Exhibit 10.1
 
SECURITIES PURCHASE AGREEMENT
 
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of December 21, 2006,
by and among Rancher Energy Corp., a Nevada corporation, with headquarters
located at 999-18th Street, Suite 1740, Denver, Colorado 80202 (the "Company")
and the investors listed on the Schedule of Buyers attached hereto
(individually, a "Buyer" and collectively, the "Buyers").
 
WHEREAS:
 
A.  The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (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.
 
B.  The Company has authorized a new series of convertible notes of the Company,
in the form attached hereto as Exhibit A (the "Notes"), which Notes shall be
convertible into the Company's common stock, par value $0.00001 per share
(the "Common Stock") (as converted, the "Conversion Shares"), in accordance with
the terms of the Notes.
 
C.  Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, (i) that number of shares of
Common Stock set forth opposite such Buyer's name in column (3) on the Schedule
of Buyers attached hereto (which aggregate number of shares for all Buyers shall
not exceed 50,895,420) (the "Common Shares"), (ii) that aggregate principal
amount of the Notes set forth opposite such Buyer's name in column (4) on the
Schedule of Buyers attached hereto (which aggregate amount for all Buyers shall
be $0) and (iii) warrants, in substantially the form attached hereto as Exhibit
B (the "Warrants"), to acquire up to that number of additional shares of Common
Stock set forth opposite such Buyer's name in column (5) of the Schedule of
Buyers (as exercised, collectively, the " Warrant Shares").
 
D.  Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the "Registration Rights
Agreement"), pursuant to which the Company will agree 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.
 
E.  The Common Shares, the Notes, the Conversion Shares, the Warrants and the
Warrant Shares collectively are referred to herein as the "Securities".
 
NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
 

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1.  PURCHASE AND SALE OF COMMON SHARES, NOTES AND WARRANTS.
 
(a)  Purchase of Common Shares, Notes and Warrants.
 
(i)  Common Shares, Notes and Warrants. Subject to the satisfaction (or waiver)
of the conditions set forth in Sections 6 and 7 below, the Company shall issue
and sell to each Buyer, and each Buyer severally, but not jointly, agrees to
purchase from the Company on the Closing Date (as defined below), (x) the number
of Common Shares set forth opposite such Buyer's name in column (3) on the
Schedule of Buyers, (y) a principal amount of Notes as is set forth opposite
such Buyer's name in column (4) on the Schedule of Buyers and (z) Warrants to
acquire up to that number of Warrant Shares as is set forth opposite such
Buyer's name in column (5) on the Schedule of Buyers, (the "Closing").
 
(ii)  Closing. The date and time of the Closing (the "Closing Date") shall be
10:00 a.m., New York City time, on the date hereof (or such later date as is
mutually agreed to by the Company and each Buyer) after notification of
satisfaction (or waiver) of the conditions to the Closing set forth in Sections
6 and 7 below at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New
York, New York 10022 unless the Company and the Buyers (as defined below) agree
otherwise.
 
(iii)  Purchase Price. (1) The aggregate purchase price for the Common Shares,
the Notes and the Warrants to be purchased by each such Buyer at the Closing
(the "Purchase Price") shall be the amount set forth opposite each Buyer's name
in column (6) of the Schedule of Buyers. Each Buyer shall pay $1.50 for each
Common Share and related Warrants and $1,000 for each $1,000 of principal amount
of Notes and related Warrants to be purchased by such Buyer at the Closing.
 
(2)  The Buyers and the Company agree that the Common Shares, the Notes and the
Warrants constitute an "investment unit" for purposes of Section 1273(c)(2) of
the Internal Revenue Code of 1986, as amended (the "Code"). Not later than two
days before the Closing Date, the Buyers shall notify the Company of their
determination of the allocation of the issue price of such investment unit among
the Common Shares, the Notes and the Warrants in accordance with Section
1273(c)(2) of the Code and Treasury Regulation Section 1.1273-2(h), and neither
the Buyers nor the Company shall take any position inconsistent with such
allocation in any tax return or in any judicial or administrative proceeding in
respect of taxes.
 
