SECURITIES PURCHASE AGREEMENT
 
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of February 28, 2008,
by and among TXCO Resources Inc., a Delaware corporation, with headquarters
located at 777 E. Sonterra Blvd., Suite 350, San Antonio, Texas
78258 (the "Company"), and the investors listed on the Schedule of Buyers
attached hereto (individually, a "Buyer" and collectively, the "Buyers").
 
WHEREAS:
 
A. On November 20, 2007, the Company and the Buyers entered into (i) that
certain Securities Purchase Agreement (the "Existing Securities Purchase
Agreement"), pursuant to which the Company issued to the Existing Holders shares
of the Company's Series C Convertible Preferred Stock, par value $0.01 per share
(the "Existing Preferred Shares") convertible into the Company's common stock
(the "Common Stock"), par value $0.01 per share (the "Existing Conversion
Shares") and (y) that certain Registration Rights Agreement (the "Existing
Registration Rights Agreement"), pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the Existing
Registration Rights Agreement) under the Securities Act of 1933, as amended (the
"1933 Act").
 
B. The Company has authorized a new series of convertible preferred stock of the
Company designated as Series D Convertible Preferred Stock, the terms of which
are set forth in the certificate of designation for such series of preferred
stock (the "Series D Certificate of Designations") in the form attached hereto
as Exhibit A-1, which Series D Convertible Preferred Stock shall be convertible
into Common Stock, in accordance with the terms of the Series D Certificate of
Designations.
 
C. The Company has also authorized a new series of convertible preferred stock
of the Company designated as Series E Convertible Preferred Stock, the terms of
which are set forth in the certificate of designation for such series of
preferred stock (the "Series E Certificate of Designations", and together with
Series D Certificate of Designations, the "Certificates of Designations") in the
form attached hereto as Exhibit A-2, which Series E Convertible Preferred Stock
shall be convertible into Common Stock, in accordance with the terms of the
Series E Certificate of Designations.
 
D. The Company and the Buyers desire to enter into this Agreement, pursuant to
which, among other things, upon the terms and conditions stated in this
Agreement, at the Initial Closing (as defined below), (i) the Company and each
Buyer shall exchange such Buyer's Existing Preferred Shares for that aggregate
number of shares of Series D Convertible Preferred Stock set forth opposite such
Buyer's name in column (3) on the Schedule of Buyers (which aggregate number for
all Buyers shall be 55,000) (the "Exchanged Preferred Shares") (as converted,
collectively, the "Exchanged Conversion Shares") and (ii) each Buyer wishes to
purchase, and the Company wishes to sell, that aggregate number of shares of
Series E Convertible Preferred Stock set forth opposite such Buyer's name in
column (4) on the Schedule of Buyers (which aggregate number for all Buyers
shall be 20,000) (the "Initial Preferred Shares") (as converted, collectively,
the "Initial Conversion Shares").
 

--------------------------------------------------------------------------------

 
E. Subject to the terms and conditions set forth in this Agreement, the Buyers
shall have the right to participate in Additional Closings (as defined below) in
order to purchase, and require the Company to sell up to that aggregate number
of shares of Series D Preferred Stock set forth opposite such Buyer's name in
column (5) on the Schedule of Buyers (which aggregate number for all Buyers
shall not exceed 30,000) (the "Additional Preferred Shares", together with the
Initial Preferred Shares and the Exchanged Preferred Shares, the "Preferred
Shares") (as converted, collectively, the "Additional Conversion Shares",
together with the Initial Conversion Shares and the Exchanged Conversion Shares,
the "Conversion Shares").
 
F. Contemporaneously with the Initial Closing, the parties hereto are executing
and delivering a Registration Rights Agreement, substantially in the form
attached hereto as Exhibit B (the "Registration Rights Agreement"), pursuant to
which the Company has agreed to provide certain registration rights with respect
to the Registrable Securities (as defined in the Registration Rights Agreement),
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
 
G. The Preferred Shares may be entitled to dividends, which at the option of the
Company, subject to certain conditions, may be paid in shares of Common Stock
(the "Dividend Shares").
 
H. The Preferred Shares, the Conversion Shares and the Dividend Shares are
collectively referred to herein as the "Securities".
 
I. The Company and each Buyer is executing and delivering this Agreement (i)
with respect to the issuance of the Initial Preferred Shares and Additional
Preferred Shares, in reliance upon the exemption from securities registration
afforded by Section 4(2) of the 1933 Act, and Rule 506 of Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the 1933 Act and (ii) with respect to the exchange
of the Existing Preferred Shares for the Exchanged Preferred Shares, in reliance
upon the exemption from registration provided by Section 3(a)(9) of the 1933
Act.
 
NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
 

1.
PURCHASE AND SALE OF PREFERRED SHARES.

 
(a) Purchase of Preferred Shares.
 
(i) Initial Preferred Shares; Exchange. Subject to the satisfaction (or waiver)
of the conditions set forth in Sections 6(a) and 7(a) below, (x) each Buyer
shall surrender to the Company its Existing Preferred Shares and the Company
shall issue and deliver to the Buyers the number of Exchanged Preferred Shares
set forth opposite such Buyer's name in column (3) on the Schedule of Buyers and
(y) the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, agrees to purchase from the Company on the Initial Closing Date
(as defined below), the number of Initial Preferred Shares as is set forth
opposite such Buyer's name in column (4) on the Schedule of Buyers (the "Initial
Closing").
 
- 2 -

--------------------------------------------------------------------------------

 
(ii) Additional Preferred Shares. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 1(c), 6(b) and 7(b) below, the Company shall
issue and sell to each Buyer electing to participate in such Additional Closing
pursuant to Section 1(c) below, and each such Buyer severally, but not jointly,
agrees to purchase from the Company on such Additional Closing Date (as defined
below), up to the number of Additional Preferred Shares as is set forth opposite
such Buyer's name in column (5) on the Schedule of Buyers (each, an "Additional
Closing").
 
(iii) Closing. The Initial Closing and the Additional Closings are each referred
to in this Agreement as a "Closing". Each Closing shall occur on the applicable
Closing Date at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New
York, New York 10022.
 
(iv) Purchase Price. The purchase price for each Buyer of the Initial Preferred
Shares to be purchased by each such Buyer at the Initial Closing shall be the
amount set forth opposite such Buyer's name in column (6) of the Schedule of
Buyers (the "Initial Purchase Price"). Each Buyer shall pay $1,000 for each
Additional Preferred Share to be purchased by such Buyer at each Additional
Closing (the "Additional Purchase Price", and together with the Initial Purchase
Price, the "Purchase Price").
 
(b) Initial Closing Date. The date and time of the Initial Closing (the "Initial
Closing Date") shall be 10:00 a.m., New York City Time, on the date hereof after
notification of satisfaction (or waiver) of the conditions to the Initial
Closing set forth in Sections 6(a) and 7(a) below (or such later date as is
mutually agreed to by the Company and each Buyer).
 
(c) Additional Closing Date. The date and time of the Additional Closings (each
an "Additional Closing Date," and together with the Initial Closing Date, each a
"Closing Date" and collectively, the "Closing Dates") shall be 10:00 a.m., New
York City time, on the date specified in the applicable Additional Closing
Notice (as defined below), subject to satisfaction (or waiver) of the conditions
to Additional Closing set forth in Sections 6(b) and 7(b) and the conditions
contained in this Section 1(c) (or such later date as is mutually agreed to by
the Company and the applicable Buyer). Subject to the requirements of Sections
6(b) and 7(b) and the conditions contained in this Section 1(c), each Buyer may
purchase (provided that such Buyer was a Buyer under this Agreement on the date
hereof and such Buyer holds all of the Preferred Shares purchased hereunder at
the time of such Additional Closing), at such Buyer's option, Additional
Preferred Shares by delivering written notice to the Company (an "Additional
Closing Notice") at any time during the period beginning after the date hereof
and ending on March 20, 2008 (the "Additional Closing Expiration Date"), which
Additional Closing Expiration Date may be extended at the option of the Company
to a date not later than May 20, 2008. The Additional Closing Notice shall be
delivered at least ten (10) Business Days prior to the applicable Additional
Closing Date set forth in such Additional Closing Notice. An Additional Closing
Notice shall set forth (i) the number of Additional Preferred Shares to be
purchased by such Buyer at the Additional Closing, which number of shares shall
not exceed the number of Additional Preferred Shares as is set forth opposite
such Buyer's name in column (4) on the Schedule of Buyers, (ii) the aggregate
Additional Purchase Price for the Additional Preferred Shares to be purchased
and (iii) the proposed Additional Closing Date. As used herein, "Business Day"
means any day other than Saturday, Sunday or other day on which commercial banks
in The City of New York are authorized or required by law to remain closed.
 
