such notice shall be deemed given one business day after delivery
to such carrier. All notices shall be addressed to the party to be notified at
the address as follows, or at such other address as such party may designate by
ten days’ advance written notice to the other party:

    

    If to the
Company:

    

    Arkanova
Acquisition Corporation

    Suite
300

    21
Waterway Avenue

    The
Woodlands TX 77380

    Fax:
281-362-2788

    Attention:
Pierre Mulacek, President

    If to the
Investor:

    

    To the
Address for Notice as provided on the signature page hereof.

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    
 

    (e) Expenses. The parties
hereto shall pay their own costs and expenses in connection herewith. In the
event that legal proceedings are commenced by any party to this Agreement
against another party to this Agreement in connection with this Agreement or the
other Transaction Documents, the party or parties which do not prevail in such
proceedings shall severally, but not jointly, pay their pro rata share of the
reasonable attorneys’ fees and other reasonable out-of-pocket costs and expenses
incurred by the prevailing party in such proceedings.

    

    (f) Amendments and
Waivers. Any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Paragraph shall be binding upon each holder of any Notes
purchased under this Agreement at the time outstanding, each future holder of
all such Notes, and the Company.

    

    (g) Publicity. Except as
set forth below, no public release or announcement concerning the transactions
contemplated hereby shall be issued by the Company or the Investor without the
prior consent of the Company (in the case of a release or announcement by the
Investor) or the Investor (in the case of a release or announcement by the
Company) (which consents shall not be unreasonably withheld), except as such
release or announcement may be required by law or the applicable rules or
regulations of any securities exchange or securities market, in which case the
Company or the Investor, as the case may be, shall allow the Investor or the
Company, as applicable, to the extent reasonably practicable in the
circumstances, reasonable time to comment on such release or announcement in
advance of such issuance.

    

    (h) Severability. Any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the
remaining provisions hereof but shall be interpreted as if it were written so as
to be enforceable to the maximum extent permitted by applicable law, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any
respect.

    

    (i) Entire Agreement.
This Agreement, including the exhibits and any disclosure schedules, and the
other Transaction Documents constitute the entire agreement among the parties
hereof with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings, both oral and written, between the parties
with respect to the subject matter hereof and thereof.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    (j) Further Assurances.
The parties shall execute and deliver all such further instruments and documents
and take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.

    

    (k) Governing Law: Consent to
Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas without regard
to the choice of law principles thereof. Each of the parties hereto irrevocably
submits to the exclusive jurisdiction of the Courts of the State of Texas for
the purpose of any suit, action, proceeding or judgment relating to or arising
out of this Agreement and the transactions contemplated hereby. Service of
process in connection with any such suit, action or proceeding may be served on
each party hereto anywhere in the world by the same methods as are specified for
the giving of notices under this Agreement. Each of the parties hereto
irrevocably consents to the jurisdiction of any such court in any such suit,
action or proceeding and to the laying of venue in such court. Each party hereto
irrevocably waives any objection to the laying of venue of any such suit, action
or proceeding brought in such courts and irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. EACH OF THE
PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION
WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED
SPECIFICALLY AS TO THIS WAIVER.

    

    

     

    

    

    

    

    [REMAINDER OF PAGE INTENTIONALLY LEFT
BLANK]

     

     

     

    
      
         

      

      
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    Signatures

    

    To
evidence the binding effect of the terms and conditions set forth above, the
parties have executed this Agreement or caused their duly authorized officers to
execute this Agreement as of the date first above written.

    

    

    ARKANOVA
ENERGY CORPORATION

    

    

    

    By:
_______________________________

          Pierre
Mulacek, President

    

    

    THE
INVESTOR

    

    

    

    By:
_______________________________

          Authorized
Signatory

    

    Print
Name:                                                                                                

    

    Print
Title (if
applicable):                                                                                                

    

    Principal
Amount of Note purchased: USD $______________

    

    
      	
              ADDRESS
      FOR NOTICE

            
	 
      
	
              C/o:
      _____________________________________________________

            
	
              Street:
      ___________________________________________________

            
	
              City/State/Zip:
      _____________________________________________

            
	
              Attention:
      ________________________________________________

            
	
              Tel:
      _____________________________________________________

            
	
              Fax:
      _____________________________________________________

            
	 
      
	
              DELIVERY
      INSTRUCTIONS

            
	
              (if
      different from above)

            
	 
      
	
              C/o:
      _____________________________________________________

            
	
              Street:
      ___________________________________________________

            
	
              City/State/Zip:
      _____________________________________________

            
	
              Attention:
      ________________________________________________

            
	
              Tel:
      _____________________________________________________

            

    

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    ANNEX
“A”

    

    

    THIS
INSTRUMENT RELATES TO AN OFFERING OF SECURITIES IN AN OFFSHORE TRANSACTION TO
PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933 ACT)
PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE “1933 ACT”). NONE OF THE SECURITIES TO WHICH THIS INSTRUMENT
RELATES HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE SECURITIES
LAWS, AND, UNLESS SO REGISTERED, NONE MAY BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED HEREIN EXCEPT IN
ACCORDANCE WITH THE PROVISIONS OF REGULATION S UNDER THE 1933 ACT, PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE 1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE WITH ALL
APPLICABLE SECURITIES LAWS. IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE
SECURITIES MAY NOT BE CONDUCTED UNLESS IN ACCORDANCE WITH THE 1933
ACT.

    

    

    USD $
________________                                                                                                                     September
_____, 2008

    

    ARKANOVA
ACQUISITION CORPORATION

    

    8%
SECURED PROMISSORY NOTE

    

    FOR VALUE RECEIVED, Arkanova Acquisition
Corporation, a corporation organized and existing under the laws of the
State of Delaware (the “Company”), promises to pay to
______________________ of _______________, the
registered holder hereof (the “Holder”), the principal sum
of ________________($____________)
United  States Dollars on the Maturity Date (as defined below) and to
pay interest on the principal sum outstanding from time to time in arrears at
the rate of eight percent (8.0 %) per annum (computed on the basis of the actual
number of days elapsed and a year of 365 days), accruing from the date of
initial issuance of this Note (the “Issue Date”), until payment
in full of the principal sum has been made or duly provided for (whether before
or after the Maturity Date).

    

    This Note
is being issued pursuant to the terms of a Note Purchase Agreement of even date
herewith (the “NPA”),
to which the Company and the Holder (or the Holder’s predecessor in interest)
are parties.  Capitalized terms not otherwise defined herein shall
have the meanings ascribed to them in the NPA.

    

    This Note
is subject to the following additional provisions:

    

    1. Maturity
Date.  The term “Maturity Date” means the date
occurring at any time after the first anniversary of this Note upon which the
Holder demands payment of this Note in writing.  This Note shall be in
default if payment is not made within five (5) days of demand after the Maturity
Date.

    

    2. Security.  The
payment when due of this Note is secured by a pledge of shares of shares of the
outstanding common stock of the Company’s wholly owned subsidiary, Prism
Corporation, in accordance with the terms and conditions of a Pledge Agreement
of even date herewith.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    3. Prepayment
Provisions.  This Note may be prepaid in whole or in part at
any time prior to the Maturity Date, without penalty.  Any payment
shall be applied as provided in Section 4.

    

    4. Application of
Payments.  Any payment made on account of the Note shall be
applied in the following order of priority: (i) first, to accrued interest
through and including the date of payment, and then (ii) to principal of this
Note.

    

    5. Default.  The
Company shall be in default hereunder if any payment is not made within five (5)
days of demand on or after the Maturity Date.

    

    6. Manner of
Payments.  All payments contemplated hereby to be made “in
cash” shall be made in immediately available good funds of United States of
America currency by wire transfer to an account designated in writing by the
Holder to the Company (which account may be changed by notice similarly
given).  For purposes of this Note, the phrase “date of payment” means
the date good funds are received in the account designated by the notice which
is then currently effective.

    

    7. No Impairment; Direct
Obligation.  Subject to the terms of the NPA, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Note at the
time, place, and rate, and in the coin or currency, as herein prescribed. This
Note is a direct obligation of the Company.

    

    8. Limited
Recourse.  No recourse shall be had for the payment of the
principal of, or the interest on, this Note, or for any claim based hereon, or
otherwise in respect hereof, against any incorporator, shareholder, officer or
director, as such, past, present or future, of the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.

    

    9. Restrictions on
Resale.  The Holder of the Note, by acceptance hereof, agrees
that this Note is being acquired for investment and that such Holder will not
offer, sell or otherwise dispose of this Note except under circumstances which
will not result in a violation of the Securities Act of 1933, as amended, or any
applicable state blue sky or foreign laws or similar laws relating to the sale
of securities.

    

    10. Notices.  Any
notice given by any party to the other with respect to this Note shall be given
in the manner contemplated by the NPA in the Section entitled
“Notices.”

    

    11. Applicable
Laws.  This Note shall be governed by and construed in
accordance with the laws of the State of Texas.  Each of the parties
consents to the exclusive jurisdiction of the Courts of the State of Texas in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the
bringing of any such proceeding in such jurisdictions.  To the extent
determined by such court, the Company shall reimburse the Holder for any
reasonable legal fees and disbursements incurred by the Holder in enforcement of
or protection of any of its rights under any of this Note.

    

    12. Jury Trial Waiver.
The Company and the Holder hereby waive a trial by jury in any action,
proceeding or counterclaim brought by either of the Parties hereto against the
other in respect of any matter arising out of or in connection with this
Note.

    

    13. Events of
Default.  Each of he following shall constitute an “Event of
Default”:

    

    (a) Default in
Payment.  The Company shall default in the payment of principal
or interest on this Note or any other amount due; or

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    (b) Breach of Representation or
Warranty.  Any of the representations or warranties made by the
Company herein, in the NPA or any of the other Transaction Agreements shall be
false or misleading in any material respect at the time made; or

    

    (c) Change of
Management.  The occurrence of any event which results in the
current executive officers of the Company no longer serving in their respective
current capacities with the Company; or

    

    (d) Assignment for
Creditors.  The Company shall (i) make an assignment for the
benefit of creditors or commence proceedings for its dissolution; or (ii) apply
for or consent to the appointment of a trustee, liquidator or receiver for its
or for a substantial part of its property or business; or

    

    (e) Appointment of
Trustee.  A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its property or business without
its consent; or

    

    (f) Court
Control.  Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties or assets of
the Company; or

    

    (g) Bankruptcy
Proceedings. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the
Company.

    

    If an
Event of Default shall have occurred, then, or at any time thereafter, and in
each and every such case, unless such Event of Default shall have been waived in
writing by the Holder (which waiver shall not be deemed to be a waiver of any
subsequent default) at the option of the Holder and in the Holder’s sole
discretion, the Holder may consider this Note immediately due and payable (and
the Maturity Date shall be accelerated accordingly), without presentment,
demand, protest or notice of any kinds, all of which are hereby expressly
waived, anything herein or in any note or other instruments contained to the
contrary notwithstanding, and interest shall accrue on the total amount due (the
“Default Amount”) on
the date of the Event of Default (the “Default Date”) at the rate of
16% per annum or the maximum rate allowed by law, whichever is lower, from the
Default Date until the date payment is made, and the Holder may immediately
enforce any and all of the Holder’s rights and remedies provided herein or any
other rights or remedies afforded by law.

    

    14.  Covenants of the
Company.  The Company covenants and agrees that, so long as any
principal of, or interest on, this Note shall remain unpaid, unless the Holder
shall otherwise consent in writing, it will comply with the following
terms:

    

    (a) Reporting
Requirements. The Company will furnish to the Holder or make publicly
available:

    

    (i) as soon
as possible, and in any event within ten (10) days after obtaining knowledge of
the occurrence of (A) an Event of Default, (B) an event which, with the giving
of notice or the lapse of time or both, would constitute an Event of Default, or
(C) a material adverse change in the condition or operations, financial or
otherwise, of the Company, taken as whole, the written statement of the Chief
Executive Officer or the Chief Financial Officer of the Company, setting forth
the details of such Event of Default, event or material adverse change;
and

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    (ii) promptly
after the commencement thereof, notice of each action, suit or proceeding before
any court or other governmental authority or other regulatory body or any
arbitrator as to which there is a reasonable possibility of a determination that
would (A) materially impact the ability of the Company to conduct its business,
(B) materially and adversely affect the business, operations or financial
condition of the Company, or (C) impair the validity or enforceability of the
Note or the ability of the Company to perform their obligations under the
Note.

    

    (b) Compliance with Laws.
The Company will comply, in all material respects with all applicable laws,
rules, regulations and orders, except to the extent that noncompliance would not
have a Material Adverse Effect upon the business, operations or financial
condition of the Company taken as a whole.

    

    (c) Preservation of
Existence. The Company will maintain and preserve its
existence.

    

    (d) Maintenance of
Properties. The Company will maintain and preserve all of its material
properties which are necessary in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted, and comply, at all
times with the provisions of all material leases (including oil and gas leases)
to which it is a party as lessee or under which it occupies property, so as to
prevent any material forfeiture or material loss thereof
thereunder.  The Company shall not allow any of its direct or indirect
subsidiaries to dispose of any of their material assets, including any material
assets in the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties,
Montana, and shall further not allow any such subsidiary to encumber any of such
assets or incur any indebtedness, except trade payables incurred in the ordinary
course of business.

    

    (e) Maintenance of
Insurance. The Company will maintain, with responsible and reputable
insurers, insurance with respect to its properties and business, in such amounts
and covering such risks, as is carried generally in accordance with sound
business practice by companies in similar businesses in the same localities in
which the Company is situated.

    

    (f) Keeping of Records and Books
of Account. The Company will keep adequate records and books of account,
with complete entries made in accordance with generally accepted accounting
principles, reflecting all of its financial and other business
transactions.

    

    15. Qualification.  In
the event for any reason, any payment by or act of the Company or the Holder
shall result in payment of interest which would exceed the limit authorized by
or be in violation of the law of the jurisdiction applicable to this Note, then
ipso facto the
obligation of the Company to pay interest or perform such act or requirement
shall be reduced to the limit authorized under such law, so that in no event
shall the Company be obligated to pay any such interest, perform any such act or
be bound by any requirement which would result in the payment of interest in
excess of the limit so authorized. In the event any payment by or act of the
Company shall result in the extraction of a rate of interest in excess of a sum
which is lawfully collectible as interest, then such amount (to the extent of
such excess not returned to the Company) shall, without further agreement or
notice between or by the Company or the Holder, be deemed applied to the payment
of principal, if any, hereunder immediately upon receipt of such excess funds by
the Holder, with the same force and effect as though the Company had
specifically designated such sums to be so applied to principal and the Holder
had agreed to accept such sums as an interest-free prepayment of this Note. If
any part of such excess remains after the principal has been paid in full,
whether by the provisions of the preceding sentences of this Section or
otherwise, such excess shall be deemed to be an interest-free loan from the
Company to the Holder, which loan shall be payable immediately upon demand by
the Company. The provisions of this Section shall control every other provision
of this Note.