(b)  Form of Payment. On the Closing Date, (i) each Buyer, shall pay its
Purchase Price in accordance with wire transfer instructions provided by the
Company and (ii) the Company shall deliver to each Buyer the Common Shares and
the Notes (allocated in the principal amounts as such Buyer shall request) which
such Buyer is then purchasing hereunder along with the Warrants (allocated in
the amounts as such Buyer shall request) which such Buyer is purchasing, in each
case duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.
 
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(c)  Subsequent Sales of Common Shares, Notes and Warrants. At any time on or
before the 30th day following the Closing, or such later time as the Company and
the holders of at least 60% of the Registrable Securities purchased at the
Closing may mutually agree, the Company may sell additional securities up to a
maximum raised hereby (including the securities sold at the Closing) of
$76,343,130 to such persons (the “Additional Buyers”) as may be approved by the
Board of Directors of the Company. All such sales made at any additional
closings (each an “Additional Closing”), (i) shall be made on the terms and
conditions set forth in this Agreement, (ii) the representations and warranties
of the Company set forth in Section 3 hereof (and the Schedules thereto) shall
speak as of the Closing and the Company shall have no obligation to update any
such disclosure, and (iii) the representations and warranties of the Additional
Buyers in Section 2 hereof shall speak as of such Additional Closing. This
Agreement, including without limitation, the Schedule of Buyers, may be amended
by the Company without the consent of the Buyers to include any Additional
Buyers and the Additional Buyer(s) shall be entitled to rely upon the legal
opinion delivered to the Buyers at the Closing. Any Additional Buyers shall be
deemed to be “Buyers” for all purposes under this Agreement.
 
2.  BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and not
jointly, represents and warrants with respect to only itself that:
 
(a)  No Sale or Distribution. Such Buyer is acquiring the Common Shares, the
Notes and the Warrants, and upon conversion of the Notes and exercise of the
Warrants (other than pursuant to a Cashless Exercise (as defined in the
Warrants)) will acquire the Conversion Shares issuable upon conversion of the
Notes and the Warrant Shares issuable upon exercise of the Warrants, as
principal 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; 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 and pursuant to the
applicable terms of the Transaction Documents (as defined in Section 3(b)). 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.
 
(b)  Accredited Investor Status. Such Buyer is (i) an "accredited investor" as
that term is defined in Rule 501(a) of Regulation D, or (ii) a resident of the
Province of Ontario that is an "Accredited Investor" for the purpose of National
Instrument 45-106 of the Canadian Securities Administration and, if such Buyer
is relying on clause (ii) above, has delivered an executed representation letter
concurrently with the execution and delivery of this Agreement evidencing the
manner in which such Buyer satisfies such definition of "Accredited Investor"
and containing certain other representations, warranties and acknowledgements of
the Buyer.
 
(c)  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.
 
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(d)  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 that 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 and is able to afford a complete loss of such investment. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
 
(e)  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.
 
(f)  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 form reasonably acceptable to the Company, 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"), notwithstanding the forgoing, the requirement to
deliver a legal opinion as set out in clause (B) above shall not apply to
transfers to an affiliate of the Buyer; (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. 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(f).
 
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(g)  Legends. Such Buyer understands that the certificates or other instruments
representing the Common Shares, the Notes and the Warrants and, until such time
as the resale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant 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):
 
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
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 FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
 
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, 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 a law firm reasonably acceptable to the Company (with Schulte Roth &
Zabel LLP being deemed acceptable), in a form reasonably acceptable to the
Company, 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.
 
(h)  Validity; Enforcement. This Agreement and the Registration Rights Agreement
to which such Buyer is a party 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.
 
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(i)  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.
 
(j)  Residency. Such Buyer is a resident of that jurisdiction specified below
its address on the Schedule of Buyers.
 