- 3 -

--------------------------------------------------------------------------------

 
(d) Form of Payment. On the Initial Closing Date, each Buyer shall pay the
Initial Purchase Price to the Company for the Initial Preferred Shares to be
issued and sold to such Buyer at the Initial Closing by wire transfer of
immediately available funds for such Initial Purchase Price in accordance with
the Company's written wire instructions (less, in the case of Capital Ventures
International ("Capital Ventures"), a Buyer, the amounts withheld pursuant to
Section 4(g)). On each Additional Closing Date, each Buyer shall pay the
Additional Purchase Price to the Company for the Additional Preferred Shares to
be issued and sold to such Buyer at such Additional Closing by wire transfer of
immediately available funds for such Additional Purchase Price in accordance
with the Company's written wire instructions. At each Closing, the Company shall
deliver to each Buyer the Preferred Shares (in such numbers as such Buyer shall
request) which such Buyer is then purchasing or receiving in exchange for
Existing Preferred Shares, as applicable, duly executed on behalf of the Company
and registered in the name of such Buyer or its designee.
 
(e) Consents and Waivers. Each of the Buyers, in its capacity as a holder of
Existing Preferred Shares, hereby (x) consents to the transactions contemplated
hereby, including, without limitation, the exchange of the Existing Preferred
Shares for the Exchanged Preferred Shares, the issuance of the Preferred Shares,
the reservation for issuance and the issuance of the Conversion Shares issuable
upon conversion of the Preferred Shares and the reservation for issuance and the
issuance of the Dividend Shares issuable with respect to the Preferred Shares,
(y) waives any rights with respect to the transactions contemplated hereby set
forth in Section 4(o) of the Existing Securities Purchase Agreement, including,
without limitation, the notice periods set forth therein, and (z) in its
capacity as a holder of Series D Preferred Stock, hereby consents to the
creation and issuance of the Series E Preferred Stock as a class of stock that
is pari passu with the Series D Preferred Stock as to rights to payment of
dividends and receipt of liquidation preferences, all as set forth in the Series
E Certificate of Designations.
 
(f) Holding Period. For the purposes of Rule 144, the Company acknowledges that
the holding period of the Existing Preferred Shares (including the corresponding
Existing Conversion Shares) may be tacked onto the holding period of the
Exchanged Preferred Shares (including the corresponding Exchanged Conversion
Shares). The Company agrees not to take a position contrary to this Section
3(f). The Company agrees to take all actions, including, without limitation, the
issuance by its legal counsel of any necessary legal opinions, necessary to
issue to the Exchanged Conversion Shares that are freely tradable on an Eligible
Market without restriction and not containing any restrictive legend without the
need for any action by the Investor.
 
(g) Existing Securities Purchase Agreement; Existing Registration Rights
Agreement. As of the Initial Closing Date, to the extent any covenants of the
Company or any Buyer or agreements to issue additional securities of the Company
under the Existing Securities Purchase Agreement remain in effect, those
covenants and agreements are hereby superseded by the terms of this Agreement.
As of the Initial Closing Date, to the extent any covenants of the Company or
any Buyer or agreements to register securities of the Company under the 1933 Act
under the Existing Registration Rights Agreement remain in effect, those
covenants and agreements are hereby superseded by the terms of the Registration
Rights Agreement.
 
- 4 -

--------------------------------------------------------------------------------

 

2.
BUYER'S REPRESENTATIONS AND WARRANTIES.

 
Each Buyer represents and warrants with respect to only itself that:
 
(a) Organization; Authority. Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents (as
defined below) to which it is a party and otherwise to carry out its obligations
hereunder and thereunder.
 
(b) No Public Sale or Distribution. Such Buyer is (i) acquiring the Preferred
Shares, (ii) upon conversion of the Preferred Shares will acquire the Conversion
Shares and (iii) will acquire the Dividend Shares in each case, in the ordinary
course of business for its own account and not with a view towards, or for
resale in connection with, the public sale or distribution thereof, except
pursuant to sales registered or exempted under the 1933 Act and such Buyer does
not have a present arrangement to effect any distribution of the Securities to
or through any person or entity; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. Such Buyer is acquiring the
Securities hereunder in the ordinary course of its business. Such Buyer does not
presently have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.
 
(c) Accredited Investor Status. Such Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D.
 
(d) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire the
Securities.
 
(e) Information. Such Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer's right to
rely on the Company's representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice from
Persons other than the Company as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
In addition, such Buyer acknowledges that, in connection with the Closing, the
Company is entering into the transactions set forth in Schedule 2(e) and that
the Buyer has been afforded the opportunity to ask questions of the Company
regarding the same.
 
- 5 -

--------------------------------------------------------------------------------

 
(f) No Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.
 
(g) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the
1933 Act, as amended, (or a successor rule thereto) (collectively, "Rule 144");
(ii) any sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the Person (as defined in Section 3(s)) through whom the sale is made) may
be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
Person is under any obligation to register the Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder. Notwithstanding the foregoing, the Securities may be
pledged in connection with a bona fide margin account or other loan or financing
arrangement secured by the Securities and such pledge of Securities shall not be
deemed to be a transfer, sale or assignment of the Securities hereunder, and no
Buyer effecting a pledge of Securities shall be required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document (as defined in Section
3(b)), including, without limitation, this Section 2(g).
 
(h) Legends. Such Buyer understands that the certificates or other instruments
representing the Preferred Shares and, until such time as the resale of the
Conversion Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the stock certificates representing the
Conversion Shares, except as set forth below, shall bear any legend as required
by the "blue sky" laws of any state and a restrictive legend in substantially
the following form (and a stop-transfer order may be placed against transfer of
such stock certificates):
 
- 6 -

--------------------------------------------------------------------------------

 
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
 
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at The Depository Trust Company ("DTC"), if, unless otherwise required
by state securities laws, (i) such Securities are registered for resale under
the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such
holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that such sale, assignment or transfer of the
Securities may be made without registration under the applicable requirements of
the 1933 Act, or (iii) such holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A. The Company shall be responsible for the fees of its
transfer agent and all DTC fees associated with such issuance.
 
(i) Validity; Enforcement. This Agreement and the Registration Rights Agreement
have been duly and validly authorized, executed and delivered on behalf of such
Buyer and shall constitute the legal, valid and binding obligations of such
Buyer enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
 
(j) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to such Buyer, except in the case of clauses (ii)
and (iii) above, for such conflicts, defaults, rights or violations which would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of such Buyer to perform its obligations
hereunder.
 
- 7 -

--------------------------------------------------------------------------------

 
(k) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.
 
(l) Certain Trading Activities. Other than with respect to this Agreement and
the transactions contemplated herein, since the time that such Buyer was first
contacted by the Company, the Agents (as defined below) or any other Person
regarding this investment in the Company, neither the Buyer nor any Affiliate
(as defined by Rule 405 promulgated pursuant to the 1933 Act) of such Buyer
which (x) had knowledge of the transactions contemplated hereby, (y) has or
shares discretion relating to such Buyer's investments or trading or information
concerning such Buyer's investments and (z) is subject to such Buyer's review or
input concerning such Affiliate's investments or trading (collectively, "Trading
Affiliates") has directly or indirectly, nor has any Person acting on behalf of
or pursuant to any understanding with such Buyer or Trading Affiliate, effected
or agreed to effect any transactions in the securities of the Company. Such
Buyer hereby covenants and agrees not to, and shall cause its Trading Affiliates
not to, engage, directly or indirectly, in any transactions in the securities of
the Company or involving the Company's securities during the period from the
date hereof until such time as (i) the transactions contemplated by this
Agreement are first publicly announced as described in Section 4(i) hereof or
(ii) this Agreement is terminated in full pursuant to Section 8 hereof.
 
(m) Placement Agents’ Fees. Such Buyer is not paying or receiving any fees,
commission or other payments to any Person in connection with the exchange of
such Buyer’s Existing Preferred Shares for the Exchange Preferred Shares.
 

3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 
The Company represents and warrants to each of the Buyers that:
 
(a) Organization and Qualification. Each of the Company and its Subsidiaries (as
defined below) are entities duly organized and validly existing and in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authorization to own their properties and to carry on
their business as now being conducted. Each of the Company and its Subsidiaries
is duly qualified as a foreign entity to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
reasonably be expected to have a Material Adverse Effect. As used in this
Agreement, "Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, results of operations, condition
(financial or otherwise) of the Company or its Subsidiaries taken as a whole on
a consolidated basis, or on the transactions contemplated hereby or in the other
Transaction Documents or by the agreements and instruments to be entered into in
connection herewith or therewith, or on the authority or ability of the Company
to perform its obligations under the Transaction Documents. The Company has no
significant subsidiaries (as such term is defined in Rule 1-02 of Regulation S-X
promulgated by the SEC) other than those listed on Schedule 3(a) (collectively,
the "Subsidiaries").
 