     

    
      
         

      

      
        17

        
          

        

      

      
         

    

    Signature

    

    To
evidence the binding effect of the foregoing provisions, the Company has caused
this instrument to be duly executed by an officer thereunto duly authorized as
of, but not necessarily on, the date first above written.

     

     

    
      
        	 	ARKANOVA
      ACQUISITION  CORPORATION	 
	 	 	 	 
	
                 

              	
                By:
      

              	 	 
	 	 	Pierre
      Mulacek,	 
	 	 	President	 
	 	 	 	 

      

    

     

     

     

     

    
      
         

      

      
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    ANNEX
“B”

    

    Wire
Instructions

    

     

     

     

    
      	Bank: 	 	COMERICA
    BANK
	 	 	 
	Swift
      Code: 	 	MNBDUS33
	 	 	 
	Account
of:	 	Pegasus Bank;
      Account No. 1851661080
	 	 	 
	Final Credit
      BNF:	 	Snell Wylie &
      Tibbals; Account No. 50000248
	 	 	 
	      
              SWT
      Credit to:

            	 	      
              (1305.0004)

            

    

                                                

                                                

    
      
         

      

      
        19

        
          

        

      

      
         

    

    ANNEX
“C”

    

    

    THIS
AGREEMENT RELATES TO AN OFFERING OF SECURITIES IN AN OFFSHORE TRANSACTION TO
PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933 ACT)
PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE “1933 ACT”). NONE OF THE SECURITIES TO WHICH THIS AGREEMENT RELATES
HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE SECURITIES LAWS, AND,
UNLESS SO REGISTERED, NONE MAY BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN
THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED HEREIN EXCEPT IN ACCORDANCE
WITH THE PROVISIONS OF REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE WITH ALL APPLICABLE SECURITIES
LAWS. IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE
CONDUCTED UNLESS IN ACCORDANCE WITH THE 1933 ACT.

    

    

    PLEDGE
AGREEMENT

    

    

    THIS PLEDGE AGREEMENT (this
“Agreement”) is made
and entered into this ___ day of September, 2008, by and between Arkanova Acquisition
Corporation, a Delaware corporation, (“Pledgor”), and the investor
indicated on the signature page hereof  (“Secured Party”).

    

    

    Background

    

    A. On even
date herewith, Pledgor and the Secured Party entered into a Note Purchase
Agreement (the “NPA”)”)
pursuant to which Pledgor issued to Secured Party a Secured Promissory Note (the
“Note”) and agreed to
pledge shares of the issued and outstanding common stock of the Pledgor’s wholly
owned subsidiary, Prism Corporation, to secure payment of the indebtedness
evidenced by the Note; and

    

    B. The
parties desire to set forth in writing their agreement as to the terms and
conditions of the administration and disposition of the pledge of shares of
Prism Corporation and certain other matters as set forth herein;

    

    

    Terms and
Conditions

    

    In
consideration of the mutual benefits to be derived from the covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:

    

    1. Pledge.  As
collateral security for the payment and performance of the Obligations (as
defined in Section 2 hereof) by Pledgor, Pledgor hereby pledges to the Secured
Party, and grants, transfers, assigns and hypothecates to the Secured Party a
continuing security interest in, the following property owned by Pledgor (the
“Pledged
Collateral”):

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    
 

    (a) Pledged
Shares.  The number of issued and outstanding shares of common
stock of Prism Corporation set forth on the signature page hereto and delivered
this date to Secured Party in accordance with Section 3(a) hereof as security
for the indebtedness evidenced by the Note, together with any and all
certificates, stock powers and other instruments evidencing or relating to such
shares of stock (collectively, the “Pledged
Shares”).

    

    (b) Dividends and
Proceeds.  Except as provided in Section 10(b) hereof, all
dividends, cash, products, proceeds, securities, instruments and other property
from time to time received, receivable or otherwise distributed in respect of or
in exchange for any or all of the Pledged Shares, including, but not limited to,
all distributions or payments in partial or complete liquidation or redemption
of the Pledged Shares.

    

    (c) Additional
Shares.  All additional shares of common stock of Prism
Corporation from time to time hereafter acquired by Pledgor arising from the
Pledged Shares as a result of any reclassification, readjustment, stock split,
stock dividend, or reorganization and the certificates representing such
additional shares, and all dividends, cash, products, proceeds, securities,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
shares.

    

    2. Obligations
Secured.  This Agreement secures the payment and performance of
(i) all obligations of Pledgor to the Secured Party now or hereafter existing
under the Note whether for indebtedness (principal and interest), fees, damages,
expenses or otherwise, and whether evidenced by any instrument, agreement or
book account, (ii) all obligations of Pledgor to the Secured Party now or
hereafter existing under the NPA, and (iii) all obligations of Pledgor to the
Secured Party now or hereafter existing under this Agreement, regardless of
whether the amounts referred to in clause (i), (ii) or (iii) above are due or to
become due, direct or indirect, primary or secondary, joint, several, or joint
and several, or fixed or contingent obligations of Pledgor.  All of
such obligations are collectively referred to herein as the “Obligations".

    

    3. Delivery
of  Pledged Collateral.  (a)  Upon the
execution of this Agreement, Pledgor shall deliver and deposit with the Secured
Party the stock certificate or certificates or other instruments evidencing the
Pledged Shares, along with such assignments, financing statements, endorsements,
and transfer powers duly executed by Pledgor in blank as will enable the Secured
Party to register the Pledged Shares in the Secured Party's name or in the name
of the Secured Party's nominee in the appropriate record books of Prism
Corporation in the Event of Default (as such term is herein after
defined).

    

    4. Return of Pledged
Collateral.  Secured Party shall return the Pledged Collateral
or the balance thereof, if any, in its possession to Pledgor upon payment in
full of the Obligations.

    

    5. Further Assurances and
Documentation.  Pledgor agrees that at any time and from time
to time, at the expense of Pledgor, Pledgor will promptly execute and deliver
all further instruments and documents, and take all further action that the
Secured Party may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Secured Party to exercise and enforce the Secured Party's rights and remedies
hereunder with respect to any Pledged Collateral.

     

    
      
         

      

      
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    6. Responsibility for Pledged
Collateral.  Secured Party shall exercise reasonable care in
the custody and preservation of the Pledged Collateral.  The Secured
Party shall be deemed to have exercised reasonable care in the custody and
preservation of the Pledged Collateral in the Secured Party's possession if the
Pledged Collateral is accorded treatment substantially equal to that which the
Secured Party accords the Secured Party's own property of similar
nature.  The Secured Party shall be under no duty or responsibility to
(i) fix or preserve the rights of Pledgor with respect to the Pledged
Collateral
against prior parties, (ii) fix or preserve rights against any parties to any
instrument or chattel paper which may be a part of the Pledged Collateral, (iii)
sell or otherwise realize upon the Pledged Collateral, or (iv) seek payment from
any particular source.  Without limiting the generality of the
foregoing, the Secured Party shall not have any responsibility or obligation for
any action in connection with any conversion, call, exchange, maturity,
redemption, retirement, tender or any other event relating to any of the Pledged
Collateral whether or not the Secured Party has or is deemed to have knowledge
of such matters.  The Secured Party shall never be liable for the
Secured Party's failure to use diligence to collect any amount payable with
respect to the Pledged Collateral, but shall be liable only to account to
Pledgor for what the Secured Party may actually collect or receive
thereon.  After payment of part of the Obligations, the Secured Party
may, at the Secured Party's option, retain all or any portion of the Pledged
Collateral as security for any remaining Obligations and retain this Agreement
as evidence of such security.

    

    7. Representations and
Warranties.  Pledgor represents and warrants to Secured Party
as follows:

    

    (a) Authorization.  The
execution, delivery and performance of this Agreement are within Pledgor's
powers and are not in contravention of any applicable law.

    

    (b) Absence of
Conflicts.  Pledgor is not obligated under any contract or
agreement, which materially or adversely affects Pledgor's properties or assets,
or Pledgor's financial condition, and neither the execution nor delivery of this
Agreement nor the consummation of any transaction contemplated hereby will
conflict with or result in any breach of the terms, conditions, or provisions
of, or constitute a default under any agreement or instrument relative thereto
to which Pledgor is subject.

    

    (c) Authorized
Shares.  The Pledged Shares have been duly authorized and
validly issued by Prism Corporation and are fully paid and
non-assessable.

    

    (d) Unencumbered Title to
Pledged Collateral.  Pledgor is the legal and beneficial owner
of the Pledged Collateral owned by Pledgor, free and clear of any lien, security
interest, option or other charge or encumbrance whatsoever except for the
security interest created by this Agreement.  Until such time as the
Obligations have been paid in full, Pledgor, at Pledgor's sole expense, will
keep the Pledged Collateral free from other liens, security interests,
encumbrances or claims; and Pledgor will defend the Pledged Collateral against
the claims and demands of all persons claiming the Pledged Collateral or any
part thereof or interest therein.

    

    (e) Perfected Security
Interest.  The pledge of the Pledged Shares and the delivery
thereof to the Secured Party pursuant to this Agreement creates a valid and
perfected first priority security interest in the Pledged Collateral, securing
the payment of the Obligations.

    

    (f) No Approval
Required.  No authorization, approval, or other action by, and
no notice to or filing with, any governmental authority or regulatory body is
required either (i) for the pledge by Pledgor of the Pledged Collateral pursuant
to this Agreement or for the execution, delivery or performance of the Agreement
by Pledgor or (ii) for the exercise by the Secured Party of the rights provided
for in this Agreement or the remedies in respect of the Pledged Collateral
pursuant to this Agreement (except as may be required in connection with such
disposition by laws affecting the offering and sale of securities
generally).

     

    
      
         

      

      
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    (g) Accurate
Information.  All information contained in statements furnished
or to be furnished to the Secured Party by or on behalf of Pledgor in connection
with the Pledged Collateral or the Obligations is complete and accurate in all
material respects.

    

    8. Affirmative Covenants of
Pledgor.  For and during such period of time as any portion of
the Obligations shall remain unpaid or Pledgor shall have any commitment or
obligation hereunder, Pledgor shall comply with each of the following provisions
of this Section, unless the Secured Party shall otherwise consent in
writing:

    

    (a) Performance of
Obligations.  Pledgor will duly and punctually pay and perform
each of the Obligations to the extent such party is liable therefor, including,
without limitation, its obligations under this Agreement and each of the other
documents securing the Obligations, as the same may at any time be amended or
modified.

    

    (b) Preservation of Existence
and Franchises and Conduct of Business.  Pledgor will do , and
will cause  both Prism Corporation and its wholly owned subsidiary,
Provident Energy Associates of Montana, LLC, to do, or cause to be done, all
things necessary to preserve and keep in full force and effect their respective
corporate existence, rights, leases (including oil and gas leases), agreements,
and all other licenses or rights necessary to comply with all laws, regulations,
rules, statutes, or other provisions applicable to the respective entity in the
operation of their respective business, noncompliance with which would
materially and adversely affect either the business or credit of such
entity.

    

    (c) Sales or Encumbrances of
Subsidiary Assets.  Pledgor shall not allow any of its direct
or indirect subsidiaries to dispose of any of their material assets,
including  any material assets in the  Two Medicine Cut Bank
Sand Unit in Pondera and Glacier Counties, Montana, and shall further not allow
any such subsidiary to encumber any of such assets or incur any indebtedness,
except trade payables incurred in the ordinary course of business.

    

    (d) Confidential
Information.   Pledgor will, and will cause its
subsidiaries to, furnish to the Secured Party any information which the Secured
Party may from time to time reasonably request concerning any covenant,
provision or condition of the Agreement or any matter in connection with the
business and operations of Pledgor and its subsidiaries.  Secured
Party agrees that, until the occurrence of an Event of Default, it will take all
reasonable steps to keep confidential any proprietary information given to it by
Pledgor, provided, however, that this restriction shall not apply to information
which (i) has at the time in question entered the public domain through no
default of this provision, or (ii) is required to be disclosed by law or by any
order, rule or regulation (whether valid or invalid) of any court or
governmental agency, or authority.

    

    (e) Notice of Material Events
and Defense of Action.  Pledgor will promptly notify Secured
Party of:  (i) any material adverse change in Pledgor’s or any
subsidiary’s financial condition, (ii) the occurrence of any Event of Default,
(iii) the acceleration of the maturity of any debt owed by Pledgor or sub
sididary or of any default by Pledgor or any subsidiary under any indenture,
mortgage, agreement, contract or other instrument to which Pledgor or any
subsidiary is a party or by which any of them or any of the properties is bound;
(iv) any material adverse claim (or any claim of $25,000 or more) asserted
against Pledgor or any subsidiary or with respect to Pledgor’s or any
subsidiary’s properties, or (v) the filing of any suit or proceeding against
Pledgor or any subsidiary.  Upon the occurrence of any of the
foregoing, Pledgor will take, or cause to be taken, all reasonably necessary or
appropriate steps to remedy promptly any such material adverse change or
default, to protect against any such adverse claim, to appear in and defend any
such suit or proceeding, and to resolve all controversies on account of any of
the foregoing at Pledgor’s expense.

     

    
      
         

      

      
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    (f) Reporting
Requirements.  Within ten (10) days of the end of each calendar
quarter, Pledgor shall furnish Secured Party with a sworn statement of Pledgor,
stating that Pledgor has no knowledge that an Event of Default has occurred, or
such event has occurred and is continuing as of the date of such statement and a
statement as to the nature thereof and the action which Pledgor proposes to take
with respect thereto.

    

    9. Expenses.  Pledgor
will upon demand pay to Secured Party the amount of any and all reasonable
expenses, including the reasonable fees and expenses of the Secured Party's
counsel and of any experts and agents, which the Secured Party may incur after
the occurrence of an Event of Default (as hereinafter defined) in connection
with (i) the custody or preservation of, or the sale of, collection from, or
other realization upon, any of the Pledged Collateral, or (ii) the exercise or
enforcement of any of the rights of the Secured Party hereunder.

    

    10. Voting Rights and
Dividends.  So long as no Event of Default or event that, with
the giving of notice or the lapse of time, or both, would become an Event of
Default shall have occurred and be continuing:

    

    (a) Pledgor
shall be entitled to exercise any and all voting and other consensual rights
pertaining to the Pledged Collateral or any part thereof for any purpose not
inconsistent with the terms of this Agreement; provided, however, Pledgor may
not exercise such voting rights so as to impair the value of the Pledged
Collateral or to dilute the Secured Party's ownership percentage represented by
the Pledged Collateral and Secured Party shall not be required to exercise
preemptive rights.