(k)  Buyer's Broker Fees. Each Buyer shall be responsible for the payment of any
placement agent's fees, financial advisory fees, or brokers' commissions for
placement agents, financial advisors and/or brokers engaged by such Buyer
relating to or arising out of the transactions contemplated hereby.
 
(l)  Certain Trading Activities. Other than the transactions contemplated
herein, since the time that such Buyer was first contacted by the Company, the
Agent or any other Person regarding this investment in the Company neither the
Buyer nor any Affiliate 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 (i) the later of (A) sixty (60) days after the Closing Date and (B)
such time as the transactions contemplated by this Agreement are first publicly
announced as described in Section 4(i) hereof or (ii) such time as this
Agreement is terminated in full pursuant to Section 8 hereof. Other than to
other Persons party to this Agreement and those expressly acknowledged by the
Company, such Buyer has maintained the confidentiality of all disclosures made
to it in connection with this transaction (including the existence and terms of
this transaction). Such Buyer acknowledges the SEC's position set forth in Item
65, Section 5 under Section A, of the Manual of Publicly Available Telephone
Interpretations, dated July 1997, compiled by the Office of Chief Counsel,
Division of Corporation Finance, and such Buyer will adhere to such position.
 
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3.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to each of the Buyers that, as of the date hereof and as of the Closing
Date:
 
(a)  Organization and Qualification. The Company and its "Subsidiaries" (which
for purposes of this Agreement means any joint venture or any entity in which
the Company, directly or indirectly, owns any of the capital stock or holds an
equity or similar interest) 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) or prospects of the Company and its Subsidiaries,
individually or taken as a whole, 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 (as
defined below). The Company has no Subsidiaries except as set forth on Schedule
3(a).
 
(b)  Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Registration Rights Agreement, the Transfer Agent
Instructions (as defined in Section 5(b)), the Warrants 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 Common Shares, the
Notes and the Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion of the Notes and the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants
have been duly authorized by the Company's Board of Directors and, subject to
obtaining the Stockholder Approval (as defined below) and except as set forth in
Section 3(e), 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.
 
(c)  Issuance of Securities. The issuance of the Common Shares, the Notes and
the Warrants are duly authorized and are free from all taxes, liens and charges
with respect to the issue thereof. As of the Closing, 40,900,000 shares of
Common Stock shall have been duly authorized and reserved for issuance pursuant
to the transactions contemplated hereby. From and after the Stockholder Approval
(as defined below), the Company shall have reserved from its duly authorized
capital stock not less than the sum of (i) 100% of the Common Shares issued
hereunder, and (ii) 130% of the maximum number of shares of Common Stock
issuable (x) upon conversion of the Notes (without taking into account any
limitations on the conversion of the Notes set forth in the Notes) and (y) upon
exercise of the Warrants (without taking into account any limitations on the
exercise of the Warrants set forth in the Warrants). Upon conversion or exercise
in accordance with the Notes or the Warrants, as the case may be, the Conversion
Shares and the Warrant Shares, respectively, 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. Assuming the accuracy of
each of the representations and warranties set forth in Section 2 of this
Agreement, the offer and issuance by the Company of the Securities is exempt
from registration under the 1933 Act.
 
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(d)  No Conflicts. Except as set forth on Schedule 3(d), 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 Common Shares, the Notes and Warrants
and reservation for issuance and issuance of the Conversion Shares and the
Warrant Shares) will not (i) result in a violation of any articles of
incorporation, articles of formation, any articles of designations or other
constituent documents of the Company or any of its Subsidiaries, any capital
stock of the Company or any of its Subsidiaries or bylaws of the Company or any
of its Subsidiaries or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) in any
respect 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
foreign, federal and state securities laws and regulations and the rules and
regulations of the OTC Bulletin Board (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.
 
(e)  Consents. Neither the Company nor any of its Subsidiaries is 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, except
for the following consents, authorizations, orders, filings and registrations
(none of which is required to be filed or obtained before the Closing): (i) the
filing with the SEC of one or more Registration Statements in accordance with
the requirements of the Registration Rights Agreement and (ii) the filing of a
listing application for the Common Shares, the Conversion Shares and the Warrant
Shares with the Principal Market, which shall be done pursuant to the rules of
the Principal Market. The Company and its Subsidiaries are unaware of any facts
or circumstances that 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 listing 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.
 