- 8 -

--------------------------------------------------------------------------------

 
(b) Authorization; Enforcement; Validity. The Company has the requisite power
and authority to enter into and perform its obligations under this Agreement,
the Certificates of Designations, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), each of
the Lock-Up Agreements and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this
Agreement (collectively, the "Transaction Documents") and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Preferred Shares and the reservation for
issuance and the issuance of the Conversion Shares issuable upon conversion of
the Preferred Shares and the reservation for issuance and the issuance of the
Dividend Shares issuable with respect to the Preferred Shares, have been duly
authorized by the Company's board of directors and (other than the filing with
the SEC of a Form D and one or more Registration Statements in accordance with
the requirements of the Registration Rights Agreement and any other filings as
may be required by any state securities agencies or by the Principal Market (as
defined below)), no further filing, consent, or authorization is required by the
Company, its board of directors or its stockholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies. The Series D
Certificate of Designations in the form attached hereto as Exhibit A-1 has been
filed with the Secretary of State of the State of Delaware and is in full force
and effect, enforceable against the Company in accordance with its terms and has
not been amended. The Series E Certificate of Designations in the form attached
hereto as Exhibit A-2 has been filed with the Secretary of State of the State of
Delaware and is in full force and effect, enforceable against the Company in
accordance with its terms and has not been amended.
 
(c) Issuance of Securities. The Preferred Shares are duly authorized and upon
issuance in accordance with the terms of the Transaction Documents shall be free
from all taxes, liens and charges with respect to the issue thereof, and the
Preferred Shares shall be entitled to the rights and preferences set forth in
the applicable Certificate of Designations. As of the applicable Closing, a
number of shares of Common Stock shall have been duly authorized and reserved
for issuance which equals 110% of the sum of (i) the maximum number of shares of
Common Stock issuable upon conversion of the Preferred Shares and (ii) the
maximum number of Dividend Shares issuable pursuant to the terms of the
Certificates of Designations, issuable at such Closing and issued at any prior
Closing (assuming for purposes hereof, that the Preferred Shares are convertible
at the Conversion Price and without taking into account any limitations on the
conversion of the Preferred Shares set forth in the Certificates of Designations
and that all dividends will be issued in the form of Dividend Shares for a
period of three (3) years at an assumed value of the Weighted Average Price as
of the Initial Closing Date). Upon issuance or conversion in accordance with the
Certificates of Designations, the Conversion Shares and the Dividend Shares will
be validly issued, fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common Stock.
Subject to the accuracy of the representations and warranties of the Buyers in
this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.
 
- 9 -

--------------------------------------------------------------------------------

 
(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Preferred Shares and the Dividend Shares and reservation for issuance of the
Conversion Shares and the Dividend Shares) will not (i) result in a violation of
the Certificate of Incorporation (as defined in Section 3(r)) of the Company or
any certificate of incorporation, certificate of formation, any certificate of
designations or other constituent document of any of its Subsidiaries, any
capital stock of the Company or Bylaws (as defined in Section 3(r)) or any of
its Subsidiaries bylaws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of The NASDAQ
Global Select Market (the "Principal Market")) applicable to the Company or any
of its Subsidiaries or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected, which with regard to subsections (ii) and
(iii) would reasonably be expected to cause a Material Adverse Effect.
 
(e) Consents. The Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the Closing Date, and the
Company and its Subsidiaries are unaware of any facts or circumstances which
might prevent the Company from obtaining or effecting any of the registration,
application or filings pursuant to the preceding sentence. The Company is not in
violation of the requirements of the Principal Market and has no knowledge of
any facts that would reasonably lead to delisting or suspension of the Common
Stock in the foreseeable future.
 
(f) Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) to the knowledge of the Company, an "affiliate"
of the Company or any of its Subsidiaries (as defined in Rule 144) or (iii) to
the knowledge of the Company, a "beneficial owner" of more than 10% of the
shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "1934 Act")). The Company further
acknowledges that no Buyer is acting as a financial advisor or fiduciary of the
Company or any of its Subsidiaries (or in any similar capacity) with respect to
the Transaction Documents and the transactions contemplated hereby and thereby,
and any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
 
- 10 -

--------------------------------------------------------------------------------

 
(g) No General Solicitation; Placement Agents' Fees. Neither the Company, nor
any of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or brokers' commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, attorney's fees and out-of-pocket expenses) arising in connection
with any such claim. The Company acknowledges that it has engaged Lazard Freres
& Co. LLC, BMO Capital Markets and Scotia Capital Inc. as placement agents (the
"Agents") in connection with the sale of the Securities (other than the issuance
of the Exchanged Preferred Shares). Other than the Agents, the Company has not
engaged any placement agent or other agent in connection with the sale of the
Securities. No fees, commissions or other payments to any Person shall be made
by the Company in connection with the exchange of the Buyer’s Existing Preferred
Shares for the Exchanged Preferred Shares or the issuance of the Exchanged
Preferred Shares.
 
(h) No Integrated Offering. Except as set forth on Schedule 3(h), none of the
Company, its Subsidiaries, any of their affiliates, and any Person acting on
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that
would require registration of any of the Securities under the 1933 Act or cause
this offering of the Securities to be integrated with prior offerings by the
Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
referred to in the preceding sentence that would require registration of any of
the Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings.
 
(i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Preferred Shares will increase
in certain circumstances. The Company further acknowledges that its obligation
to issue Conversion Shares upon conversion of the Preferred Shares and the
Dividend Shares in accordance with this Agreement and the Certificates of
Designations is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company.
 
- 11 -

--------------------------------------------------------------------------------

 
(j) Application of Takeover Protections; Rights Agreement. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or any
certificates of designations or the laws of the jurisdiction of its formation or
incorporation which is or could become applicable to any Buyer as a result of
the transactions contemplated by this Agreement, including, without limitation,
the Company's issuance of the Securities and any Buyer's ownership of the
Securities. Except as disclosed in the SEC Documents and Schedule 3(j), the
Company has not adopted a stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change in
control of the Company.
 
(k) SEC Documents; Financial Statements. Except as disclosed on Schedule 3(k),
during the two (2) years prior to the date hereof, the Company has timely filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the 1934 Act
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
Documents"). The Company has delivered to the Buyers or their respective
representatives true, correct and complete copies of each of the SEC Documents
not available on the EDGAR system that have been requested by each Buyer. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto as in effect as of the time of filing. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
 
(l) Absence of Certain Changes. Except as disclosed in the SEC Documents, since
December 31, 2006 there has been no Material Adverse Effect. Neither the Company
nor any of its Subsidiaries has taken any steps to seek protection pursuant to
any bankruptcy law nor does the Company have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
The Company and its Subsidiaries, individually and on a consolidated basis, are
not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing will not, be Insolvent (as defined
below). For purposes of this Section 3(l), "Insolvent" means, with respect to
any Person (as defined in Section 3(s)) (i) the present fair saleable value of
such Person's assets is less than the amount required to pay such Person's total
Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.
 
- 12 -

--------------------------------------------------------------------------------

 
(m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.
 
(n) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, the Certificates of Designations, any other certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in
violation of any of the foregoing, except in all cases for possible violations
which would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect. Without limiting the generality of the
foregoing, the Company is not in violation of any of the rules, regulations or
requirements of the Principal Market and has no knowledge of any facts or
circumstances that would reasonably lead to delisting or suspension of the
Common Stock by the Principal Market in the foreseeable future. During the two
(2) years prior to the date hereof, (i) the Common Stock has been designated for
quotation on the Principal Market or its predecessor, (ii) trading in the Common
Stock has not been suspended by the SEC or the Principal Market and (iii) the
Company has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
 
(o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries
nor any director, officer, agent, employee or other Person acting on behalf of
the Company or any of its Subsidiaries has, in the course of its actions for, or
on behalf of, the Company or any of its Subsidiaries (i) used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.
 
- 13 -

--------------------------------------------------------------------------------

 
(p) Sarbanes-Oxley Act. The Company is in material compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof, and any and all applicable rules and regulations promulgated
by the SEC thereunder that are effective as of the date hereof.
 
(q) Transactions With Affiliates. Except as disclosed in the SEC Documents, none
of the officers or directors of the Company or any of its Subsidiaries is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such officer
or director or, to the actual knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.
 
(r) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of (i) 100,000,000 shares of Common Stock, of which as
of the date hereof, 33,998,442 are issued and outstanding and 1,986,257 shares
are reserved for issuance pursuant to securities granted or that may be granted
that are (other than the Preferred Shares) exercisable or exchangeable for, or
convertible into, shares of Common Stock and (ii) 10,000,000 shares of Preferred
Stock of which, as of the date hereof, 55,000 Existing Preferred Shares are
issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
set forth on Schedule 3(r): (i) none of the Company's capital stock is subject
to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) except as disclosed in the SEC
Documents, there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries; (iii) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act
(except pursuant to the Registration Rights Agreement); (iv) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (v) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vi) except as disclosed in the SEC Documents, the Company does
not have any stock appreciation rights or "phantom stock" plans or agreements or
any similar plan or agreement; and (vii) the Company and its Subsidiaries have
no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company's or its Subsidiaries' respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect. Included in the SEC Documents are true, correct and complete copies of
the Company's Certificate of Incorporation, as amended and as in effect on the
date hereof (the "Certificate of Incorporation"), and the Company's Bylaws, as
amended and as in effect on the date hereof (the "Bylaws"), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.
 