    

    (b) Pledgor
shall be entitled to receive and retain any and all dividends and interest paid
in respect of the Pledged Collateral; provided, however, that any and all (A)
dividends and interest paid or payable other than cash in respect of, and
instruments and other property received, receivable or otherwise distributed in
respect of, or in exchange for, any Pledged Collateral; (B) dividends and other
distributions paid or payable in cash in respect of any Pledged Collateral in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash
paid, payable or otherwise distributed in redemption of, or in exchange for, any
Pledged Collateral, shall be, and shall be forthwith delivered to the Secured
Party to hold as, Pledged Collateral and shall, if received by Pledgor, be
received in trust for the benefit of the Secured Party, be segregated from the
other property or funds of Pledgor, and be forthwith delivered to Secured Party
as Pledged Collateral in the same form as so received (with any necessary
endorsements); and provided further, that Pledgor shall promptly notify the
Secured Party of the occurrence of any of the above matters upon the occurrence
thereof.

    

    (c) Secured
Party shall execute and deliver (or cause to be executed and delivered) to
Pledgor all such proxies and other instruments as Pledgor may reasonably request
for the purpose of enabling Pledgor to exercise the voting and other rights
which Pledgor is entitled to exercise pursuant to paragraph (i) above and to
receive the dividends or interest payments which Pledgor is authorized to
receive and retain pursuant to Subsection (b) above.

     

    
      
         

      

      
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    11. Events of
Default.  The occurrence of any one or more of the following
events shall constitute an Event of Default hereunder:

    

    (a) Default Under
Obligations.  Pledgor shall be in default under the terms of
the Obligations, including the Note, the NPA and this Agreement.

    

    (b) Defaults Under Other
Instruments.  Pledgor shall be in default under the terms of
any other documents and instruments relating to the Aggregate Offering, as such
term is defined in the NPA.

    

    (c) Insolvency.   Pledgor
or any subsidiary shall admit in writing Pledgor's or subsidiary’s inability to
pay its debts, or shall make a general assignment of Pledgor's or any
subsidiary’s assets or property rights for the benefit of Pledgor's or any
subsidiary’s creditors; or any proceeding shall be instituted by or against
Pledgor or any subsidiary seeking to adjudicate Pledgor or any subsidiary as a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or
composition of Pledgor or any subsidiary or Pledgor's or any subsidiary’s debts
under any law relating to bankruptcy, insolvency or reorganization or release of
debtors, or seeking appointment of a receiver, custodian, trustee, or other
similar official for Pledgor or any subsidiary or for any substantial part of
the property of Pledgor or any subsidiary and in the case of any such proceeding
instituted against Pledgor or any subsidiary shall remain undismissed for a
period of ninety (90) days.

    

    (d) Failure to Perform
Obligations.  Pledgor shall fail to perform any of Pledgor’s
covenants or obligations set forth in this Agreement.

    

    (e) Falsity of
Representation.  Any warranty, representation or statement made
or furnished to Secured Party by Pledgor pursuant to this Agreement shall prove
to have been false in any material respect when made or furnished.

    

    (f) Levy Against
Collateral.  The levy against the Pledged Collateral, or any
part thereof, of any execution, attachment, sequestration or other
writ.

    

    12. Remedies Upon
Default.

    

    (a) Remedies.  Upon
the occurrence of an Event of Default, and in addition to any and all other
rights and remedies which Secured Party may then have hereunder, or under the
Texas Business and Commerce Code or any comparable uniform commercial code
applicable to Pledgor (the “Code”), or otherwise, Secured
Party may at Secured Party's option (i) declare the entire unpaid balance of
principal of, and all accrued interest on, the Obligations immediately due and
payable without demand, presentment, notice of default, notice of intent to
accelerate or notice of acceleration of maturity, all of which are hereby
expressly waived; (ii) notify any person obligated on any of the Pledged
Collateral of the security interest of Secured Party therein and request such
person to make payment directly to the Secured Party, (iii) demand, sue
for, collect or otherwise reduce Secured Party's claims to judgment, foreclose
or otherwise enforce the Secured Party's security interest through judicial
procedure or make any settlement or compromise Secured Party deems desirable
with respect to any of the Pledged Collateral; (iv) after notification,
expressly provided for herein, if any, sell or otherwise dispose of, at the
office of Secured Party, or elsewhere, as chosen by Secured Party, all or any
part of the Pledged Collateral, and any such sale or other disposition may be as
a unit or in parcels, by public or private proceedings, and by way of one or
more contracts (it being agreed that the sale of any part of the Pledged
Collateral shall not exhaust the power of sale granted hereunder, but sales may
be made from time to time until all of the Pledged Collateral has been sold or
until the Obligations have been paid in full) and at such sale it shall not be
necessary to exhibit the Pledged Collateral; (v) at Secured Party's discretion,
retain the Pledged Collateral in satisfaction of the Obligations whenever the
circumstances are such that Secured Party is entitled to do so under the Code;
(vi) apply by appropriate judicial proceedings for appointment of a
receiver for the Pledged Collateral, or any part thereof; (vii) purchase
the Pledged Collateral at any public sale; (viii) purchase the Pledged
Collateral at any private sale; and/or (ix) exercise the rights set forth
in Section 13(b) hereof.  The foregoing remedies shall be cumulative
and except for the provisions of Section 13(a)(v) above without prejudice to the
Secured Party's right to recover any deficiency including reasonable attorneys'
fees and costs permitted by this Agreement.

     

    
      
         

      

      
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    (b) Sale of Pledged
Collateral.  Secured Party is authorized, at any sale of the
Pledged Collateral, if Secured Party deems it advisable, to restrict the
prospective bidders or purchasers to those persons who will represent and agree
that they are purchasing for their own account, for investment, and not with a
view to distribution or sale of any of the Pledged Collateral.  Upon
any such sale, Secured Party shall have the right to deliver, assign, and
transfer to the purchaser thereof the Pledged Collateral so
sold.  Each purchaser at any such sale shall hold the property sold
absolutely, free from any claim or right of whatsoever kind. Secured Party shall
give Pledgor ten (10) days’ written notice of Secured Party’s intention to make
any such public or private sales or sale at broker’s board or on a securities
exchange.  Such notice, in case of sale at broker’s board or a
securities exchange, shall state the board or exchange at which such sale is to
be made and the day on which the Pledged Collateral, or that portion thereof so
being sold, will first be offered to sale at such board or
exchange.  At any such sale, the Pledged Collateral may be sold in one
lot as an entirety or in separate parcels, as the Secured Party may
determine.  Secured Party shall not be obligated to make any such sale
pursuant to any such notice.  Secured Party may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned.  In case of any sale of all or any part of the Pledged
Collateral on credit or for future delivery, the Pledged Collateral so sold may
be retained by the Secured Party until the selling price is paid by the
purchaser thereof, but the Secured Party shall not incur any liability in case
of the failure of such purchaser to take up and pay such selling price, and such
Pledged Collateral may again be sold upon like notice.  Secured Party
may also, at Secured Party's discretion, proceed by a suit or suits at law, or
in equity to foreclose the pledge and sell the Pledged Collateral, or any
portion thereof, under a judgment or decree of a court or courts of competent
jurisdiction.  If any consent, approval or authorization of any state,
municipal or other governmental department, agency or authority should be
necessary to effectuate any sale or other disposition of the Pledged Collateral,
or any part thereof, Pledgor will execute all such applications and other
instruments as may be required in connection with securing any such consent,
approval or authorization, and will otherwise use its best efforts to secure the
same.

    

    (c) Notification.  Reasonable
notification of the time and place of any public sale of the Pledged Collateral,
or any reasonable notification of the time after which any private sale or other
intended disposition of the Pledged Collateral is to be made, shall be sent to
Pledgor and to any other person entitled under the Code to notice; provided,
however, that if the Pledged Collateral threatens to decline quickly in value,
Secured Party may sell or otherwise dispose of the Pledged Collateral without
notification, advertisement or other notice of any kind.  It is agreed
that notice sent or given not less than ten (10) calendar days prior to the
taking of the action to which the notice relates is reasonable notification and
notice for the purpose of this Agreement.  Notice shall be deemed to
be sent when it is deposited in the United States Mail, return receipt
requested, bearing the proper postage and addressed to Pledgor and any other
person entitled to receive notice, at their last known address according to the
records of the Secured Party.

     

    
      
         

      

      
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    (d) Application of
Proceeds.  Upon the occurrence of an Event of Default or
maturity of any instrument evidencing the Obligations or any part thereof,
whether such maturity be by such terms of such instruments or through the
exercise of any power of acceleration, Secured Party is authorized and empowered
to apply any and all funds realized from the sale of the Pledged Collateral not
previously credited against the Obligations first toward the payment of the
costs, charges and expenses, if any, incurred in the collection of such funds
hereunder, and then toward the payment of the Obligations, and shall pay any
balance remaining to Pledgor in accordance with the written instructions
executed by Pledgor or as prescribed by the Code.

    

    (e) Deficiency.  In
the event that the proceeds of any sale, collection or realization upon the
Pledged Collateral by Secured Party are insufficient to pay all amounts to which
Secured Party is legally entitled, Pledgor shall be liable for the deficiency,
together with interest thereon at such rate as shall be fixed by applicable law,
together with the costs of collection and the reasonable fees of any attorneys
employed by Secured Party to collect such deficiency.

    

    13. Secured Party Appointed
Attorney-in-Fact.  Pledgor hereby irrevocably appoints Secured
Party as Pledgor's attorney-in-fact, with full authority in the place and stead
of Pledgor and in the name of Pledgor or otherwise, from time to time in the
Secured Party's discretion after the occurrence of an Event of Default to take
any action and to execute any instrument which the Secured Party may deem
necessary or advisable to accomplish the purpose of this Agreement, including,
without limitation, (i) the right and power to execute and deliver any and all
powers and other instruments, documents, certificates and agreements necessary
or appropriate to transfer ownership of the Pledged Collateral, and (ii) the
right and power to receive, endorse and collect all checks and other instruments
made payable to Pledgor representing any dividend, interest payment or other
distribution in respect of the Pledged Collateral or any part thereof and to
give full acquittance for the same.  The foregoing appointment of the
Secured Party as Pledgor's attorney-in-fact is irrevocable and is coupled with
an interest.

    

    14. Certain Rights Before and
After a Default.

    

    (a) Secured Party May
Perform.  If Pledgor fails to perform any agreement contained
herein, the Secured Party may perform, or cause performance of, such agreement,
and the expenses of the Secured Party incurred in connection therewith shall be
payable by Pledgor pursuant to the provisions of Section 9 hereof.

    

    (b) Notification of
Issuer.  Secured Party shall have the right to notify the
issuer of the Pledged Collateral that the Pledged Collateral has been
pledged.

    

    15. Cumulative Rights and
Remedies.  All rights and remedies of Secured Party hereunder
are cumulative of each other and of every other right or remedy which Secured
Party may otherwise have at law or in equity or under any other contract or
other writing for the enforcement of the security interest herein or the
collection of the Obligations, and the exercise by Secured Party of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.  Secured Party shall not be
required to first endeavor to collect from Pledgor or any other party obligated
for the Obligations or to proceed against or exhaust other collateral or
security for the Obligations hereby secured before pursuing any of Secured
Party’s rights pursuant to this Agreement against Pledgor.  Should
Pledgor have theretofore executed or hereafter execute any other security
agreement in favor of Secured Party in which a security interest is created as
security for the debts of Pledgor or another or others, in respect of which
Pledgor may not be personally liable, the security interest therein created and
all other rights,  powers and privileges vested in Secured Party by
the terms thereof shall exist concurrently with the security interest created
herein, and, in addition, all property in which Secured Party holds a security
interest under any such other security agreement shall also be part of the
Pledged Collateral hereunder, and all or any part of the proceeds of the sale or
other disposition of such property may, in the discretion of Secured Party, be
applied by it in accordance with the terms hereof, and of such other security
agreement, or agreements, or any of them.

     

    
      
         

      

      
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    16. Surrender of
Collateral.  Secured Party may surrender, release, exchange or
alter any collateral or security for the Obligations without affecting the
liability of Pledgor under this Agreement, and this Agreement shall continue
effective notwithstanding any legal disability of Pledgor to incur any
indebtedness or obligation incurred to Secured Party.

    

    17. Effect of Other
Agreements.  This Agreement shall in no way be construed as a
limitation or extinguishment of any guaranty, security agreement, pledge
agreement, assignment, or any other instrument, document or agreement granting
an interest in collateral for or guaranteeing the payment or performance of the
Obligations executed by any person prior to, or contemporaneously with, the
execution of this Agreement, but all prior or contemporaneous guaranties,
security agreements, pledge agreements, assignments, or any other instruments,
documents, or agreement granting an interest in collateral for or guaranteeing
the payment or performance of the Obligations shall remain in full force and
effect in accordance with their terms.

    

    18. General
Provisions.

    

    (a) Amendment.  This
Agreement may not be modified, altered, amended, or terminated except by the
written agreement of the Secured Party and Pledgor.

    

    (b) Severability.  If
a court of competent jurisdiction determines that any provision contained in
this Agreement is void, illegal or unenforceable, the other provisions shall
remain in full force and effect and the provision held to be void, illegal or
unenforceable shall be limited so that it shall remain in effect to the extent
permissible by law.

    

    (c) Choice of Law and
Venue.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.  ANY LITIGATION,
SPECIAL PROCEEDING OR OTHER PROCEEDING AS BETWEEN THE PARTIES THAT MAY BE
BROUGHT, OR ARISE OUT OF, IN CONNECTION WITH OR BY REASON OF THIS AGREEMENT
SHALL BE BROUGHT IN THE APPLICABLE FEDERAL OR STATE COURT IN AND FOR HARRIS
COUNTY, TEXAS, WHICH COURTS SHALL BE THE EXCLUSIVE COURTS OF JURISDICTION AND
VENUE.

    

    (d) Notices. Unless
otherwise provided, any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given as hereinafter
described (i) if given by personal delivery, then such notice shall be deemed
given upon such delivery, (ii) if given by telex or telecopier, then such notice
shall be deemed given upon receipt of confirmation of complete transmittal,
(iii) if given by mail, then such notice shall be deemed given upon the earlier
of (A) receipt of such notice by the recipient or (B) three days after such
notice is deposited in first class mail, postage prepaid, and (iv) if given by
an internationally recognized overnight air courier, then such notice shall be
deemed given one business day after delivery to such carrier. All notices shall
be addressed to the party to be notified at the address as follows, or at such
other address as such party may designate by ten days’ advance written notice to
the other party:

     

    
      
         

      

      
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    If to
Pledgor:

    

    Arkanova
Acquisition Corporation

    21
Waterway Avenue

    Suite
300

    The
Woodlands TX 77380

    Fax:
281-362-2788

    Attention:
Pierre Mulacek, President

    

    If to the
Investor:

    

    To the
Address for Notice as provided on the signature page of the NPA.

    

    (e) Continuing Security
Interest.  This Agreement shall create a continuing security
interest in the Pledged Collateral and shall remain in full force and effect
until payment in full of the Obligations.