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(f)  Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
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) an "affiliate" of the Company or any of its
Subsidiaries (as defined in Rule 144 of the 1933 Act) 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.
 
(g)  No General Solicitation; Placement Agent's 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 acknowledges that it
has engaged Knight Capital Markets, LLC as placement agent (the "Agent") in
connection with the sale of the Securities.
 
(h)  No Integrated Offering. 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 Notes and the Warrant
Shares issuable upon exercise of the Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Notes in accordance with this Agreement
and the Notes and its obligation to issue the Warrant Shares upon exercise of
the Warrants in accordance with this Agreement and the Warrants is, in each
case, absolute and unconditional, following the Stockholder Approval (as defined
in Section 4(p)) and the filing of the amended and restated Articles of
Incorporation (which the Company shall file with the Secretary of State of the
State of Nevada immediately following Stockholder Approval), regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.
 
(j)  Application of Takeover Protections; Rights Agreement. Except as set forth
on Schedule 3(j), 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 Articles
of Incorporation (as defined in Section 3(r)) or the laws of the state of its
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. The Company and its board of directors have taken all necessary
action, if any, in order to render inapplicable any stockholder rights plan or
similar arrangement relating to accumulations of beneficial ownership of Common
Stock or a change in control of the Company.
 
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(k)  SEC Documents; Financial Statements. Except as set forth on Schedule 3(k),
during the two (2) years prior to the date hereof, the Company has 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 the SEC Documents not
available on the EDGAR system. As of their respective filing 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 filing 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. 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). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this Agreement or in any
disclosure schedules, contains any untrue statement of a material fact or omits
to state any material fact necessary in order to make the statements therein, in
the light of the circumstance under which they are or were made not misleading.
 
(l)  Absence of Certain Changes. Except as set forth on Schedule 3(l)(i), since
March 31, 2006, there has been no material adverse change and no material
adverse development in the business, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company or
its Subsidiaries. Except as disclosed in Schedule 3(l)(ii), since March 31,
2006, the Company has not (i) declared or paid any dividends, (ii) sold any
assets, individually or in the aggregate, in excess of $100,000 outside of the
ordinary course of business or (iii) had capital expenditures, individually or
in the aggregate, in excess of $500,000. 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 that 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.
 
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(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 any of its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation or its Bylaws or their organizational charter 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 for possible violations which could 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. Since December 16, 2005, (i) the Common Stock has been designated for
quotation on the Principal Market, (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. Except as set forth on Schedule 3(n), 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.
 
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(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.
 
(p)  Sarbanes-Oxley Act. The Company is in 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 set forth in the SEC Documents
filed at least ten (10) days prior to the date hereof and other than the grant
of stock options disclosed on Schedule 3(q), none of the officers, directors or
employees 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, director or employee or, to the
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 100,000,000 shares of Common Stock, of which as of
the date hereof, 49,104,580 are issued and outstanding, 10,000,000 shares are
reserved for issuance pursuant to the Company's stock option plan (the "Plan")
(of which options to purchase 2,325,000 shares of Common Stock have been issued
under the Plan) and 22,140,405 shares are reserved for issuance pursuant to
securities (other than the aforementioned options, the Notes and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock.
All of such outstanding shares have been, or upon issuance will be, validly
issued and are fully paid and nonassessable. Except as disclosed in 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) 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
outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its Subsidiaries; (v) 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); (vi) 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; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or "phantom stock" plans or agreements or any similar plan or agreement; and
(ix) 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. The Company has
furnished to the Buyers true, correct and complete copies of the Company's
Articles of Incorporation, as amended and as in effect on the date hereof (the
"Articles 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.
 