- 14 -

--------------------------------------------------------------------------------

 
(s) Indebtedness and Other Contracts. Except as disclosed in the SEC Documents,
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below) involving payment obligations of the Company in
excess of $1,000,000 (ii) is a party to any contract, agreement or instrument,
the violation of which, or default under which, by the other party(ies) to such
contract, agreement or instrument could reasonably be expected to result in a
Material Adverse Effect, (iii) is in violation of any term of or in default
under any contract, agreement or instrument relating to any Indebtedness, except
where such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any contract,
agreement or instrument relating to any Indebtedness, the performance of which,
in the judgment of the Company's officers, has or is expected to have a Material
Adverse Effect. For purposes of this Agreement: (x) "Indebtedness" of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, "capital leases" in
accordance with generally accepted accounting principles) (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through (G)
above; (y) "Contingent Obligation" means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; and (z)
"Person" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
 
- 15 -

--------------------------------------------------------------------------------

 
(t) Absence of Litigation. Except as disclosed in the SEC Documents, there is no
action, suit, proceeding, inquiry or investigation before or by the Principal
Market, any court, public board, government agency, self-regulatory organization
or body pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries, which if determined adversely
to the Company or any of its Subsidiaries would, or would reasonably be expected
to, have a Material Adverse Effect.
 
(u) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.
 
(v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company and its Subsidiaries believe that their relations with their
employees are good. No executive officer of the Company or any of its
Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or
any such Subsidiary or otherwise terminate such officer's employment with the
Company or any such Subsidiary. No executive officer of the Company or any of
its Subsidiaries is, or is now expected to be, in violation of any material term
of any employment contract, confidentiality, disclosure or proprietary
information agreement, non-competition agreement, or any other contract or
agreement or any restrictive covenant, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.
 
(ii) The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.
 
(w) Title. Except as would not, or would not reasonably be expected to, have a
Material Adverse Effect or is otherwise disclosed in the SEC Documents, the
Company and its Subsidiaries have defensible title to all real property and good
and marketable title to all personal property owned by them, in each case free
and clear of all liens, encumbrances and defects. Except as would not, or would
not reasonable be expected to, have a Material Adverse Effect or is otherwise
disclosed in the SEC Documents, any real property and facilities held under
lease by the Company or any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases.
 
- 16 -

--------------------------------------------------------------------------------

 
(x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations,
original works of authorship, trade secrets and other intellectual property
rights and all applications related thereto ("Intellectual Property Rights")
necessary to conduct their respective businesses as now conducted. None of the
Company's or its Subsidiaries' Intellectual Property Rights have expired,
terminated or been abandoned, or are expected to expire, terminate or be
abandoned, within one year from the date of this Agreement. The Company does not
have any knowledge of any infringement by the Company or any of its Subsidiaries
of Intellectual Property Rights of others. There is no claim, action or
proceeding being made or brought, or to the knowledge of the Company, being
threatened, against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.
 
(y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance
with any and all Environmental Laws (as hereinafter defined), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so
comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect. The term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.
 
(z) Subsidiary Rights. Except as disclosed in Schedule 3(z), the Company or one
of its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by applicable law) to receive dividends and distributions
on, all capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.
 
(aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed
all foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
 
- 17 -

--------------------------------------------------------------------------------

 
(bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company's management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure. During the twelve months prior to the date hereof, neither the
Company nor any of its Subsidiaries has received any notice or correspondence
from any accountant relating to any potential material weakness in any part of
the system of internal accounting controls of the Company or any of its
Subsidiaries.
 
(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its 1934
Act filings and is not so disclosed or that otherwise would be reasonably likely
to have a Material Adverse Effect.
 
(dd) Investment Company Status. The Company is not, and upon consummation of the
sale of the Securities will not be, an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
 
(ee) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.
 
- 18 -

--------------------------------------------------------------------------------

 
(ff) Acknowledgement Regarding Buyers' Trading Activity. It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked by the
Company or its Subsidiaries to agree, nor has any Buyer agreed with the Company
or its Subsidiaries, to desist from purchasing or selling, long and/or short,
securities of the Company, or "derivative" securities based on securities issued
by the Company or to hold the Securities for any specified term; (ii) that any
Buyer, and counterparties in "derivative" transactions to which any such Buyer
is a party, directly or indirectly, presently may have a "short" position in the
Common Stock, and (iii) that each Buyer shall not be deemed to have any
affiliation with or control over any arm's length counterparty in any
"derivative" transaction. The Company further understands and acknowledges that
one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Conversion Shares and the
Dividend Shares deliverable with respect to Securities are being determined and
(b) such hedging and/or trading activities, if any, can reduce the value of the
existing stockholders' equity interest in the Company both at and after the time
the hedging and/or trading activities are being conducted. The Company
acknowledges that such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Certificates of Designations or any
of the documents executed in connection herewith.
 
(gg) Manipulation of Price. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company.
 
(hh) U.S. Real Property Holding Corporation. The Company is not, has never been,
and so long as any Preferred Shares remain outstanding, shall not become, a U.S.
real property holding corporation within the meaning of Section 897 of the
Internal Revenue Code of 1986, as amended, and the Company shall so certify upon
any Buyer's request.
 
(ii) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries
is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA") and
to regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). Neither the Company nor any of its Subsidiaries or
affiliates owns or controls, directly or indirectly, five percent (5%) or more
of the outstanding shares of any class of voting securities or twenty-five
percent (25%) or more of the total equity of a bank or any equity that is
subject to the BHCA and to regulation by the Federal Reserve. Neither the
Company nor any of its Subsidiaries or affiliates exercises a controlling
influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.
 
(jj) Form S-3 Eligibility. The Company is eligible to register the Conversion
Shares for resale by the Buyers using Form S-3 promulgated under the 1933 Act.
 
- 19 -

--------------------------------------------------------------------------------

 
(kk) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Buyers or their agents or counsel
with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information. The Company understands and confirms
that each of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosures provided by the
Company to the Buyers in the Transaction Documents and the Schedules to this
Agreement regarding the Company and its Subsidiaries, their business and the
transactions contemplated hereby, are true and correct and do not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each press release issued by the
Company or its Subsidiaries during the twelve (12) months preceding the date of
this Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. No event or circumstance has occurred
or information exists with respect to the Company or any of its Subsidiaries or
either of their respective businesses, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.
 

4.
COVENANTS.

 
(a) Reasonable Best Efforts. Each party shall use its reasonable best efforts
timely to satisfy each of the covenants and conditions to be satisfied by it as
provided in Sections 4, 6 and 7 of this Agreement.
 
(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date. The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or "Blue Sky" laws of the states of the United
States following the Closing Date.
 
(c) Reporting Status. Until the date on which the Buyers shall have sold all the
Conversion Shares and the Dividend Shares and none of the Preferred Shares is
outstanding (the "Reporting Period"), the Company shall timely file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act (except to the extent that the Company has complied with its
obligations under the Certificates of Designations in connection with (i) a
reorganization of the Company or a merger or consolidation of the Company with
or into another entity or (ii) an event that is deemed a "liquidation event"
pursuant to the Certificates of Designations) even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination.
 
- 20 -

--------------------------------------------------------------------------------

 
(d) Use of Proceeds. The Company shall use the proceeds from the sale of the
Securities for general corporate and for working capital purposes, but not for
(A) except as set forth in Schedule 4(d), repayment of any outstanding
Indebtedness of the Company or any of its Subsidiaries or (B) redemption or
repurchase of any of its or its Subsidiaries' equity securities.
 
(e) Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports and
Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or
any consolidated balance sheets, income statements, stockholders' equity
statements and/or cash flow statements for any period other than annual, any
Current Reports on Form 8-K and any registration statements (other than on Form
S-8) or amendments filed pursuant to the 1933 Act, (ii) within four (4) Business
Days of the release thereof, facsimile or e-mail copies of all press releases
issued by the Company or any of its Subsidiaries, unless the same are filed with
the SEC through EDGAR and available to the public through EDGAR within such
time, and (iii) copies of any notices and other information made available or
given to the stockholders of the Company generally, within four (4) Business
Days of the making available or giving thereof to the stockholders, unless such
notice and other information is filed with the SEC through EDGAR and available
to the public through EDGAR within such time.
 