    

    (f) Preparation of
Agreement.  Each party to this Agreement acknowledges
that:  (i) the party had the advice of, or sufficient opportunity to
obtain the advice of, legal counsel separate and independent of legal counsel
for any other party hereto; (ii) the terms of the transactions contemplated by
this Agreement are fair and reasonable to such party; and (iii) such party has
voluntarily entered into the transactions contemplated by this Agreement without
duress or coercion.  Each party further acknowledges that such party
was not represented by the legal counsel of any other party hereto in connection
with the transactions contemplated by this Agreement, nor was he or it under any
belief or understanding that such legal counsel was representing his or its
interests.  Each party agrees that no conflict, omission or ambiguity
in this Agreement, or the interpretation thereof, shall be presumed, implied or
otherwise construed against any other party to this Agreement on the basis that
such party was responsible for drafting this Agreement.

    

    (g) Nonwaiver.  Unless
otherwise expressly provided herein, no waiver by the Secured Party of any
provision hereof shall be deemed to have been made unless expressed in writing
and signed by the Secured Party.  No delay or omission in the exercise
of any right or remedy accruing to the Secured Party upon any breach under this
Agreement shall impair such right or remedy or be construed as a waiver of any
such breach theretofore or thereafter occurring.  The waiver by the
Secured Party of any breach of any term, covenant or condition herein stated
shall not be deemed to be a waiver of any other breach, or of a subsequent
breach of the same or any other term, covenant or condition herein
contained.

    

    (h) Entire
Agreement.  This Agreement sets forth the entire understanding
of the parties with respect to the Pledged Collateral and supersedes all prior
or contemporaneous representations, understandings and agreements, oral or
written, made between the parties effecting the subject matter hereof, and all
such prior or contemporaneous representations, understandings and agreements are
hereby terminated.

    

    (i) Parties
Bound.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, assigns, heirs and
personal representatives.

    

    (j) Counterpart
Execution.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.

     

    

    

    

    

    

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    Signatures

    

    To evidence the binding effect of the
foregoing terms and condition, the parties have executed and delivered this
Agreement as of, but not necessarily on, the date first above
written.

    

     

     

     

    
       

       

      
        
          	 	ARKANOVA
      ENERGY CORPORATION	 
	 	 	 	 
	
                   

                	
                  By:
      

                	 	 
	 	 	Pierre
      Mulacek	 
	 	 	President	 
	 	 	 	 
	 	 	THE
      INVESTOR	 
	 	 	 	 
	 	 	 	 
	 	By:	 	 
	 	 	Authorized
      Signatory	 
	 	 	Print
      Name:    	 
	 	 	Print
      Title (if applicable):  	 
	 	 	 	 
	 	 	Number
      of Shares of Prism Corporation Pledged:
      ______________________	 

        

      

      
 

    

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

     

    ANNEX
“D”

    

    

    THIS
AGREEMENT RELATES TO AN OFFERING OF SECURITIES IN AN OFFSHORE TRANSACTION TO
PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933 ACT)
PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE “1933 ACT”). NONE OF THE SECURITIES TO WHICH THIS AGREEMENT RELATES
HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE SECURITIES LAWS, AND,
UNLESS SO REGISTERED, NONE MAY BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN
THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED HEREIN EXCEPT IN ACCORDANCE
WITH THE PROVISIONS OF REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE WITH ALL APPLICABLE SECURITIES
LAWS. IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE
CONDUCTED UNLESS IN ACCORDANCE WITH THE 1933 ACT.

    

    

    GUARANTY
AGREEMENT

    

    

    THIS GUARANTY AGREEMENT (this
“Guaranty”) is made and
entered into as of, but not necessarily on, the ____ day of September, 2008 and
between Arkanova Energy
Corp. a Nevada corporation (“Guarantor”),and the investor
indicated on the signature page hereof (the “Investor”)

    

    

    Background

    

    A. On even
date herewith Arkanova Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Guarantor (“Maker”), and the Investor
(“Payee”), consummated
the sale by Payee and the purchase by Maker of certain secured indebtedness of
Maker (the “Indebtedness”), and to
evidence the obligation of Maker to pay the Indebtedness Maker executed and
delivered to Payee that certain 8% Promissory Note (the “Note”) evidencing Maker’s
obligation to pay to Payee the principal and interest set forth therein;
and

    

    B. As a
material inducement to Payee purchase the Indebtedness and accept the Note as
evidence of Maker’s obligation to pay for same, Guarantor, being the sole
shareholder of Maker, has agreed to guarantee the payment of the indebtedness
evidenced by the Note and the performance of the obligations of Maker under the
Note pursuant to the terms and conditions set forth herein;

    

    

    Terms and
Conditions

    

    In
consideration of the mutual benefits to be derived from the covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, hereby agree as
follows:

     

    1. Guarantee of Maker’s
Obligations.  Guarantor, as primary obligor and not merely as
surety and intending to be legally bound hereby, hereby absolutely, irrevocably,
unequivocally and unconditionally, guarantees to Payee the due, prompt and
faithful performance of, compliance with and execution of all of the terms,
provisions, conditions, covenants, warranties, obligations and agreements of
Maker contained in, described in or pursuant to the Note and this Guaranty,
including the prompt and full payment of all indebtedness of Maker to Payee
arising pursuant to the Note and all renewals and extensions thereof, now
existing or hereafter arising pursuant to the Note (the “Guaranteed
Obligations”).  In the event of default by Maker in payment or
performance of the indebtedness evidenced by the Note, or any part thereof, when
such indebtedness or other obligations become due, whether by maturity,
prepayment or by acceleration, Guarantor shall, on demand and without further
notice of dishonor, pay the amount due thereon to Payee.  In the event
of such payment is made by Guarantor, then Guarantor shall be subrogated to the
rights then held by Payee with respect to the Guaranteed Obligations to the
extent to which the Guaranteed Obligations were discharged by
Guarantor.  Upon payment by Guarantor of any sums to Payee hereunder,
all rights of Guarantor against Maker arising as a result therefrom by way of
right of subrogation or otherwise, shall in all respects be subordinate and
junior in right of payment to the prior indefeasible payment in full of all the
obligations of Maker to Payee under the Note.  This Guaranty shall be
irrevocable by Guarantor until all of the Guaranteed Obligations have been
finally, completely and indefeasibly paid in full and completely
performed.

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    
 

    2. Nondischargeability of
Guaranty.  Guarantor hereby agrees that Guarantor’s obligations
under the terms of this Guaranty shall not be released, diminished, impaired,
modified, affected or limited in any manner whatsoever by the occurrence of any
reason or event, including without limitation, one or more of the following
events:  (a) the taking or accepting of any other security for any or
all of the Guaranteed Obligations; (b) any indulgence, compromise, settlement or
release which may be extended by Payee to Maker, Guarantor or any one or more
other parties liable in whole or in part for the Guaranteed
Obligations  for such consideration as Payee may deem proper; (c) the
lack of corporate power of Maker, the insolvency or bankruptcy of Maker, or any
party at any time liable for the payment of any or all of the Guaranteed
Obligations, whether now existing or hereafter occurring; (d) any renewal,
extension, and/or rearrangement of the payment of any or all of the Guaranteed
Obligations with or without notice to or consent of Guarantor; (e) any neglect,
delay, omissions, failure, or refusal of Payee to take or prosecute any action
for the collection of any of the Guaranteed Obligations or to foreclose or take
or prosecute any action in connection with any instrument or agreement
evidencing or securing all or any part of the Guaranteed Obligations; (f) the
enforceability of all or any part of the Guaranteed Obligations against Maker by
reason of the fact that the Guaranteed Obligations exceed the amount permitted
by law, the act of creating the Guaranteed Obligations, or any part thereof, is
ultra vires, or the officers creating same acted in excess of their authority;
(g) any payment by Maker to Payee is held to constitute a preference under the
bankruptcy laws or if for any other reason Payee is required to refund such
payment or pay the amount thereof to someone else; or (h) any impairment,
modification, change, release or limitation of the liability of Maker or
Guarantor, or of any remedy for the enforcement thereof, resulting from the
operation of any present or future provision of the Federal Bankruptcy Code or
any similar law or statute of the United States or the State of
Texas.

    

    3. No
Setoff.  The obligations, guaranties, covenants, agreements and
duties of Guarantor under this Guaranty are primary obligations of Guarantor and
shall not be subject to any counterclaim, setoff, deduction, diminution,
abatement, recoupment, suspension, deferment, reduction or defense based upon
any claim that Maker, Guarantor or any other person or entity may have against
Payee.  The obligations of Guarantor set forth herein constitute
recourse obligations of Guarantor enforceable against Guarantor to the full
extent of Guarantor’s assets and properties.

    

    4. Continuation of
Guaranty.  Guarantor covenants that this Guaranty will not be
discharged except by complete performance of the Guaranteed Obligations
contained in this Guaranty.  This Guaranty shall not be affected by,
and shall remain in full force and effect notwithstanding, any bankruptcy,
insolvency, liquidation, or reorganization of Maker or Guarantor.

     

    
      
         

      

      
        32

        
          

        

      

      
         

      

    

     

    5. Reliance on
Guaranty.  Guarantor recognizes that Payee is relying upon this
Guaranty and the undertakings of Guarantor hereunder in purchasing the
Indebtedness and accepting the Note in connection therewith, and Guarantor
further recognizes that the execution and delivery of this Guaranty is a
material inducement to Payee in purchasing the Indebtedness and accepting the
Note as evidence of Maker’s obligation to pay for same in accordance with the
terms of the Note.

    

    6. Payments under
Guaranty.  All amounts to be payable under this Guaranty shall
be payable at the address of Payee set forth in the Note or at such other
address as Payee may from time to time designate in writing.

    

    7. Representations of
Guarantor.  Guarantor hereby represents, warrants and covenants
to Payee as follows:

    

    (a) Authorization.  Guarantor
has all requisite corporate power and authority to execute, deliver and perform
this Guaranty.  The Guaranty constitutes the valid and binding
obligation of Guarantor, enforceable against Guarantor in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
moratorium, reorganization or other laws or equitable principles relating to or
affecting creditors' rights generally.

    

    (b) Benefit to
Guarantor.  Guarantor has derived, or expects to derive,
financial and other advantage and benefit, directly or indirectly, from the
consummation of the transactions contemplated by the Note and the making of this
Guaranty.

    

    8. Waiver.  Guarantor
hereby waives notice to Guarantor of the acceptance of this Guaranty, and of any
default on the part of Maker of Maker’s obligations under the Note to Payee, and
all other notices in connection herewith or in connection with the liabilities,
obligations and duties guaranteed hereby.  Guarantor further waives
diligence, presentment and suit on part of Payee in the enforcement of any
liability, obligation or duty guaranteed by Guarantor hereunder.

    

    9. Enforcement of
Guaranty.  Guarantor agrees that Payee shall not be first
required to enforce against Maker or any other person any liability, obligation
or duty guaranteed hereby before seeking enforcement thereof against
Guarantor.  Suit may be brought and maintained against Guarantor by
Payee to enforce any liability, obligation or duty guaranteed hereby without
joinder of Maker or any other party or without Payee first exhausting Payee’s
remedies against Maker or without Payee first exhausting Payee’s rights against
any security which shall ever have been given to Payee to secure the payment or
performance of the Guaranteed Obligations.

    

    10. Payment of Expenses and
Attorneys’ Fees.  Guarantor agrees to pay, on demand, and to
save Payee harmless against liability for, any and all costs and expenses
(including reasonable fees and disbursements of counsel) incurred or expended by
Payee in connection with the enforcement of or preservation of any rights under
this Guaranty.

    

    11. Governing
Law.  THIS GUARANTY IS MADE, ENTERED INTO AND PERFORMABLE IN
DALLAS COUNTY, TEXAS, AND ALL PAYMENTS ARE DUE AND PAYABLE IN DALLAS COUNTY,
TEXAS.  CONSEQUENTLY, THIS GUARANTY SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS
CONFLICTS OF LAW RULES AND ANY LITIGATION OR OTHER PROCEEDING AS BETWEEN
GUARANTOR AND PAYEE THAT MAY BE BROUGHT, OR ARISE OUT OF, IN CONNECTION WITH OR
BY REASON OF THIS GUARANTY SHALL BE BROUGHT IN THE APPLICABLE FEDERAL OR STATE
COURT IN AND FOR HARRIS COUNTY, TEXAS WHICH COURTS SHALL BE THE EXCLUSIVE COURTS
OF JURISDICTION AND VENUE.

     

    
      
         

      

      
        33

        
          

        

      

      
         

      

    

     

    12. Termination of
Guaranty.  This Guaranty shall terminate and be of no further
force or effect upon the payment of the Guaranteed Obligations in
full.

    

    13. Reformation and
Severability.  If any provision of this Guaranty is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof (i) in lieu of such illegal, invalid or unenforceable provision,
there shall be added automatically as a part of this Guaranty a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible and be legal, valid and enforceable, and (ii) the legality, validity
and enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby.

    

    14. Successors and
Assigns.  This Guaranty shall be binding upon Guarantor and its
heirs, personal representatives, successors and permitted
assigns.  Guarantor may not assign or transfer any of Guarantor’s
rights or obligations hereunder without the prior written consent of
Payee.  In the event of an assignment by Payee of its rights or
interest in the Guaranteed Obligations including the Note, or any part thereof,
the rights and benefits hereunder, to the extent applicable to the indebtedness
so assigned shall automatically pass with a transfer or assignment of the Note
or any interest therein to any holder thereof.

    

    15. Entire
Agreement.  This Guaranty embodies the final, entire agreement
of Guarantor with respect to the subject matter hereof and supersedes any and
all prior or contemporaneous agreements, representations and understandings,
whether written or oral, relating to this Guaranty.

    

    

     

    

    

    

    

    

    

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    Guarantor
Signature

    

    To evidence the binding effect of the
foregoing terms, Guarantor has executed and delivered this Guaranty as of, but
not necessarily on, the date first above written.

     

     

    
      
        	 	ARKANOVA
      ENERGY CORPORATION	 
	 	 	 	 
	
                 

              	
                By:
      

              	 	 
	 	 	Pierre
      Mulacek	 
	 	 	President	 
	 	 	 	 
	 	 	ACCEPTED:	 
	 	 	 	 
	 	 	THE
      INVESTOR	 
	 	 	 	 
	 	 	 	 
	 	By:	 	 
	 	 	Authorized
      Signatory	 
	 	 	Print
      Name:    	 
	 	 	Print
      Title (if applicable):  	 

      

    

    
 

     

     

    35ex4-1.htm

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Exhibit 4.1

    Form
S-8

    Bio-Path
Holdings, Inc.

    File No.
000-53404

    

    

    

    

    

    

    

    

    

    

    

    

    FIRST
AMENDED

    BIO-PATH
HOLDINGS, INC.

    2007 Stock Incentive
Plan

    

    Effective December __, 2008, the
Company’s Board of Directors has amended the Bio-Path Holdings, Inc. 2007 Stock
Incentive Plan to clarify the Annual Increased Provision of Section
2.2.  This “First Amended Bio-Path Holdings, Inc. 2007 Stock Incentive
Plan” sets fort the clarifying amendment to Section 2.2.