(f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall use its reasonable best efforts to maintain such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents. The Company shall use its reasonable best efforts to
maintain the Common Stock's authorization for quotation on an Eligible Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on an Eligible Market. The Company shall pay all fees and expenses
in connection with satisfying its obligations under this Section 4(f).
 
(g) Fees. The Company shall reimburse Capital Ventures, or its designee(s) (in
addition to any other expense amounts paid to any Buyer prior to the date of
this Agreement) for all reasonable costs and expenses incurred in connection
with the transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation
and implementation of the transactions contemplated by the Transaction Documents
and due diligence expenses in connection therewith), in an amount not to exceed
$50,000, which amount may be withheld by such Buyer from its Initial Purchase
Price at the Initial Closing or paid by the Company upon termination of this
Agreement. The Company shall be responsible for the payment of any placement
agent's fees or commissions, financial advisory fees, or broker's commissions
(other than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees or
commissions payable to the Agents. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorney's fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the Buyers.
 
- 21 -

--------------------------------------------------------------------------------

 
(h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by an Investor.
 
(i) Disclosure of Transactions and Other Material Information. As soon as
practicable on the first Business Day following the date of this Agreement, the
Company shall issue a press release disclosing all of the material terms of the
Transactions Documents. On or before 5:30 p.m., New York City time, on the first
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions contemplated
by the Transaction Documents in the form required by the 1934 Act and attaching
the material Transaction Documents (including, without limitation, this
Agreement (and all schedules to this Agreement), the form of Certificates of
Designations and the form of the Registration Rights Agreement) as exhibits to
such filing (including all attachments, the "Initial 8-K Filing"). On or before
9:30 a.m., New York City Time, on the first Business Day following each
Additional Closing Date, the Company shall file a Current Report on Form 8-K
with the SEC describing the transaction consummated on such date (the
"Additional 8-K Filing," and together with the Initial 8-K Filing, the "8-K
Filings"). From and after the filing of the Initial 8-K Filing with the SEC, no
Buyer shall be in possession of any material, nonpublic information received
from the Company, any of its Subsidiaries or any of its respective officers,
directors, employees or agents, that is not disclosed in the Initial 8-K Filing.
The Company shall not, and shall cause each of its Subsidiaries and its and each
of their respective officers, directors, employees and agents, not to, provide
any Buyer with any material, nonpublic information regarding the Company or any
of its Subsidiaries from and after the filing of the Initial 8-K Filing with the
SEC without the express written consent of such Buyer or as may be required
under the terms of the Transaction Documents. If a Buyer has, or believes it
has, received any such material, nonpublic information regarding the Company or
any of its Subsidiaries from the Company or any Subsidiary, it may provide the
Company with written notice thereof. If the Company agrees, in its reasonable
determination, that such information is material and nonpublic, the Company
shall, within five (5) Trading Days (as defined in the Certificates of
Designations) of receipt of such notice, make public disclosure of such
material, nonpublic information. Subject to the foregoing, neither the Company,
its Subsidiaries nor any Buyer shall issue any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with
respect to such transactions (i) in substantial conformity with the 8-K Filings
and contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Without the prior written consent of
any applicable Buyer, neither the Company nor any of its Subsidiaries or
affiliates shall disclose the name of such Buyer in any filing, announcement,
release or otherwise, unless such disclosure is required by law, regulation or
the Principal Market (except to the extent that such names appear in this
Agreement or the other Transaction Documents or the Registration Statement
required to be filed with the SEC).
 
- 22 -

--------------------------------------------------------------------------------

 
(j) Additional Preferred Shares; Variable Securities; Dilutive Issuances.  So
long as any Buyer or Buyers beneficially owns in the aggregate more than 10% of
the Preferred Shares purchased pursuant to this Agreement, the Company will not,
without the prior written consent of Buyers holding at least two-thirds of the
Preferred Shares, issue any shares of Preferred Shares (other than to the Buyers
as contemplated hereby) and the Company shall not issue any other securities
that would cause a breach or default under the Certificates of Designations. For
so long as any Preferred Shares remain outstanding, the Company shall not, in
any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable
or exercisable for Common Stock at a conversion, exchange or exercise price
which varies or may vary after issuance with the market price of the Common
Stock, including by way of one or more reset(s) to any fixed price unless the
conversion, exchange or exercise price of any such security cannot be less than
the then applicable Conversion Price (as defined in the Certificate of
Designations) with respect to the Common Stock into which any Preferred Shares
are convertible. For so long as any Preferred Shares remain outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as
such term is defined in the Certificates of Designations) if the effect of such
Dilutive Issuance is to cause the Company to be required to issue upon
conversion of any Preferred Shares any shares of Common Stock in excess of that
number of shares of Common Stock which the Company may issue upon conversion of
the Preferred Shares without breaching the Company's obligations under the rules
or regulations of the Principal Market (without giving effect to the Exchange
Cap provisions set forth in the Certificates of Designations). Notwithstanding
anything to the contrary in this section, the Company shall be permitted to
enter into the transactions described in Schedule 2(e).
 
(k) Corporate Existence. So long as any Buyer beneficially owns any Securities,
the Company shall maintain its corporate existence and shall not sell all or
substantially all of the Company's assets and shall not be party to any
Fundamental Transaction (as defined in the Certificates of Designations) unless
the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Certificates of Designations.
 
(l) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than
110% of the sum of (i) the maximum number of shares of Common Stock issuable
upon conversion of the Preferred Shares (assuming for purposes hereof, that the
Preferred Shares are convertible at the Conversion Price and without taking into
account any limitations on the conversion of the Preferred Shares set forth in
the Certificates of Designations) and (ii) the maximum number of Dividend Shares
issuable pursuant to the terms of the Certificates of Designations.
 
- 23 -

--------------------------------------------------------------------------------

 
(m) Conduct of Business. The business of the Company and its Subsidiaries shall
not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.
 
(n) Additional Registration Statements. Except as set forth on Schedule 4(n),
until the date that is forty-five (45) calendar days after the earlier of (i)
the Effective Date and (ii) the last day of the Registration Period (each as
defined in the Registration Rights Agreement) (the "Trigger Date"), the Company
shall not file a registration statement (other than with respect to an Approved
Stock Plan (as defined in the Certificates of Designations)) under the 1933 Act
relating to securities that are not the Securities.
 
(o) Additional Issuances of Securities.
 
(i) For purposes of this Section 4(o), the following definitions shall apply.
 
(1) "Convertible Securities" means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Stock.
 
(2) "Options" means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.
 
(3) "Common Stock Equivalents" means, collectively, Options and Convertible
Securities.
 
(ii) From the date hereof until the Trigger Date, the Company will not, directly
or indirectly, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or its Subsidiaries' equity or equity equivalent
securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of
Common Stock or Common Stock Equivalents (any such offer, sale, grant,
disposition or announcement being referred to as a "Subsequent Placement");
provided that the foregoing shall not apply to any Subsequent Placement which
does not have the right to have any of its securities registered for resale.
 
(iii) From the date hereof until the earlier of (i) the second anniversary of
the Initial Closing and (ii) the time that no Preferred Shares are outstanding,
the Company will not, directly or indirectly, effect any Subsequent Placement
unless the Company shall have first complied with this Section 4(o)(iii).
 
- 24 -

--------------------------------------------------------------------------------

 
(1) The Company shall deliver to each Buyer an irrevocable written notice
(the "Offer Notice") of any proposed or intended issuance or sale or exchange
(the "Offer") of the securities being offered (the "Offered Securities") in a
Subsequent Placement (subject to the Buyer's prior agreement to maintain
confidentiality of such Offer Notice), which Offer Notice shall (w) identify and
describe the Offered Securities, (x) describe the price (which price may be
expressed as a formula) and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged (except with respect to an underwritten offering of Offered
Securities or a similar offering in which the price of such Offered Securities
is determined on or about the Closing Date of such offering, in which case the
Company may provide the underwriter's proposed range of prices in satisfaction
of this clause (x) in the Offer Notice) (y) identify the persons or entities (if
known) to which or with which the Offered Securities are to be offered, issued,
sold or exchanged and (z) offer to issue and sell to or exchange with such
Buyers 50% of the Offered Securities, allocated among such Buyers (a) based on
such Buyer's pro rata portion of the aggregate number of Preferred Shares
purchased hereunder (the "Basic Amount"), and (b) with respect to each Buyer
that elects to purchase its Basic Amount, any additional portion of the Offered
Securities attributable to the Basic Amounts of other Buyers as such Buyer shall
indicate it will purchase or acquire should the other Buyers subscribe for less
than their Basic Amounts (the "Undersubscription Amount"), which process shall
be repeated until the Buyers shall have an opportunity to subscribe for any
remaining Undersubscription Amount.
 