    

    1.           PURPOSE.
The purpose of the Bio-Path Holdings, Inc. (“The Company”)
2007 Stock Incentive Plan (the “Plan”) is to provide a means
through which the Company and its Subsidiaries may attract able persons to enter
and remain in the employ of the Company and its Subsidiaries and to provide a
means whereby eligible persons can acquire and maintain Common Stock ownership,
or be paid incentive compensation measured by reference to the value of Common
Stock, thereby strengthening their commitment to the welfare of the Company and
its Subsidiaries and promoting an identity of interest between Shareholders and
these eligible persons.

    

    So that
the appropriate incentive can be provided, the Plan provides for granting
Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards,
Restricted Stock Unit Awards, Performance Awards and other stock-based awards,
or any combination of the foregoing. Capitalized terms not defined in the text
are defined in Section 24.

    

    2.           SHARES
SUBJECT TO THE PLAN.

    

    2.1           Number
of Shares. Subject to Section 18, the total number of Shares reserved and
available for grant and issuance pursuant to this Plan will be
7,000,000 Shares, subject to the automatic Share increase described in
Section 2.2 below. Of the total Shares reserved for issuance under the Plan, no
more than  4,500,000 shares of Common Stock may be issued under the Plan as
Awards under Sections 6 (Restricted Stock) and 7 (Performance and Other
Stock-Based Awards) of the Plan, subject to the automatic Share increase
described in Section 2.3 below.

    

    Shares
that have been (a) reserved for issuance under options that have expired or
otherwise terminated without issuance of the underlying Shares, (b) reserved for
issuance or issued under an Award granted hereunder but are forfeited or are
repurchased by the Company at the original issue price, or (c) reserved for
issuance or issued under an Award that otherwise terminates without Shares being
issued, shall be available for issuance. In the event of the exercise of SARs,
whether or not granted in tandem with options, only the number of shares of
Common Stock actually issued in payment of such SARs shall be charged against
the number of shares of Common Stock available for the grant of Awards
hereunder, and any Common Stock subject to tandem options, or portions thereof,
which have been surrendered in connection with any such exercise of SARs shall
not be charged against the number of shares of Common Stock available for the
grant of Awards hereunder. At all times the Company shall reserve and keep
available a sufficient number of Shares as shall be required to satisfy the
requirements of all outstanding options granted under this Plan and all other
outstanding but unvested Awards granted under this Plan. The Shares to be
offered under the Plan shall be authorized and unissued Common Stock, or issued
Common Stock that shall have been reacquired by the Company. Subject to
adjustment in accordance with Section 18.4, in any calendar year, no Participant
shall be granted Awards in respect of more than 500,000 shares of Common
Stock (whether through grants of options or SARs or other Awards of Common Stock
or rights with respect thereto).

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    2.2           Annual
Increases. The number of Shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of January of each
year, beginning with January in year 2009 and continuing through January in year
2017, by such number of Shares so that the total number of shares available for
issuance under the Plan equals ten percent (10.0%) of the total number of Shares
of the Company’s Common Stock outstanding on the last trading day in the
immediately preceding December.  The minimum number of Shares of
Common stock available under the Plan shall be 7,000,000.

     

    2.3           Award
Limitation. The number of Shares of Common Stock that may be issued under the
Plan as Awards under Sections 6 (Restricted Stock) and 7 (Performance and Other
Stock-Based Awards) of the Plan shall automatically increase on the first
trading day of January of each year, beginning with January in year 2009 and
continuing through January in year 2017, by a number of Shares equal to
sixty-four percent (64%) of the total number of Shares increased pursuant to
Section 2.2.

    

    3.           ELIGIBILITY.
ISOs (as defined in Section 5 below) may be granted only to employees (including
officers and directors who are also employees) of the Company or of a Subsidiary
of the Company. All other Awards may be granted to employees, officers,
directors, consultants, independent contractors and advisors of the Company or
Subsidiary of the Company.

     

    4.           ADMINISTRATION.

    

    4.1           Committee
Authority. This Plan will be administered by the Committee. Any power, authority
or discretion granted to the Committee may also be taken by the Board. Subject
to the general purposes, terms and conditions of this Plan, and to the direction
of the Board, the Committee will have full power to implement and carry out this
Plan. Without limitation, the Committee will have the authority to:

     

    (a)           select
persons to receive Awards;

    

    (b)           determine
the nature, extent, form and terms of Awards and the number of Shares or other
consideration subject to Awards, including whether any particular Award shall be
settled in cash or in stock;

     

    (c)           determine
the vesting, exerciseability and payment of Awards;

    

    (d)           correct
any defect, supply any omission or reconcile any inconsistency in this Plan, any
Award or any Award Agreement;

    

    (e)           determine
whether Awards will be granted singly, in combination with, in tandem with, in
replacement of, or as alternatives to, other Awards under this Plan or any other
incentive or compensation plan of the Company or any Subsidiary of the
Company;

    

    (f)           prescribe,
amend and rescind rules and regulations relating to this Plan or any
Award;

    

    (g)           make
all factual determinations with respect to, and otherwise construe and
interpret, this Plan, any Award Agreement and any other agreement or document
executed pursuant to this Plan;

    

    (h)           grant
waivers of Plan or Award conditions;

    

    (i)           determine
whether an Award has been earned;

    

    (j)           accelerate
the vesting of any Award; and

    

    (k)           make
all other determinations necessary or advisable for the administration of this
Plan.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    The
Committee’s interpretation of the Plan or any documents evidencing Awards
granted pursuant thereto and all decisions and determinations by the Committee
with respect to the Plan shall be final, binding, and conclusive on all parties
unless otherwise determined by the Board.

    

    4.2           Committee
Discretion; Board Power. Any determination made by the Committee with respect to
any Award will be made in its sole discretion at the time of grant of the Award
or, unless in contravention of any express term of this Plan or Award, at any
later time, and such determination will be final and binding on the Company and
on all persons having an interest in any Award under this Plan. The Committee
may delegate such of its powers and authority under the Plan as it deems
appropriate to designated officers or employees of the Company. In addition, the
full Board may exercise any of the powers and authority of the Committee under
the Plan. In the event of such delegation of authority or exercise of authority
by the Board, references in the Plan to the Committee shall be deemed to refer,
as appropriate, to the delegate of the Committee or the Board. Actions taken by
the Committee and any delegation by the Committee to designated officers or
employees shall comply with Section 16(b) of the Exchange Act, the
performance-based provisions of Section 162(m) of the Code, and the regulations
promulgated under each of such statutory provisions, or the respective
successors to such statutory provisions or regulations, as in effect from time
to time, to the extent applicable. Notwithstanding any other provision of the
Plan, if the Committee deems it to be in the best interest of the Company, the
Committee retains the discretion to make such Awards under the Plan that may not
comply with the requirements of Section 16(b) of the Exchange Act, Section
162(m) of the Code, or any other relevant statute or regulation.

    

    5.           STOCK
OPTIONS. The Committee may grant Options to eligible persons and will determine
whether such options will be intended to be “Incentive Stock Options” within the
meaning of Section 422 of the Code or any successor section thereof (“ISOs”) or
nonqualified stock options (options not intended to qualify as incentive stock
options) (“NQSOs”), the number of Shares subject to the Option, the Exercise
Price of the option, the period during which the option may be exercised, and
all other terms and conditions of the Option, subject to the
following:

     

    5.1           Form
of Option Grant. Each Option granted under this Plan will be evidenced by an
Award Agreement (“Stock Option Agreement”), which will expressly identify the
Option as an ISO or NQSO, and will be in such form and contain such provisions
(which need not be the same for each Participant) as the Committee may from time
to time approve, and which will comply with and be subject to the terms and
conditions of this Plan.

    

    5.2           Exercise
Period. Options may be exercisable to the extent vested within the times or upon
the events determined by the Committee as set forth in the Stock Option
Agreement governing such option; provided, however, that no option will be
exercisable after the expiration of ten (10) years from the date the option is
granted; and provided further that no ISO granted to a person who directly or by
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Subsidiary of the Company (“Ten
Percent Shareholder”) will be exercisable after the expiration of five (5) years
from the date the ISO is granted. The Committee also may provide for options to
become exercisable at one time or from time to time, periodically or otherwise,
in such number of Shares or percentage of Shares as the Committee
determines.

     

    5.3           Exercise
Price. The Exercise Price of an option will be determined by the Committee when
the option is granted and must equal or exceed Fair Market Value of the Shares
on the date of grant; provided that: the Exercise Price of any ISO granted to a
Ten Percent Shareholder will not be less than 110% of the Fair Market Value of
the Shares on the date of grant. In addition, the Exercise Price may (i) be
subject to a limit on the economic value that may be realized by a Participant
from an option or SAR, or otherwise (ii) vary from the original purchase price,
provided that such variable purchase price can never be less than the Fair
Market Value of the shares of Common Stock subject to such option or SAR,
determined as of the date of grant. 

    

    5.4           Date
of Grant. The date of grant of an Option will be the date on which the Committee
makes the determination to grant such option, unless otherwise specified by the
Committee. The Stock Option Agreement and a copy of this Plan will be delivered
to the Participant within a reasonable time after the granting of the
Option.

    

    5.5           Method
of Exercise. Options may be exercised by delivery to the Company of a written
stock option exercise agreement (the “Exercise Agreement”) in a form approved
from time to time by the Committee (which need not be the same for each
Participant), stating the number of Shares being purchased, the restrictions
imposed on the Shares purchased under such Exercise Agreement, if any, and such
representations and agreements regarding Participant’s investment intent and
access to information and other matters, if any, as may be required or desirable
by the Company to comply with applicable securities laws, together with payment
in full of the Exercise Price for the number of Shares being purchased. Payment
for the Shares purchased may be made in accordance with Section 8 of this
Plan.

     

    
 

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    5.6           Termination.
Unless otherwise expressly provided in an Award Agreement or otherwise
determined by the Committee, exercise of an option will always be subject to the
following:

    

    a.           If
the Participant is Terminated for any reason (including voluntary Termination)
other than death or Disability or for Cause, then the Participant may exercise
such Participant’s Options only to the extent that such options have vested in
accordance with the applicable Award Agreement and would have been exercisable
upon the Termination Date no later than three (3) months after the Termination
Date (or such shorter or longer time period not exceeding five (5) years as may
be determined by the Committee, with any exercise beyond three (3) months after
the Termination Date deemed to be a NQSO), but in any event, no later than the
expiration date of the Options.

    

    b.           If
the Participant is Terminated because of Participant’s death or Disability (or
the Participant dies within three (3) months after a Termination other than for
Cause or because of Participant’s Disability), then Participant’s Options may be
exercised only to the extent that such options have vested in accordance with
the applicable Award Agreement and would have been exercisable by Participant on
the Termination Date and must be exercised by Participant (or Participant’s
legal representative or authorized assignee) no later than twelve (12) months
after the Termination Date (or such shorter or longer time period not exceeding
five (5) years as may be determined by the Committee, with any such exercise
beyond twelve (12) months after the Termination Date when the Termination is for
Participant’s death or Disability, deemed to be a NQSO), but in any event no
later than the expiration date of the Options.

    

    c.           If
a Participant is terminated for Cause, neither the Participant, the
Participant’s estate nor such other person who may then hold the Option shall be
entitled to exercise any option with respect to any Shares whatsoever, after
termination of service, whether or not after termination of service the
Participant may receive payment from the Company or Subsidiary for vacation pay,
for services rendered prior to termination, for services rendered for the day on
which termination occurs, for salary in lieu of notice, or for any other
benefits. For the purpose of this paragraph, termination of service shall be
deemed to occur on the date when the Company dispatches notice or advice to the
Participant that such Participant's service is terminated.

    

    d.           If
the Participant is not an employee or a director, the Award Agreement shall
specify treatment of the Award upon Termination.

    

    5.7           Limitations
on ISO. The aggregate Fair Market Value (determined as of the date of grant) of
Shares with respect to which ISOs are exercisable for the first time by a
Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company or Subsidiary of the
Company) will not exceed $100,000 or such other amount as may be required by the
Code. If the Fair Market Value of Shares on the date of grant with respect to
which ISOs are exercisable for the first time by a Participant during any
calendar year exceeds $100,000, then the Options for the first $100,000 worth of
Shares to become exercisable in such calendar year will be ISOs and the Options
for the amount in excess of $100,000 that become exercisable in that calendar
year will be NQSOs. In the event that the Code or the regulations promulgated
thereunder are amended after the Effective Date of this Plan to provide for a
different limit on the Fair Market Value of Shares permitted to be subject to
ISOs, such different limit will be automatically incorporated herein and will
apply to any Options granted after the effective date of such
amendment.

    

    
      
         

      

      
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    5.8           Modification,
Extension or Renewal. The Committee may modify, extend or renew outstanding
Options and authorize the grant of new Options in substitution therefor,
provided that, except as expressly provided for in the Plan or an Award
Agreement, any such action may not, without the written consent of a
Participant, (i) impair any of such Participant’s rights under any option
previously granted and (ii) except as provided for in Section 18 of the Plan,
options issued hereunder will not be repriced, replaced or regranted through
cancellation or by lowering the Exercise Price of a previously granted Award
without prior approval of the Company’s Shareholders. Any outstanding ISO that
is modified, extended, renewed or otherwise altered will be treated in
accordance with Section 424(h) of the Code.

    

    5.9           Limitations
on Exercise. The Committee may specify a reasonable minimum number of Shares
that may be purchased on any exercise of an option, provided that such minimum
number will not prevent Participant from exercising the option for the full
number of Shares for which it is then exercisable.

    

    5.10           No
Disqualification. Notwithstanding any other provision in this Plan, no term of
this Plan relating to ISOs will be interpreted, amended or altered, nor will any
discretion or authority granted under this Plan be exercised, so as to
disqualify this Plan under Section 422 of the Code or, without the consent of
the Participant affected, to disqualify any ISO under Section 422 of the
Code.

    

    5.11           Lapsed
Grants. Notwithstanding anything in the Plan to the contrary, the Company may,
in its sole discretion, allow the exercise of a lapsed grant if the Company
determines that: (i) the lapse was solely the result of the Company’s inability
to timely execute the exercise of an option award prior to its lapse, and (ii)
the Participant made valid and reasonable efforts to exercise the Award. In the
event the Company makes such a determination, the Company shall allow the
exercise to occur as promptly as possible following its receipt of exercise
instructions subsequent to such determination.