(2)  To accept an Offer, in whole or in part, such Buyer must deliver a written
notice to the Company prior to the end of the tenth (10th) Business Day after
such Buyer's receipt of the Offer Notice (the "Offer Period"), setting forth the
portion of such Buyer's Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the "Notice of Acceptance"). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the "Available
Undersubscription Amount"), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent it deems reasonably
necessary.
 
(3) The Company shall have fifteen (15) Business Days from the expiration of the
Offer Period above to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the "Refused Securities"), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring person or persons or less favorable to the
Company than those set forth in the Offer Notice.
 
- 25 -

--------------------------------------------------------------------------------

 
(4) In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(o)(iii)(3) above), then each Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities specified
in its Notice of Acceptance to an amount that shall be not less than the number
or amount of the Offered Securities that such Buyer elected to purchase pursuant
to Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of
which shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities. In the event that any Buyer so elects to reduce the number
or amount of Offered Securities specified in its Notice of Acceptance, the
Company may not issue, sell or exchange more than the reduced number or amount
of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.
 
(5) Upon the closing of the issuance, sale or exchange of all or less than all
of the Refused Securities, the Buyers shall acquire from the Company, and the
Company shall issue to the Buyers, the number or amount of Offered Securities
specified in the Notices of Acceptance, upon the terms and conditions specified
in the Offer. Notwithstanding anything to the contrary contained in this
Agreement, if the Company does not consummate the closing of the issuance, sale
or exchange of all or less than all of the Refused Securities, within fifteen
(15) Business Days of the expiration of the Offer Period, the Company shall
issue to the Buyers, the number or amount of Offered Securities specified in the
Notices of Acceptance, upon the terms and conditions specified in the Offer. The
purchase by the Buyers of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Buyers of a purchase
agreement relating to such Offered Securities in form and substance as agreed
between the Company and the third party purchasers of the Offered Securities.
 
(6) Any Offered Securities not acquired by the Buyers or other persons in
accordance with Section 4(o)(iii)(2) above may not be issued, sold or exchanged
until they are again offered to the Buyers under the procedures specified in
this Agreement.
 
(7) Notwithstanding anything to the contrary in this Section 4(o) and unless
otherwise agreed to by the Buyers, the Company shall either confirm in writing
to the Buyers that the transaction with respect to the Subsequent Placement has
been abandoned or shall publicly disclose its intention to issue the Offered
Securities, in either case in such a manner such that the Buyers will not be in
possession of material non-public information, by the fifteen (15th) Business
Day following delivery of the Offer Notice. If by the fifteenth (15th) Business
Day following delivery of the Offer Notice no public disclosure regarding a
transaction with respect to the Offered Securities has been made, and no notice
regarding the abandonment of such transaction has been received by the Buyers,
such transaction shall be deemed to have been abandoned and the Buyers shall not
be deemed to be in possession of any material, non-public information with
respect to the Company. Should the Company decide to pursue such transaction
with respect to the Offered Securities, the Company shall provide each Buyer
with another Offer Notice and each Buyer will again have the right of
participation set forth in this Section 4(o)(iii). The Company shall not be
permitted to deliver more than one such Offer Notice to the Buyers in any 60 day
period. Each Buyer expressly agrees that the Company's compliance with this
Section 4(o)(iii) shall not be deemed a breach of Section 4(i) of this Agreement
by the Company.
 
- 26 -

--------------------------------------------------------------------------------

 
(8) The restrictions contained in subsections (ii) and (iii) of this Section
4(o) shall not apply in connection with the issuance of any Excluded Securities
(as defined in the Certificates of Designations) or in connection with the
issuance of the securities listed on Schedule 4(o).
 
(p) Restriction on Redemption and Cash Dividends. So long as any Preferred
Shares are outstanding, the Company shall not, directly or indirectly, redeem,
or declare or pay any cash dividend or distribution on, the Common Stock without
the prior express written consent of the holders of Preferred Shares
representing not less than two-thirds of the aggregate number of the then
outstanding Preferred Shares. Notwithstanding the foregoing, no consent of the
holders of Preferred Shares shall be required in connection with (i) the
repurchase by the Company of its capital stock deemed to occur upon the cashless
exercise of stock options or warrants if such repurchased capital stock
represents a portion of the exercise price of such options or warrants, (ii) the
repurchase by the Company of its capital stock necessary to enable the Company
to pay withholding taxes incurred by an employee upon the vesting of restricted
capital stock granted to such employee in connection with a stock incentive
plan, (iii) the exchange of the each Buyer’s Existing Preferred Shares for
Exchange Preferred Shares, or (iv) the Company for the repurchase, retirement or
other acquisition or retirement for value of capital stock of the Company held
by any future, present or former director, officer, member of management,
employee or consultant of the Company or the Subsidiaries (or the estate, family
members, spouse or former spouse of any of the foregoing); provided, however,
that the aggregate amount of payments made under clause (iii) does not exceed in
any calendar year $250,000 (with unused amounts in any calendar year being
carried over to the two succeeding calendar years) and no payments shall be
permitted pursuant to clause (iii) if a Triggering Event under the Certificates
of Designations has occurred and the Company has not satisfied its obligations
to the holders of Preferred Shares under the Certificates of Designations in
connection therewith.
 
(q) No Waiver of Lock-Up Agreements. The Company shall not amend, waive or
modify any provision of any of the Lock-Up Agreements (as defined below).
 
(r) [RESERVED].
 
(s) Consolidated Leverage Ratio. So long as any Preferred Shares remain
outstanding, the Company shall not incur any Indebtedness that could cause the
Consolidated Leverage Ratio (as defined in the Senior Indebtedness Agreements
(as defined in the Certificates of Designations) as in effect as of the date
hereof) to exceed 3.65 to 1.00.
 
- 27 -

--------------------------------------------------------------------------------

 
(t) Compliance With Existing Agreements. So long as any Preferred Shares remain
outstanding, the Company shall not permit to exist any default under, redemption
of or acceleration prior to maturity of any secured Indebtedness of the Company
or any of its Subsidiaries. The Company shall use its reasonable best efforts to
obtain the waiver and consent of the lenders under the Senior Indebtedness
Agreements to the transactions contemplated hereby and pursuant to the other
Transaction Documents within thirty (30) calendar days of the Initial Closing
Date.
 

5.
REGISTER; TRANSFER AGENT INSTRUCTIONS.

 
(a) Register. The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Preferred Shares in which the Company
shall record the name and address of the Person in whose name the Preferred
Shares have been issued (including the name and address of each transferee), the
number of Preferred Shares held by such Person, the number of Conversion Shares
issuable upon conversion of the Preferred Shares and the number of Dividend
Shares issuable with respect to the Preferred Shares held by such Person. The
Company shall keep the register open and available at all times during business
hours for inspection of any Buyer or its legal representatives.
 
(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at DTC,
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares in such amounts as specified from time to time by each Buyer
to the Company upon conversion of the Preferred Shares in the form of Exhibit C
attached hereto (the "Irrevocable Transfer Agent Instructions"). The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to
give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent with respect to the Securities, and that the Securities shall otherwise be
freely transferable on the books and records of the Company, as applicable, and
to the extent provided in this Agreement and the other Transaction Documents. If
a Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(g), the Company shall permit the transfer and shall promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such denominations
as specified by such Buyer to effect such sale, transfer or assignment. In the
event that such sale, assignment or transfer involves Conversion Shares sold,
assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the
Buyer, assignee or transferee, as the case may be, without any restrictive
legend. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.
 
- 28 -

--------------------------------------------------------------------------------

 

6.
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

 
(a) Initial Closing Date. The obligation of the Company hereunder to issue and
sell the Initial Preferred Shares to each Buyer at the Initial Closing is
subject to the satisfaction, at or before the Initial Closing Date, of each of
the following conditions, provided that these conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole discretion
by providing each Buyer with prior written notice thereof:
 
(i) Such Buyer shall have executed each of the Transaction Documents to which it
is a party and delivered the same to the Company.
 
(ii) Such Buyer and each other Buyer shall have delivered to the Company the
Existing Preferred Share stock certificates (or such evidence reasonably
satisfactory to the Company that such Existing Preferred Share stock certificate
is lost or destroyed)
 
(iii) Such Buyer and each other Buyer shall have delivered to the Company the
Initial Purchase Price (less, in the case of Capital Ventures, the amounts
withheld pursuant to Section 4(g)) for the Initial Preferred Shares being
purchased by such Buyer at the Initial Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.
 
(iv) The representations and warranties of such Buyer shall be true and correct
in all respects as of the date when made and as of the Initial Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date), and such Buyer shall have performed, satisfied and complied in all
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Buyer at or prior
to the Initial Closing Date.
 