    

    5.12           Stock
Appreciation Rights (SARs). In addition to the grant of options, as set forth
above, the Committee may also grant SARs to any person eligible to be a
Participant, which grant shall consist of a right that is the economic
equivalent, and in all other regards is identical to a stock option that is
permitted to be granted under the Plan, except that on the exercise of such SAR,
the Participant shall receive shares of Common Stock having a Fair Market Value
that is equal to the Fair Market Value of the shares of Common Stock that would
be subject to such an option, reduced by the amount that would be required to be
paid by the Participant as the purchase price on exercise of such option. A
grant of a SAR shall be documented by means of an Award Agreement (a “SAR
Agreement”) containing the relevant terms and conditions of such grant. The
Exercise Price for a SAR shall be subject to the same requirements as Options
under Section 5.3, and no SAR may be exercisable after the expiration of ten
(10) years from the date the SAR is granted. For purposes of the limitation on
the number of shares of Common Stock that may be subject to Stock Options
granted to any employee during any one calendar year, and for purposes of the
aggregate limitation on the number of shares of Common Stock that may be subject
to grants under the Plan, SARs shall be treated in the same manner as options
would be treated.

    

    6.           RESTRICTED
STOCK.

    

    6.1.           Restricted
Stock Awards. The Committee may grant to any Participant an Award of Common
Stock in such number of shares, and on such terms, conditions and restrictions,
whether based on performance standards, periods of service, retention by the
Participant of ownership of purchased or designated shares of Common Stock or
other criteria, as the Committee shall establish. If the Committee determines to
make performance-based Awards of restricted Shares under this Section 6 to
“covered employees” (as defined in Section 162(m) of the Code), performance
targets will be limited to specified levels of one or more of the Performance
Factors specified in the definition set forth in Section 24. The terms of any
Restricted Stock Award granted under this Plan shall be set forth in an Award
Agreement which shall contain provisions determined by the Committee and not
inconsistent with this Plan.

    

    
      
         

      

      
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    6.2           Issuance
of Restricted Shares. As soon as practicable after the Date of Grant of a
Restricted Stock Award by the Committee, the Company shall cause to be
transferred on the books of the Company, or its agent, Common Stock, registered
on behalf of the Participant, evidencing the restricted Shares covered by the
Award, but subject to forfeiture to the Company as of the Date of Grant if an
Award Agreement with respect to the Restricted Shares covered by the Award is
not duly executed by the Participant and timely returned to the Company. All
Common Stock covered by Awards under this Section 6 shall be subject to the
restrictions, terms and conditions contained in the Plan and the Award Agreement
entered into by the Participant. Until the lapse or release of all restrictions
applicable to an Award of restricted Shares, the share certificates representing
such restricted Shares may be held in custody by the Company, its designee, or,
if the certificates bear a restrictive legend, by the Participant. Upon the
lapse or release of all restrictions with respect to an Award as described in
Section 6.5, one or more share certificates, registered in the name of the
Participant, for an appropriate number of shares as provided in Section 6.5,
free of any restrictions set forth in the Plan and the Award Agreement shall be
delivered to the Participant.

    

    6.3           Shareholder
Rights. Beginning on the Date of Grant of the Restricted Stock Award and subject
to execution of the Award Agreement as provided in Section 6.2, the Participant
shall become a shareholder of the Company with respect to all shares subject to
the Award Agreement and shall have all of the rights of a shareholder,
including, but not limited to, the right to vote such shares and the right to
receive dividends; provided, however, that any Common Stock distributed as a
dividend or otherwise with respect to any restricted Shares as to which the
restrictions have not yet lapsed, shall be subject to the same restrictions as
such restricted Shares and held or restricted as provided in Section
6.2.

    

    6.4           Restriction
on Transferability. None of the restricted Shares may be assigned or transferred
(other than by will or the laws of descent and distribution, or to an inter
vivos trust with respect to which the Participant is treated as the owner under
Sections 671 through 677 of the Code, except to the extent that Section 16 of
the Exchange Act limits a Participant's right to make such transfers), pledged
or sold prior to lapse of the restrictions applicable thereto.

    

    6.5           Delivery
of Shares Upon Vesting. Upon expiration or earlier termination of the forfeiture
period without a forfeiture and the satisfaction of or release from any other
conditions prescribed by the Committee, or at such earlier time as provided
under the provisions of Section 6.7, the restrictions applicable to the
restricted Shares shall lapse. As promptly as administratively feasible
thereafter, the Company shall deliver to the Participant or, in case of the
Participant's death, to the Participant's Beneficiary, one or more share
certificates for the appropriate number of shares of Common Stock, free of all
such restrictions, except for any restrictions that may be imposed by
law.

    

    6.6           Forfeiture
of Restricted Shares. Subject to Sections 6.7, all restricted Shares shall be
forfeited and returned to the Company and all rights of the Participant with
respect to such restricted Shares shall terminate unless the Participant
continues in the service of the Company or a Subsidiary as an employee until the
expiration of the forfeiture period for such restricted Shares and satisfies any
and all other conditions set forth in the Award Agreement. The Committee shall
determine the forfeiture period (which may, but need not, lapse in installments)
and any other terms and conditions applicable with respect to any Restricted
Stock Award.

    

    6.7           Waiver
of Forfeiture Period. Notwithstanding anything contained in this Section 6 to
the contrary, the Committee may, in its sole discretion, waive the forfeiture
period and any other conditions set forth in any Award Agreement under
appropriate circumstances (including the death, Disability or retirement of the
Participant or a material change in circumstances arising after the date of an
Award) and subject to such terms and conditions (including forfeiture of a
proportionate number of the restricted Shares) as the Committee shall deem
appropriate.

    

    
      
         

      

      
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    6.8           Restricted
Stock Unit Awards. Without limiting the generality of the foregoing provisions
of this Section 6, and subject to such terms, limitations and restrictions as
the Committee may impose, Participants designated by the Committee may receive
Awards of Restricted Stock Units representing the right to receive shares of
Common Stock in the future subject to the achievement of one or more goals
relating to the completion of service by the Participant and/or the achievement
of performance or other objectives. If the Committee determines to make
performance-based Awards of Restricted Stock Units under this Section 6.8 to
“covered employees” (as defined in Section 162(m) of the Code), performance
targets will be limited to specified levels of one or more of the Performance
Factors specified in the definition set forth in Section 24. Restricted Stock
Unit Awards shall be subject to the restrictions, terms and conditions contained
in the Plan and the applicable Award Agreements entered into by the appropriate
Participants. Until the lapse or release of all restrictions applicable to an
Award of Restricted Stock Units, no shares of Common Stock shall be issued in
respect of such Awards and no Participant shall have any rights as a Shareholder
of the Company with respect to the shares of Common Stock covered by such
Restricted Stock Unit Award. Upon the lapse or release of all restrictions with
respect to a Restricted Stock Unit Award or at a later date if distribution has
been deferred, one or more share certificates, registered in the name of the
Participant, for an appropriate number of shares, free of any restrictions set
forth in the Plan and the related Award Agreement shall be delivered to the
Participant. A Participant’s Restricted Stock Unit Award shall not be contingent
on any payment by or consideration from the Participant other than the rendering
of services. Notwithstanding anything contained in this Section 6.8 to the
contrary, the Committee may, in its sole discretion, waive the forfeiture period
and any other conditions set forth in any Award Agreement under appropriate
circumstances (including the death, Disability or retirement of the Participant)
and subject to such terms and conditions (including forfeiture of a
proportionate number of the Restricted Stock Units) as the Committee shall deem
appropriate.

     

    7.           PERFORMANCE
AND OTHER STOCK-BASED AWARDS.

    

    7.1           Performance
Awards.

    

    (a)           Award
Periods and Calculations of Potential Incentive Amounts. The Committee may grant
Performance Awards to Participants. A Performance Award shall consist of the
right to receive a payment (measured by the Fair Market Value of a specified
number of shares of Common Stock, increases in such Fair Market Value during the
Performance Period and/or a fixed cash amount) contingent upon the extent to
which certain predetermined performance targets have been met during a
Performance Period. The Committee, in its discretion and under such terms as it
deems appropriate, may permit newly eligible Participants, such as those who are
promoted or newly hired, to receive Performance Awards after a Performance
Period has commenced.

    

    (b)           Performance
Targets. The performance targets may include such goals related to the
performance of the Company or, where relevant, any one or more of its
Subsidiaries or divisions and/or the performance of a Participant as may be
established by the Committee in its discretion. In the case of Performance
Awards to “covered employees” (as defined in Section 162(m) of the Code), the
targets will be limited to specified levels of one or more of the Performance
Factors specified in the definition set forth in Section 24. The performance
targets established by the Committee may vary for different Performance Periods
and need not be the same for each Participant receiving a Performance Award in a
Performance Period. Except to the extent inconsistent with the performance-based
compensation exception under Section 162(m) of the Code, in the case of
Performance Awards granted to employees to whom such section is applicable, the
Committee, in its discretion, but only under extraordinary circumstances as
determined by the Committee, may change any prior determination of performance
targets for any Performance Period at any time prior to the final determination
of the Award when events or transactions occur to cause the performance targets
to be an inappropriate measure of achievement.

    

    (c)           Earning
Performance Awards. The Committee, at or as soon as practicable after the Date
of Grant, shall prescribe a formula to determine the percentage of the
Performance Award to be earned based upon the degree of attainment of the
applicable performance targets.

    

    (d)           Payment
of Earned Performance Awards. Payments of earned Performance Awards shall be
made in cash, Common Stock or Stock Units, or a combination of cash, Common
Stock and Stock Units, in the discretion of the Committee. The Committee, in its
sole discretion, may define, and set forth in the applicable Award Agreement,
such terms and conditions with respect to the payment of earned Performance
Awards as it may deem desirable.

    
      
         

      

      
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    (e)           Termination
of Service. In the event of a Participant’s Termination during a Performance
Period, the Participant’s Performance Awards shall be forfeited except as may
otherwise be provided in the applicable Award Agreement.

    

    7.2.           Grant
of Other Stock-Based Awards. Other stock-based awards, consisting of stock
purchase rights (with or without loans to Participants by the Company containing
such terms as the Committee shall determine), Awards of Common Stock, or Awards
valued in whole or in part by reference to, or otherwise based on, Common Stock,
may be granted either alone or in addition to or in conjunction with other
Awards under the Plan. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the persons to whom and the
time or times at which such Awards shall be made, the number of shares of Common
Stock to be granted pursuant to such Awards, and all other conditions of the
Awards. Any such Award shall be confirmed by an Award Agreement executed by the
Committee and the Participant, which Award Agreement shall contain such
provisions as the Committee determines to be necessary or appropriate to carry
out the intent of this Plan with respect to such Award.

    

    7.3.           Terms
of Other Stock-Based Awards. In addition to the terms and conditions specified
in the Award Agreement, Awards made pursuant to Section 7.2 shall be subject to
the following:

    

    (a)           Any
Common Stock subject to Awards made under Section 7.2 may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on which the
shares are issued, or, if later, the date on which any applicable restriction,
performance or deferral period lapses; and

    

    (b)           If
specified by the Committee in the Award Agreement, the recipient of an Award
under Section 7.2 shall be entitled to receive, currently or on a deferred
basis, interest or dividends or dividend equivalents with respect to the Common
Stock or other securities covered by the Award; and

    

    (c)           The
Award Agreement with respect to any Award shall contain provisions dealing with
the disposition of such Award in the event of the Participant’s Termination
prior to the exercise, realization or payment of such Award, whether such
termination occurs because of retirement, Disability, death or other reason,
with such provisions to take account of the specific nature and purpose of the
Award.

    

    8.           PAYMENT
FOR SHARE PURCHASES.

    

    8.1           Payment.
Payment for Shares purchased pursuant to this Plan may be made in cash (by
check) or, where expressly approved for the Participant by the Committee or
where expressly indicated in the Participant’s Award Agreement and where
permitted by law:

     

    (a)           by
cancellation of indebtedness of the Company to the Participant;

    

    (b)           by
surrender of shares (or by delivering a certification or attestation of
ownership of such shares) that either: (1) have been owned by Participant for
any period required by the Company and have been paid for within the meaning of
SEC Rule 144 (and, if such shares were purchased from the Company by use of a
promissory note, such note has been fully paid with respect to such shares); or
(2) were obtained by Participant in the public market;

    

    (c)           by
tender of a promissory note having such terms as may be approved by the
Committee and bearing interest at a rate sufficient to avoid imputation of
income under the Code;

    

    (d)           by
waiver of compensation due or accrued to the Participant for services
rendered;

    

    (e)           with
respect only to purchases upon exercise of an option, and provided that a public
market for the Company’s stock exists:

    
      
         

      

      
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      (1)           through
a “same day sale” commitment from the Participant and a broker-dealer that is a
member of the National Association of Securities Dealers (an “NASD Dealer”)
whereby the Participant irrevocably elects to exercise the option and to sell a
portion of the Shares so purchased to pay for the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or

      

      (2)           through
a “margin” commitment from the Participant and a NASD Dealer whereby the
Participant irrevocably elects to exercise the option and to pledge the Shares
so purchased to the NASD Dealer in a margin account as security for a loan from
the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or

       

    

                   
(f)           by any
combination of the foregoing or other methods authorized by the
Committee.

    

    At its
discretion, the Committee may modify or suspend any method for the exercise of
stock options, including any of the methods specified in the previous sentence.
Delivery of shares for exercising an Option shall be made either through the
physical delivery of shares or through an appropriate certification or
attestation of valid ownership.

    

    8.2           Loan
Guarantees. Except as prohibited by law or regulation, the Committee may
authorize a guarantee by the Company of a third-party loan to the Participant
for the purpose of purchasing Shares awarded under this Plan.

    

    9.           WITHHOLDING
TAXES

    

    9.1           Withholding
Generally. Whenever Shares are to be issued in satisfaction of Awards granted
under this Plan, the Company may require the Participant to remit to the Company
an amount sufficient to satisfy federal, state and local withholding tax
requirements prior to the delivery of any certificate or certificates for such
Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be
made in cash, such payment will be net of an amount sufficient to satisfy
federal, state, and local withholding tax requirements.

    

    9.2           Stock
Withholding. When, under applicable law, a Participant incurs tax liability in
connection with the exercise or vesting of any Award that is subject to tax
withholding and the Participant is obligated to pay the Company the amount
required to be withheld, the Committee may in its sole discretion allow the
Participant to satisfy the minimum withholding tax obligation by electing to
have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be
determined. All elections by a Participant to have Shares withheld for this
purpose will be made in accordance with the requirements established by the
Committee and be in writing in a form acceptable to the Committee.

    

    10.            PRIVILEGES
OF STOCK OWNERSHIP. No Participant will have any of the rights of a Shareholder
with respect to any Shares until the Shares are issued to the Participant. After
Shares are issued to the Participant, the Participant will be a Shareholder and
have all the rights of a Shareholder with respect to such Shares, including the
right to vote and receive all dividends or, other distributions made or paid
with respect to such Shares; provided, that if such Shares are Restricted Stock,
then any new, additional or different securities the Participant may become
entitled to receive with respect to such Shares by virtue of a stock dividend,
stock split or any other change in the corporate or capital structure of the
Company will be subject to the same restrictions as the Restricted Stock;
provided, further, that the Participant will have no right to retain such stock
dividends or stock distributions with respect to Shares that are repurchased at
the Participant’s Purchase Price or Exercise Price pursuant to Section
12.