(b) Additional Closing Date. The obligation of the Company hereunder to issue
and sell the Additional Preferred Shares to each Buyer at the Additional Closing
is subject to the satisfaction, at or before the Additional Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
 
(i) Such Buyer and each other Buyer shall have delivered to the Company the
Additional Purchase Price for the Additional Preferred Shares being purchased by
such Buyer at such Additional Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
 
(ii) The representations and warranties of such Buyer shall be true and correct
in all respects as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date, which shall be true and correct as of such
specified date), and such Buyer shall have performed, satisfied and complied in
all respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Buyer at or prior
to the Additional Closing Date.
 
- 29 -

--------------------------------------------------------------------------------

 

7.
CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

 
(a) Initial Closing Date. The obligation of each Buyer hereunder to purchase the
Initial Preferred Shares at the Initial Closing is subject to the satisfaction,
at or before the Initial Closing Date, of each of the following conditions,
provided that these conditions are for each Buyer's sole benefit and may be
waived by such Buyer at any time in its sole discretion by providing the Company
with prior written notice thereof:
 
(i) The Company shall have duly executed and delivered to such Buyer (A) each of
the Transaction Documents, (B) the Exchanged Preferred Shares (in such numbers
as is set forth across from such Buyer's name in column (3) of the Schedule of
Buyers) being exchanged by such Buyer at the Initial Closing pursuant to this
Agreement and (B) the Initial Preferred Shares (in such numbers as is set forth
across from such Buyer's name in column (4) of the Schedule of Buyers) being
purchased by such Buyer at the Initial Closing pursuant to this Agreement.
 
(ii) Such Buyer shall have received the opinion of Fulbright & Jaworski L.L.P.,
the Company's outside counsel, dated as of the Initial Closing Date, in
substantially the form of Exhibit D attached hereto.
 
(iii) The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit C attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company's transfer agent.
 
(iv) The representations and warranties of the Company shall be true and correct
in all material respects (except for those representations and warranties that
are qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date, which shall be true and correct as of such
specified date) and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Initial Closing Date. Such Buyer shall have received
a certificate, executed by the Chief Executive Officer of the Company, dated as
of the Initial Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by such Buyer in the form attached hereto
as Exhibit E.
 
(v) The Company shall have delivered to such Buyer a letter from the Company's
transfer agent certifying the number of shares of Common Stock outstanding as of
a date within five days of the Initial Closing Date.
 
(vi) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Initial
Closing Date, by the SEC or the Principal Market from trading on the Principal
Market nor shall suspension by the SEC or the Principal Market have been
threatened, as of the Initial Closing Date, either (A) in writing by the SEC or
the Principal Market or (B) by falling below the minimum maintenance
requirements of the Principal Market.
 
- 30 -

--------------------------------------------------------------------------------

 
(vii) The Company shall have obtained all governmental, regulatory or third
party consents and approvals, if any, necessary for the sale of the Securities.
 
(viii) The Series D Certificate of Designations in the form attached hereto as
Exhibit A-1 shall have been filed with the Secretary of State of the State of
Delaware and shall be in full force and effect, enforceable against the Company
in accordance with its terms and shall not have been amended.
 
(ix) The Series E Certificate of Designations in the form attached hereto as
Exhibit A-2 shall have been filed with the Secretary of State of the State of
Delaware and shall be in full force and effect, enforceable against the Company
in accordance with its terms and shall not have been amended.
 
(x) Such Buyer shall have received lock-up agreements in the form attached
hereto as Exhibit F (the "Lock-Up Agreements"), duly executed and delivered by
each of James E. Sigmon, Jeff Bookout, Robert R. Thomae, M. Frank Russell, Gary
Grinsfelder, P. Mark Stark and the Company. Each Buyer acknowledges the prior
receipt of each of the Lock-Up Agreements.
 
(b) Additional Closing Date. The obligation of each Buyer hereunder to purchase
the Additional Preferred Shares at the Additional Closing is subject to the
satisfaction, at or before the Additional Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof:
 
(i) The Company shall have duly executed and delivered to such Buyer the
Additional Preferred Shares (in such numbers as such Buyer shall request) being
purchased by such Buyer at the Additional Closing pursuant to this Agreement.
 
(ii) The representations and warranties of the Company shall be true and correct
in all material respects (except for those representations and warranties that
are qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Additional
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such specified date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Company at or prior to the Additional Closing Date. Such Buyer shall
have received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Additional Closing Date, to the foregoing effect and in
the form attached hereto as Exhibit E.
 
- 31 -

--------------------------------------------------------------------------------

 
(iii) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Additional
Closing Date, by the SEC or the Principal Market from trading on the Principal
Market nor shall suspension by the SEC or the Principal Market have been
threatened, as of the Additional Closing Date, either (A) in writing by the SEC
or the Principal Market or (B) by falling below the minimum maintenance
requirements of the Principal Market.
 
(iv) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.
 
(v) Such Buyer shall have received the opinion of Fulbright & Jaworski L.L.P.,
the Company's outside counsel, dated as of the Additional Closing Date, in
substantially the form of Exhibit D attached hereto.
 
(vi) The Series D Certificate of Designations in the form attached hereto as
Exhibit A-1 shall have been filed with the Secretary of State of the State of
Delaware and shall be in full force and effect, enforceable against the Company
in accordance with its terms and shall not have been amended.
 

8.
TERMINATION.

 
In the event that the Initial Closing shall not have occurred with respect to a
Buyer on or before five (5) Business Days from the date hereof due to the
Company's or such Buyer's failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, if this Agreement is terminated pursuant to this Section 8,
the Company shall remain obligated to reimburse the non-breaching Buyers for the
expenses described in Section 4(g) above.

9.
MISCELLANEOUS.

 
(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof by
certified mail to each party at the address for such notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY. 
 
- 32 -

--------------------------------------------------------------------------------

 
(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.
 
(c) Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
 
(d) Severability. If any provision of this Agreement is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or
unenforceable shall be deemed amended to apply to the broadest extent that it
would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this
Agreement so long as this Agreement as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter
hereof and the prohibited nature, invalidity or unenforceability of the
provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties.
The parties will endeavor in good faith negotiations to replace the prohibited,
invalid or unenforceable provision(s) with a valid provision(s), the effect of
which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).
 
(e) Entire Agreement; Amendments. Except as set forth on Schedule 9(e), this
Agreement and the other Transaction Documents supersede all other prior oral or
written agreements between the Buyers, the Company, their Affiliates and Persons
acting on their behalf with respect to the matters discussed herein, and this
Agreement, the other Transaction Documents and the instruments referenced herein
and therein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the holders of at least two-thirds of the Preferred Shares
issued and issuable hereunder, and any amendment to this Agreement made in
conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Securities, as applicable. No provision hereof may be
waived other than by an instrument in writing signed by the party against whom
enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the Preferred Shares then
outstanding, except with the express written consent of each holder so excluded.
Except as set forth on Schedule 9(e), no consideration shall be offered or paid
to any Person to amend or consent to a waiver or modification of any provision
of any of the Transaction Documents unless the same consideration also is
offered to all holders of Preferred Shares. Except as set forth on Schedule
9(e), the Company has not, directly or indirectly, made any agreements with any
Buyers relating to the terms or conditions of the transactions contemplated by
the Transaction Documents except as set forth in the Transaction Documents.
Without limiting the foregoing, the Company confirms that, except as set forth
in this Agreement, no Buyer has made any commitment or promise or has any other
obligation to provide any financing to the Company or otherwise.
 
- 33 -

--------------------------------------------------------------------------------

 
(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
 
If to the Company:
 
TXCO Resources Inc.
777 E. Sonterra Blvd., Suite 350
San Antonio, Texas 78258

Telephone:
(210) 679-2429

Facsimile:
(210) 496-3232

Attention:
M. Frank Russell, Vice President and General Counsel

With a copy (for informational purposes only) to:
 
Fulbright & Jaworski L.L.P.
Convent Street, Suite 2200
San Antonio, Texas 78205

Telephone:
(210) 224-5575

Facsimile:
(210) 270-7205

Attention:
Daryl Lansdale, Jr.

 
If to the Transfer Agent:
 
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10038

Telephone:
(718) 921-8206

Facsimile:
(718) 921-8336

Attention:
Carlos Pinto, Vice President

 
- 34 -

--------------------------------------------------------------------------------

 
If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers,
 
with a copy (for informational purposes only) to:
 
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022

Telephone:
(212) 756-2000

Facsimile:
(212) 593-5955

Attention:
Eleazer N. Klein, Esq.

 
or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.
 
(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including the Buyers of the Preferred Shares. The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds of the aggregate number of
Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Certificates of
Designations). A Buyer may assign some or all of its rights hereunder in
connection with transfer of any of its Securities as is otherwise permitted by
this Agreement without the consent of the Company, in which event such assignee
shall be deemed to be a Buyer hereunder with respect to such assigned rights.
 
(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.
 
(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing and the delivery and conversion of Securities, as
applicable. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
 
(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
 
- 35 -

--------------------------------------------------------------------------------

 
(k) Indemnification. In consideration of each Buyer's execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons' agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees"),
as incurred, from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents, (b) any breach of any covenant, agreement
or obligation of the Company contained in the Transaction Documents or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction Documents. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.
 