    

    11.            TRANSFERABILITY.

    

    
      
         

      

      
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    11.1           Non-Transferability
of Options. No Option granted under the Plan shall be transferable by the
Participant otherwise than by will or by the laws of descent and distribution,
and such option right shall be exercisable, during the Participant’s lifetime,
only by the Participant. Notwithstanding the foregoing, the Committee may set
forth in an Award Agreement at the time of grant or thereafter, that the Options
(other than Incentive Stock Options) may be transferred to members of the
Participant’s immediate family, to trusts solely for the benefit of such
immediate family members and to partnerships or limited liability companies in
which such family members and/or trusts are the only partners or members, as the
case may be. For this purpose, immediate family means the Participant’s spouse,
parents, children, stepchildren, grandchildren and legal dependants. Any
transfer of options made under this provision will not be effective until notice
of such transfer is delivered to the Company.

    

    11.2           Rights
of Transferee. Notwithstanding anything to the contrary herein, if an option has
been transferred in accordance with Section 11.1 above, the option shall be
exercisable solely by the transferee. The option shall remain subject to the
provisions of the Plan, including that it will be exercisable only to the extent
that the Participant or Participant’s estate would have been entitled to
exercise it if the Participant had not transferred the Option. In the event of
the death of the Participant prior to the expiration of the right to exercise
the transferred option, the period during which the option shall be exercisable
will terminate on the date 12 months following the date of the Participant’s
death. In no event will the option be exercisable after the expiration of the
exercise period set forth in the Award Agreement. The Option shall be subject to
such other rules relating to transferees as the Committee shall
determine.

    

    12.           RESTRICTIONS
ON SHARES. At the discretion of the Committee, the Company may reserve to itself
and/or its assignee(s) in the Award Agreement a right to repurchase a portion of
or all Unvested Shares held by a Participant following such Participant’s
Termination at any time within three (3) months after the later of Participant’s
Termination Date and the date Participant purchases Shares under this Plan, for
cash and/or cancellation of purchase money indebtedness, at the Participant’s
Exercise Price or Purchase Price, as the case may be.

    

    13.           CERTIFICATES.
All certificates for Shares or other securities delivered under this Plan will
be subject to such stock transfer orders, legends and other restrictions,
consistent with the terms of the Awards, as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or foreign
securities law, or any rules, regulations and other requirements of the SEC or
any stock exchange or automated quotation system upon which the Shares may be
listed or quoted.

    

    14.           ESCROW;
PLEDGE OF SHARES. To enforce any restrictions on a Participant’s Shares, the
Committee may require the Participant to deposit all certificates representing
Shares, together with stock powers or other instruments of transfer approved by
the Committee, appropriately endorsed in blank, with the Company or an agent
designated by the Company to hold in escrow until such restrictions have lapsed
or terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is permitted
to execute a promissory note as partial or full consideration for the purchase
of Shares under this Plan will be required to pledge and deposit with the
Company all or part of the Shares so purchased as collateral to secure the
payment of Participant’s obligation to the Company under the promissory note;
provided, however, that the Committee may require or accept other or additional
forms of collateral to secure the payment of such obligation and, in any event,
the Company will have full recourse against the Participant under the promissory
note notwithstanding any pledge of the Participant’s Shares or other collateral.
In connection with any pledge of the Shares, Participant will be required to
execute and deliver a written pledge agreement in such form as the Committee
will from time to time approve. In the discretion of the Committee, the pledge
agreement may provide that the Shares purchased with the promissory note may be
released from the pledge on a pro rata basis as the promissory note is
paid.

    

    15.           EXCHANGE
AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time,
authorize the Company, with the consent of the respective Participants, to issue
new Awards in exchange for the surrender and cancellation of any or all
outstanding Awards. The Committee may at any time buy from a Participant an
Award previously granted with payment in cash, Shares (including Restricted
Stock) or other consideration, based on such terms and conditions as the
Committee and the Participant may agree.

    

    16.            SECURITIES
LAW AND OTHER STATUTORY AND REGULATORY COMPLIANCE.

    
      
         

      

      
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    16.1           Securities
Law. An Award will not be effective unless such Award is in compliance with all
applicable federal and state securities laws, rules and regulations of any
governmental body, and the requirements of any stock exchange or automated
quotation system upon which the Shares may then be listed or quoted, as they are
in effect on the date of grant of the Award and also on the date of exercise or
other issuance. However, in the event that an Award is not effective as
discussed in the preceding sentence, the Company will use reasonable efforts to
modify, revise or renew such Award in a manner so as to make the Award
effective. Notwithstanding any other provision in this Plan, the Company will
have no obligation to issue or deliver certificates for Shares under this Plan
prior to: (a) obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable; and/or (b) completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company will be under no obligation to register the
Shares with the SEC or to effect compliance with the registration, qualification
or listing requirements of any state securities laws, stock exchange or
automated quotation system, and the Company will have no liability for any
inability or failure to do so.

    

    16.2           Section
409A. This Plan and all Awards hereunder shall be interpreted in such manner as
to comply with the requirements of Section 409A of the Code, its regulations and
other guidance thereunder.

    

    17.           NO
OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan
will confer or be deemed to confer on any Participant any right to continue in
the employ of, or to continue any other relationship with, the Company or any
Subsidiary of the Company or limit in any way the right of the Company or any
Subsidiary of the Company to terminate Participant’s employment or other
relationship at any time, with or without cause.

    

    18.           CORPORATE
TRANSACTIONS.

    

    18.1           Assumption
or Replacement of Awards by Successor. If a Change-of-Control Event
occurs:

    

    (a)           the
successor company in any Change-of-Control Event may, if approved in writing by
the Committee prior to any Change-of-Control Event:

    

    (1)           substitute
equivalent options or Awards or provide substantially similar consideration to
Participants as was provided to Shareholders (after taking into account the
existing provisions of the Awards), or

    

    (2)           issue,
in place of outstanding Shares of the Company held by the Participant,
substantially similar shares or substantially similar other securities or
substantially similar other property subject to repurchase restrictions no less
favorable to the Participant.

    

    (b)           Notwithstanding
anything in this Plan to the contrary, the Committee may, in its sole
discretion, provide that the vesting of any or all options and Awards granted
pursuant to this Plan will accelerate immediately prior to the consummation of a
Change-of-Control Event. If the Committee exercises such discretion with respect
to Options, such options will become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Committee
determines, and if such Options are not exercised prior to the consummation of
such event, they shall terminate at such time as determined by the
Committee.

     

    18.2           Other
Treatment of Awards. Subject to any rights and limitations set forth in Section
18.1, if a Change-of-Control Event occurs or has occurred, any outstanding
Awards will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets constituting
the Change-of-Control Event.

    

    
      
         

      

      
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    18.3           Assumption
of Awards by the Company. The Company, from time to time, also may substitute or
assume outstanding awards granted by another company, whether in connection with
an acquisition of such other company or otherwise, by either (a) granting an
Award under this Plan in substitution of such other company’s award, or (b)
assuming such award as if it had been granted under this Plan if the terms of
such assumed award could be applied to an Award granted under this Plan. Such
substitution or assumption will be permissible if the holder of the substituted
or assumed award would have been eligible to be granted an Award under this Plan
if the other company had applied the rules of this Plan to such grant. If the
Company assumes an award granted by another company, the terms and conditions of
such award will remain unchanged (except that the exercise price and the number
and nature of Shares issuable upon exercise of any such option will be adjusted
appropriately pursuant to Section 424(a) of the Code). If the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.

    

    18.4           Adjustment
of Shares. In the event that the number of outstanding shares is changed by a
stock dividend, recapitalization, stock split, reverse stock split, subdivision,
combination, reclassification or similar change in the capital structure of the
Company without consideration, then (a) the number of Shares reserved for
issuance under this Plan, (b) the Exercise Prices of and number of Shares
subject to outstanding Options, and (c) the number of Shares subject to other
outstanding Awards will be proportionately adjusted, subject to any required
action by the Board or the Shareholders of the Company and compliance with
applicable securities laws; provided, however, that fractions of a Share will
not be issued but will either be replaced by a cash payment equal to the Fair
Market Value of such fraction of a Share or will be rounded up to the nearest
whole Share, as determined by the Committee.

    

    19.           ADOPTION
AND SHAREHOLDER APPROVAL. This Plan will become effective on the date that this
Plan is approved by the Shareholders of the Company, consistent with applicable
laws (the “Effective Date”).

     

    20.           TERM
OF PLAN. Unless earlier terminated as provided herein, this Plan will terminate
ten (10) years from the date this Plan is adopted by the Board and approved by
the Shareholders of the Company. The expiration of the Plan, however, shall not
affect the rights of Participants under Options theretofore granted to them, and
all unexpired options and Awards shall continue in force and operation after
termination of the Plan, except as they may lapse or be terminated by their own
terms and conditions.

    

    21.           AMENDMENT
OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan
in any respect, including without limitation, amendment of any form of Award
Agreement or instrument to be executed pursuant to this Plan; provided, however,
that the Board will not, (i) without the approval of the Shareholders of the
Company, amend this Plan in any manner that applicable law or regulation
requires such Shareholder approval, or (ii) without the written consent of the
Participant substantially alter or impair any Option or Award previously granted
under the Plan. Notwithstanding the foregoing, if an option has been transferred
in accordance with the terms of this Plan, written consent of the transferee
(and not the Participant) shall be necessary to substantially alter or impair
any option or Award previously granted under the Plan.

    

    22.           EFFECT
OF SECTION 162(m) OF THE CODE. The Plan, and all Awards designated by the
Committee as “performance-based compensation” for purposes of Section 162(m) of
the Code are intended to be exempt from the application of Section 162(m) of the
Code, which restricts under certain circumstances the Federal income tax
deduction for compensation paid by a public company to certain executives in
excess of $1 million per year. The Committee may, without Shareholder approval
(unless otherwise required to comply with Rule 16b-3 under the Exchange Act or
in accordance with applicable market or exchange requirements), amend the Plan
retroactively and/or prospectively to the extent it determines necessary in
order to comply with any subsequent clarification of Section 162(m) of the Code
required to preserve the Company’s Federal income tax deduction for compensation
paid pursuant to the Plan. To the extent that the Committee determines as of the
Date of Grant of an Award that (i) the Award is intended to comply with Section
162(m) of the Code and (ii) the exemption described above is no longer available
with respect to such Award, such Award shall not be effective until any
Shareholder approval required under Section 162(m) of the Code has been
obtained. Notwithstanding the foregoing, if the Committee deems it to be in the
best interest of the Company, the Committee retains the discretion to make such
Awards under the Plan that may not comply with the requirements of Section
162(m) of the Code.

    
      
         

      

      
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    23.           GENERAL.

    

    23.1           Additional
Provisions of an Award. Awards under the Plan also may be subject to such other
provisions (whether or not applicable to the benefit awarded to any other
Participant) as the Committee determines appropriate including, without
limitation, provisions to assist the Participant in financing the purchase of
Stock upon the exercise of Options, provisions for the forfeiture of or
restrictions on resale or other disposition of shares of Stock acquired under
any Award, provisions giving the Company the right to repurchase shares of Stock
acquired under any Award in the event the Participant elects to dispose of such
shares, provisions which restrict a Participant’s ability to sell Shares for a
period of time under certain circumstances, and provisions to comply with
Federal and state securities laws and Federal and state tax withholding
requirements. Any such provisions shall be reflected in the applicable Award
Agreement. In addition, the Committee may, in its discretion, provide in an
Award Agreement that, in the event that the Participant engages, within a
specified period after termination of employment, in certain activity specified
by the Committee that is deemed detrimental to the interests of the Company
(including, but not limited to, the breach of any non-solicitation and/or
non-compete agreements with the Company), the Participant will forfeit all
rights under any Options that remain outstanding as of the time of such act and
will return to the Company an amount of shares with a Fair Market Value
(determined as of the date such shares are returned) equal to the amount of any
gain realized upon the exercise of any Option that occurred within a specified
time period.

    

    23.2           Claim
to Awards and Employment Rights. Unless otherwise expressly agreed in writing by
the Company, no employee or other person shall have any claim or right to be
granted an Award under the Plan or, having been selected for the grant of an
Award, to be selected for a grant of any other Award.

    

    23.3           Designation
and Change of Beneficiary. Each Participant shall file with the Committee a
written designation of one or more persons as the beneficiary who shall be
entitled to receive the amounts payable with respect to an Award of Restricted
Stock, if any, due under the Plan upon his death. A Participant may, from time
to time, revoke or change his beneficiary designation without the consent of any
prior beneficiary by filing a new designation with the Committee. The last such
designation accepted by the Committee shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
accepted by the Committee prior to the Participant’s death, and in no event
shall it be effective as of a date prior to such receipt. If no beneficiary
designation is filed by the Participant, the beneficiary shall be deemed to be
the Participant's spouse or, if the Participant is unmarried at the time of
death, the Participant's estate.

    

    23.4           Payments
to Persons Other Than Participants. If the Committee shall find that any person
to whom any amount is payable under the Plan is unable to care for his or her
affairs because of illness or accident, or is a minor, or is otherwise legally
incompetent or incapacitated or has died, then any payment due to such person or
such person’s estate (unless a prior claim therefor has been made by a duly
appointed legal representative) may, if the Committee so directs the Company, be
paid to such person’s spouse, child, relative, an institution maintaining or
having custody of such person, or any other person deemed by the Committee, in
its absolute discretion, to be a proper recipient on behalf of such person
otherwise entitled to payment. Any such payment shall be a complete discharge of
the liability of the Committee and the Company therefor.

    

    23.5           No
Liability of Committee Members. No member of the Committee shall be personally
liable by reason of any contract or other instrument executed by such Committee
member or on such member's behalf in such member's capacity as a member of the
Committee nor for any mistake of judgment made in good faith, and the Company
shall indemnify and hold harmless each member of the Committee and each other
employee, officer or director of the Company to whom any duty or power relating
to the administration or interpretation of the Plan may be allocated or
delegated, against any cost or expense (including counsel fees) or liability
(including any sum paid in settlement of a claim) arising out of any act or
omission to act in connection with the Plan unless arising out of such person’s
own fraud or willful bad faith; provided, however, that approval of the Board
shall be required for the payment of any amount in settlement of a claim against
any such person. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such persons may be entitled
under the Company’s Articles of Incorporation or By-Laws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.

    

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    23.6           Governing
Law. The Plan and all agreements hereunder shall be governed by and construed in
accordance with the internal laws of the State of Utah without regard to the
principles of conflicts of law thereof.

    

    23.7           Funding.
No provision of the Plan shall require the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made or otherwise
to segregate any assets, nor shall the Company maintain separate bank accounts,
books, records or other evidence of the existence of a segregated or separately
maintained or administered fund for such purposes. Participants shall have no
rights under the Plan other than as general unsecured creditors of the Company,
except that insofar as they may have become entitled to payment of additional
compensation by performance of services, they shall have the same rights as
other employees under general law.

    

    23.8           Reliance
on Reports. Each member of the Committee and each member of the Board shall be
fully justified in relying, acting or failing or refusing to act, and shall not
be liable for having so relied, acted or failed or refused to act in good faith,
upon any report made by the independent public accountant of the Company and its
subsidiaries and Affiliates and upon any other information furnished in
connection with the Plan by any person or persons other than
himself.

    

    23.9           Relationship
to Other Benefits. No payment under the Plan shall be taken into account in
determining any benefits under any pension, retirement, profit sharing, group
insurance or other benefit plan of the Company or any Subsidiary except as
otherwise specifically provided in such other plan.

    

    23.10           Expenses.
The expenses of administering the Plan shall be borne by the Company and its
Subsidiaries and Affiliates.

    

    23.11           Pronouns.
Masculine pronouns and other words of masculine gender shall refer to both men
and women.

    

    23.12           Titles
and Headings. The titles and headings of the sections in the Plan are for
convenience of reference only, and in the event of any conflict, the text of the
Plan, rather than such titles or headings shall control.

    

    23.13           Termination
of Employment. For all purposes herein, a person who transfers from employment
or service with the Company to employment or service with a Subsidiary or
Affiliate or vice versa shall not be deemed to have terminated employment or
service with the Company, a Subsidiary or Affiliate.

    

    23.14           Nonexclusivity
of the Plan. Neither the adoption of this Plan by the Board, the submission of
this Plan to the Shareholders of the Company for approval, nor any provision of
this Plan will be construed as creating any limitations on the power of the
Board to adopt such incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options and bonuses otherwise than
under this Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.

    

    23.15           Employees
Based Outside of the United States. Notwithstanding any provision of the Plan to
the contrary, in order to foster and promote achievement of the purposes of the
Plan or to comply with provisions of laws in other countries in which the
Company, its Affiliates, and its Subsidiaries operate or have employees, the
Committee, in its sole discretion, shall have the power and authority to (i)
determine which employees employed outside the United States are eligible to
participate in the Plan, (ii) modify the terms and conditions of Awards granted
to employees who are employed outside the United States, and (iii) establish
subplans (through the addition of schedules to the Plan or otherwise), modify
option exercise procedures and other terms and procedures to the extent such
actions may be necessary or advisable.

    

    24.           DEFINITIONS.
As used in this Plan, the following terms will have the following
meanings:

    

    
      
         

      

      
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    “Adjusted
Business Unit EBITDA” means, for any period, for the selected business unit, an
amount equal to the sum of (without duplication) (a) Net Income, (b) Net
Interest Charges, (c) the amount of taxes, based on or measured by income, used
or included in tax expense deducted in determining such Net Income, (d) the
amount of depreciation and amortization expense deducted in determining such Net
Income, (e) the amount of integration expenses (as identified on the business
unit's profit and loss statements) incurred during such period, (f) other
non-recurring expenses incurred during such period, (g) any related party
charges, (h) any items included in “net other expenses” as listed on the
business unit's income statement, (i) all participating executives' bonuses that
are paid out under the Plan and any performance awards paid under the Bio-Path
Holdings, Inc. 2007 Stock Incentive Plan, and (j) any adjustments
that appear on the business unit's computation of pro forma earnings as publicly
announced by the Company; and, except with regard to item (j) above, all
determined in accordance with GAAP. Adjusted Business Unit EBITDA will also be
calculated without reference to any discontinued operations. 

    

    “Adjusted
EBITDA” means, for any period, for the Company and its subsidiaries, an amount
equal to the sum of (without duplication) (a) Consolidated Net Income, (b)
Consolidated Net Interest Charges, (c) the amount of taxes, based on or measured
by income, used or included in tax expense deducted in determining such
Consolidated Net Income, (d) the amount of depreciation and amortization expense
deducted in determining such Consolidated Net Income, (e) the amount of
integration expenses (as identified on Company's profit and loss statements)
incurred during such period, (f) other non-recurring expenses incurred during
such period, (g) any items (other than gains or losses on put options on Company
stock) included in “net other expenses” as listed on the Company's consolidated
income statement, (h) any related party charges, (i) all participating
executives' bonuses that are paid out under the Bio-Path Holdings, Inc. 2007
Annual Incentive Plan and any performance awards paid under the Bio-Path
Holdings, Inc. 2007 Stock Incentive Plan, and (j) any adjustments
that appear on the Company's computation of pro forma earnings as publicly
announced by the Company; all determined on a consolidated basis and except with
regard to item (j) above, in accordance with GAAP. Adjusted EBITDA will also be
calculated without reference to any discontinued operations. 

    

    “Affiliate”
means any entity in which the Company has an ownership interest of at least
20%.

    

    “Award”
means any award under this Plan, including any Option, Restricted Stock,
Performance Award or other stock-based Award.

    

    “Award
Agreement” means, with respect to each Award, the signed written agreement
between the Company and the Participant setting forth the terms and conditions
of the Award.

    

    “Board”
means the Board of Directors of the Company.

    

    “Cause”
means the Company, a Subsidiary or Affiliate having cause to terminate a
Participant’s employment or service under any existing employment, consulting or
any other agreement between the Participant and the Company or a Subsidiary or
Affiliate or, in the absence of such an employment, consulting or other
agreement, upon (i) the determination by the Committee that the Participant has
ceased to perform his duties to the Company, a Subsidiary or Affiliate (other
than as a result of his incapacity due to physical or mental illness or injury),
which failure amounts to an intentional and extended neglect of his duties to
such party, (ii) the Committee’s determination that the Participant has engaged
or is about to engage in conduct materially injurious to the company, a
Subsidiary or Affiliate or (iii) the Participant having been convicted of a
felony or a misdemeanor carrying a jail sentence of six months or
more.

    

    “Change-of-Control
Event” means the occurrence of any one or more of the following events: (i)
there shall have been a change in a majority of the Board of Directors of the
Company within a one (1) year period, unless the appointment of a director or
the nomination for election by the Company’s Shareholders of each new director
was approved by the vote of a majority of the directors then still in office who
were in office at the beginning of such one (1) year period, or (ii) the Company
shall have been sold by either (A) a sale of all or substantially all its
assets, or (B) a merger or consolidation, other than any merger or consolidation
pursuant to which the Company acquires another entity, or (C) a tender offer,
whether solicited or unsolicited.

    

    
      
         

      

      
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    “Code”
means the Internal Revenue Code of 1986, as amended. Reference in the Plan to
any section of the Code shall be deemed to include any amendments or successor
provisions to such section and any regulations under such section.

    

     “Common
Stock” means the outstanding common stock, of the Company, or any other class of
securities into which substantially all the Common Stock is converted or for
which substantially all the Common Stock is exchanged.

    

    “Committee”
means the Compensation Committee, the Stock Option Committee or such other
committee appointed by the Board consisting solely of two or more Outside
Directors or the Board.

    

    “Company”
means Bio-Path Holdings, Inc., a Utah corporation, or any successor
corporation.

    

    “Consolidated
Net Income” means, for any period, for the Company and its subsidiaries, the net
income of the Company and its subsidiaries from continuing operations without
giving effect to extraordinary net gains or extraordinary net losses, all
determined on a consolidated basis in accordance with GAAP, and consistent with
past practices.

    

    “Consolidated
Net Interest Charges” means, for any period, for the Company and its
subsidiaries, the sum of, without duplication, (a) all interest, premium
payments, commissions, fees, charges and related expenses (and interest income)
of the Company and its subsidiaries in connection with indebtedness (including
capitalized interest) or bank accounts, money market accounts and investment
accounts, or financing leases and notes receivable, or in connection with the
deferred purchase price of assets, in each case to the extent treated as
interest in accordance with GAAP, and (b) the portion of rent expense of the
Company and its subsidiaries with respect to such period under capital leases
that is treated as interest in accordance with GAAP.

    

    “Disability”
or “Disabled” means a disability, whether temporary or permanent, partial or
total, as determined in good faith by the Committee. Where relevant, the
Committee shall apply a definition that complies with one set forth in Section
409A of the Code.

    

    “Exchange
Act” means the Securities Exchange Act of 1934, as amended.

    

    “Exercise
Price” means the price at which a holder of an Option may purchase the Shares
issuable upon exercise of the Option.

    

    “Fair
Market Value” means, as of any date, the value of a share of the Company’s
Common Stock determined as follows:

    

    (a)           if
such Common Stock is publicly traded and is then listed on a national securities
exchange or quoted on a national automated quotation system, its closing price
on the date of determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, and if there were no
trades on such date, on the day on which a trade occurred next preceding such
date;

    

    (b)           if
such Common Stock is publicly traded and is then quoted on the NASDAQ Global
Market, its closing price on the NASDAQ Global Market on the date of
determination as reported in The Wall Street Journal, and if there were no
trades on such date, on the day on which a trade occurred next preceding such
date;

    

    (c)           if
such Common Stock is publicly traded but is not quoted on the NASDAQ National
market nor listed or admitted to trading on a national securities exchange, the
average of the closing bid and asked prices on the date of determination as
reported in The Wall Street Journal or, if not reported in The Wall Street
Journal, as reported by any reputable publisher or quotation service, as
determined by the Committee in good faith, and if there were no trades on such
date, on the day on which a trade occurred next preceding such
date;

    

    (d)           if
none of the foregoing is applicable, by the Committee in good faith based upon
factors available at the time of the determination, including, but not limited
to, capital raising activities of the Company.

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    “GAAP”
means generally accepted accounting principles in the United
States.

    

    “Insider”
means an officer or director of the Company or any other person whose
transactions in the Company’s Common Stock are subject to Section 16 of the
Exchange Act.

    

    “NASD
Dealer” has the meaning set forth in section 8(e).

    

    “Net
Income” means, for any period, for the selected business unit, the net income of
the business unit from continuing operations without giving effect to
extraordinary net gains or extraordinary net losses, all determined in
accordance with GAAP, and consistent with past practices. 

    

    “Net
Interest Charges” means, for any period, for the selected business unit, the sum
of, without duplication, (a) all interest, premium payments, commissions, fees,
charges and related expenses (and interest income) of the business unit in
connection with indebtedness (including capitalized interest) or bank accounts,
money market accounts and investment accounts, or financing leases and notes
receivable, or in connection with the deferred purchase price of assets, in each
case to the extent treated as interest in accordance with GAAP, and (b) the
portion of rent expense of the business with respect to such period under
capital leases that is treated as interest in accordance with
GAAP. 

    

    “NQSOs”
has the meaning set forth in Section 5.

    

    “Option”
means an award of an option to purchase Shares pursuant to Section
5.

    

    “Outside
Director” means a person who is both (i) a “nonemployee director” within the
meaning of Rule 16b-3 under the Exchange Act, or any successor rule or
regulation and (ii) an “outside director” within the meaning of Section 162(m)
of the Code.

    

    “Participant”
means a person who receives an Award under this Plan.

    

    “Performance
Award” means an Award of Shares, or cash in lieu of Shares, pursuant to Section
7.

    

    “Performance
Factors” means the factors selected by the Committee from time to time,
including, but not limited to, the following measures to determine whether the
performance goals established by the Committee and applicable to Awards have
been satisfied: revenue; net revenue; revenue growth; net revenue growth;
earnings before interest, taxes, depreciation and amortization (“EBITDA”);
Adjusted EBITDA; Adjusted Business Unit EBITDA, EBITDA growth, Adjusted EBITDA
growth and Adjusted Business Unit EBITDA growth; funds from operations; funds
from operations per share; operating income (loss); operating income growth;
operating cash flow; adjusted operating cash flow return on income; net income;
net income growth; pre- or after-tax income (loss); cash available for
distribution; cash available for distribution per share; cash and/or cash
equivalents available for operations; net earnings (loss); earnings (loss) per
share; earnings per share growth; return on equity; return on assets; share
price performance (based on historical performance or in relation to selected
organizations or indices); total shareholder return; total shareholder return
growth; economic value added; improvement in cash-flow (before or after tax);
successful capital raises; successful completion of acquisitions; and
confidential business unit objectives. A Performance Factor may be measured over
a Performance Period on a periodic, annual, cumulative or average basis and may
be established on a company-wide basis or established with respect to one or
more operating units, divisions, subsidiaries, acquired businesses, minority
investments, partnerships or joint ventures. Unless otherwise determined by the
Company by no later than the earlier of the date that is ninety (90) days after
the commencement of the Performance Period or the day prior to the date on which
twenty-five percent (25%) of the Performance Period has elapsed, the Performance
Factors will be determined by not accounting for a change in GAAP during a
Performance Period

     

     “Performance
Period” means the period of service determined by the Committee, not to exceed
five years, during which years of service or performance is to be measured for
Restricted Stock Awards or Performance Awards.

    

    “Plan”
means the Bio-Path Holdings, Inc. 2007 Stock Incentive Plan, as amended from time to time.

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    “Restricted
Stock Award” means an award of Shares pursuant to Section 6.

    

    “SEC”
means the Securities and Exchange Commission.

    

    “Securities
Act” means the Securities Act of 1933, as amended.

    

    “Shares”
means shares of the Company’s Common Stock reserved for issuance under this
Plan, as adjusted pursuant to Section 18, and any successor
security.

    

    “Stock
Unit” means an Award giving the right to receive Shares granted under either
Section 6.8 or Section 7 of the Plan.

    

    “Subsidiary”
means any corporation or other legal entity (other than the Company) in an
unbroken chain of corporations and/or other legal entities beginning with the
Company if each of the corporations and entities other than the last corporation
or entity in the unbroken chain owns stock, other equity securities or other
equity interests possessing 50% or more of the total combined voting power of
all classes of stock, other equity securities or other equity interests in one
of the other corporations or entities in such chain.

    

    “Ten
Percent Shareholder” has the meaning set forth in Section 5.2.

    

    “Termination”
or “Terminated” means, for purposes of this Plan with respect to a Participant,
that the Participant has for any reason ceased to provide services as an
employee, officer, director, consultant, independent contractor, or advisor to
the Company or Subsidiary of the Company. An employee will not be deemed to have
ceased to provide services in the case of (i) sick leave, (ii) military leave,
or (iii) any other leave of absence approved by the Committee, provided, that
such leave is for a period of not more than 90 days, unless re-employment upon
the expiration of such leave is guaranteed by contract or statute or unless
provided otherwise pursuant to formal policy adopted from time to time by the
Company and issued and promulgated to employees in writing. In the case of any
employee on an approved leave of absence, the Committee may make such provisions
respecting suspension of vesting of the Award while on leave from the employ of
the Company or a Subsidiary as it may deem appropriate, except that in no event
may an Option be exercised after the expiration of the term set forth in the
option agreement. The Committee will have sole discretion to determine whether a
Participant has ceased to provide services and the effective date on which the
Participant ceased to provide services (the “Termination
Date”). 

     

    “Unvested
Shares” means “Unvested Shares” as defined in the Award Agreement.

    

    “Vested
Shares” means “Vested Shares” as defined in the Award Agreement.

    

    

    

     

    
      
         

      

      
        18

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