(l) No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
 
(m) Remedies. Each Buyer and each holder of the Securities shall have all rights
and remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under the Transaction Documents, any remedy at law may prove to
be inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond
or other security.
 
- 36 -

--------------------------------------------------------------------------------

 
(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Buyer exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Buyer may rescind or
withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.
 
(o) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.
 
(p) Independent Nature of Buyers' Obligations and Rights. The obligations of
each Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and the Company
acknowledges that the Buyers are not acting in concert or as a group, and the
Company will not assert any such claim, with respect to such obligations or the
transactions contemplated by the Transaction Documents. Each Buyer confirms that
it has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer
shall be entitled to independently protect and enforce its rights, including,
without limitation, the rights arising out of this Agreement or out of any other
Transaction Documents, and it shall not be necessary for any other Buyer to be
joined as an additional party in any proceeding for such purpose.
 
[Signature Page Follows]
 
- 37 -

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
COMPANY:
     
TXCO RESOURCES INC.
     
By:
/s/ James E. Sigmon    
Name: James E. Sigmon
Title:   President

 

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
BUYERS:
     
CAPITAL VENTURES INTERNATIONAL
     
BY: HEIGHTS CAPITAL MANAGEMENT,
INC., its authorized agent
     
By:
/s/ Martin Kibinger    
Name: Martin Kibinger
Title:   Investment Manager

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
OTHER BUYERS:
     
UBS O'CONNOR LLC F/B/O: O'CONNOR
PIPES CORPORATE STRATEGIES MASTER
LTD
     
By:
/s/ Nicholas Nocerino    
Name: Nicholas Nocerino
Title:   Managing Director

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
UBS O'CONNOR LLC F/B/O: O'CONNOR
GLOBAL CONVERTIBLE ARBITRAGE
MASTER LTD
     
By:
/s/ Nicholas Nocerino    
Name: Nicholas Nocerino
Title:   Managing Director

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
UBS O'CONNOR LLC F/B/O: O'CONNOR
GLOBAL CONVERTIBLE ARBITRAGE II
MASTER LTD
     
By:
/s/ Nicholas Nocerino    
Name: Nicholas Nocerino
Title:   Managing Director

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

 
RADCLIFFE SPC, LTD. FOR AND ON
BEHALF OF THE CLASS A SEGREGATED
PORTFOLIO
     
By:
/s/ Gerald F. Stahlecker    
Name: Gerald F. Stahlecker
Title:   Managing Director

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
WHITEBOX CONVERTIBLE ARBITRAGE
PARTNERS, LP
      By: Whitebox Convertible Arbitrage Advisors LLC         By: Whitebox
Advisors LLC        
By:
/s/ Andrew Redleaf    
Name: Andrew Redleaf
Title:   Managing Member of the General Partner

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
GUGGENHEIM PORTFOLIO COMPANY
XXXI, LLC
      By:
Guggenheim Advisors, LLC
        By: Whitebox Advisors LLC         
By:
/s/ Andrew Redleaf    
Name: Andrew Redleaf
Title:   Managing Member of the General Partner

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

 
WHITEBOX INTERMARKET PARTNERS, LP
      By: Whitebox Intermarket Advisors LLC         By: Whitebox Advisors LLC  
     
By:
/s/ Andrew Redleaf    
Name: Andrew Redleaf
Title:   Managing Member of the General Partner

--------------------------------------------------------------------------------

 
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
WHITEBOX SPECIAL OPPORTUNITIES
PARTNERS, SERIES B, LP
      By: Whitebox Special Opportunities Advisors LLC         By: Whitebox
Advisors LLC        
By:
/s/ Andrew Redleaf    
Name: Andrew Redleaf
Title:   Director

--------------------------------------------------------------------------------

 
SCHEDULE OF BUYERS

(1)
 
(2)
 
(3)
 
(4)
 
(5)
 
(6)
 
(7)
                         
Buyer
 
Address and Facsimile Number
 
Exchanged
Preferred
Shares
 
Aggregate
Number of
Initial
Preferred
Shares
 
Aggregate
Number of
Additional
Preferred
Shares
 
Initial Purchase
Price
 
Legal Representative's
Address and Facsimile Number
                         
Capital Ventures International
 
c/o Heights Capital Management, Inc.
101 California Street, Suite 3250
San Francisco, CA 94111
Attention: Martin Kobinger
Facsimile: (415) 403-6525
Telephone: (415) 403-6500
Residence: Cayman Islands
 
25,500
 
15,000
 
13,909
 
$       15,000,000
 
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attention: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2376
                         
Whitebox Convertible Arbitrage Partners, LP
 
c/o Whitebox Advisors, LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416
Attention: Jonathan Wood
Telephone: (612) 253-6025
Facsimile: (612) 253-6135
Residence: British Virgin Islands
 
8,500
 
3,542
 
4,637
 
$         3,542,000
 
N/A
                         
Guggenheim Portfolio Company XXXI, LLC
 
c/o Whitebox Advisors, LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416
Attention: Jonathan Wood
Telephone: (612) 253-6025
Facsimile: (612) 253-6135
Residence: British Virgin Islands
 
800
 
333
 
437
 
$            333,000
 
N/A

 

--------------------------------------------------------------------------------

 
Whitebox Intermarket Partners, LP
 
c/o Whitebox Advisors, LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416
Attention: Jonathan Wood
Telephone: (612) 253-6025
Facsimile: (612) 253-6135
Residence: British Virgin Islands
 
1,200
 
500
 
655
 
$       500,000
 
N/A
                         
Whitebox Special Opportunities Partners, Series B, LP
 
c/o Whitebox Advisors, LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416
Attention: Jonathan Wood
Telephone: (612) 253-6025
Facsimile: (612) 253-6135
Residence: British Virgin Islands
 
1,500
 
625
 
818
 
$      625, 000
 
N/A
                         
Radcliffe SPC, Ltd. For and on behalf of the Class A Convertible Crossover
Segregated Portfolio
 
c/o RG Capital Management, LP
3 Bala Plaza-East, Suite 501
Bala Cynwyd, PA 19004
Attention: Gerald F. Stahlecker
Facsimile: (610) 617-0580
Telephone: (610) 617-5911
Residence: Cayman Islands
 
10,000
 
0
 
5,454
 
0
 
N/A
                         
UBS O’Connor LLC fbo O’Connor Global Convertible Arbitrage Master Limited
 
UBS O’Connor LLC
One North Wacker Dr., 32nd Floor
Chicago, IL 60606
Attention: Robert Murray
Telephone: (312) 525-6247
Facsimile: (312) 525-6271
Residence: Cayman Islands
 
5,520
 
0
 
3,011
 
0
 
N/A
                         

UBS O’Connor LLC fbo O’Connor Global Convertible Arbitrage II Master Limited
 
UBS O’Connor LLC
One North Wacker Dr., 32nd Floor
Chicago, IL 60606
Attention: Robert Murray
Telephone: (312) 525-6247
Facsimile: (312) 525-6271
Residence: Cayman Islands
 
480
 
0
 
262
 
0
 
N/A

 

--------------------------------------------------------------------------------

 
UBS O’Connor LLC fbo O’Connor Pipes Corporate Strategies Master Limited
 
UBS O’Connor LLC
One North Wacker Dr. 32nd Floor
Chicago, IL 60606
Attention: Robert Murray
Telephone: (312) 525-6247
Facsimile: (312) 525-6271
Residence: Cayman Islands
 
1,500
 
0
 
818
 
0
 
N/A
                         
TOTAL
     
55,000
 
20,000
 
30,000
 
$  20,000,000
   

--------------------------------------------------------------------------------

EXHIBITS

Exhibit A-1
Form of Series D Certificate of Designations
Exhibit A-2
Form of Series E Certificate of Designations
Exhibit B
Form of Registration Rights Agreement
Exhibit C
Form of Irrevocable Transfer Agent Instructions
Exhibit D
Form of Outside Company Counsel Opinion
Exhibit E
Form of Officer's Certificate
Exhibit F
Form of Lock-Up Agreement

 

--------------------------------------------------------------------------------

 
SCHEDULES
 
Schedule 2(e) - Information
Schedule 3(a) - List of Subsidiaries
Schedule 3(h) - No Integrated Offering
Schedule 3(j) - Stockholder Rights Plan
Schedule 3(k) - SEC Documents
Schedule 3(r) - Equity Capitalization
Schedule 3(z) - Subsidiary Rights
Schedule 4(d) - Use of Proceeds
Schedule 4(n) - Additional Registration Statements
Schedule 4(o) - Additional Issuances of Securities
Schedule 9(e) - Entire Agreement; Amendments

--------------------------------------------------------------------------------