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(s)  Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below), (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. Schedule 3(s) provides a detailed
description of the material terms of any such outstanding Indebtedness. 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.
 
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(t)  Absence of Litigation. Except as set forth in Schedule 3(t), 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, the Common Stock or any of the
Company's Subsidiaries or any of the Company's or its Subsidiaries' officers or
directors.
 
(u)  Insurance. Except as set forth on Schedule 3(u), 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.
 
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(ii)  The Company and its Subsidiaries, to their knowledge, 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 set forth on Schedule 3(w), the Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described in
Schedule 3(w) or such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company and any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
 
(x)  Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, service marks and all
applications and registrations therefor, trade names, patents, patent rights,
copyrights, original works of authorship, inventions, trade secrets and other
intellectual property rights ("Intellectual Property Rights") necessary to
conduct their respective businesses as now conducted. None of the Company's
registered, or applied for, Intellectual Property Rights, to the extent the
Company has such Intellectual Property Rights, have expired or terminated or
have been abandoned, or are expected to expire or terminate or expected to be
abandoned, within three years from the date of this Agreement. The Company does
not have any knowledge of any infringement by the Company or 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 its Subsidiaries regarding its Intellectual Property
Rights. Neither the Company nor any of its Subsidiaries is aware 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. Except as set forth on Schedule 3(y), the Company and
its Subsidiaries, to their knowledge, (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, (iii) are in compliance with all terms
and conditions of any such permit, license or approval, (iv) do not own or
operate any real property contaminated with any substance that is in violation
of Environmental Laws, and (v) is liable for any off-site disposal or
contamination pursuant to any Environmental Laws where, in each of the foregoing
clauses (i), (ii), (iii), (iv) and (v) the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect. There is no civil, criminal or administrative action, suit,
investigation, inquiry or proceeding pending or, to the knowledge of the
Company, threatened by or before any court or governmental authority against the
Company or any of its Subsidiaries relating to or arising from the Company's nor
any Subsidiary's non-compliance with any Environmental Laws, nor has the Company
received written notice of any alleged violations of Environmental Laws. 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.
 
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(z)  Subsidiary Rights. 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. Except as set forth on Schedule 3(aa), 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.
 
(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 in 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 have 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.
 
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(cc)  Ranking of Notes. Except as set forth on Schedule 3(cc), no Indebtedness
of the Company is senior to or ranks pari passu with the Notes in right of
payment, whether with respect of payment of redemptions, interest, damages or
upon liquidation or dissolution or otherwise.
 
(dd)  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.
 
(ee)  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.
 
(ff)  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.
 
(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) other than the Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
 
(hh)  Disclosure. All disclosure provided by the Company to the Buyers regarding
the Company or any of its Subsidiaries, their business and the transactions
contemplated hereby in the Transaction Documents and the Schedules to this
Agreement is true and correct and does 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 any of 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 the light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its
or their business, 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.
 
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(ii)  Material Acquisition Agreements. The agreements set forth on Schedule
3(jj) are all of the material agreements relating to the acquisition of the Big
Muddy Field, Cole Creek South Field and South Glenrock Field and related
interests therein (the "Acquisition Agreements"). Each Acquisition Agreement is
in full force and effect and is a valid and binding obligation of the Company
and any Subsidiary which is a party thereto, enforceable against such parties in
accordance with their terms. The non-binding letter of intent set forth on
Schedule 3(jj) is the only material agreement relating to the acquisition of the
East Teapot Dome Field and related interests therein. None of the Company, any
Subsidiary which is a party thereto, nor to the Company's knowledge, any third
party, is in material breach or default under any Acquisition Agreement, and to
the Company's knowledge, no event has occurred which, with notice or lapse of
time, would constitute a material breach or default by the Company, any
Subsidiary or any third party, or permit termination or modification by the
other party under such Acquisition Agreement.
 
4.  COVENANTS.
 
(a)  Best Efforts. Each party shall use its best efforts timely to satisfy each
of the conditions to be satisfied by it as provided in Sections 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 Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares and
Warrant Shares and none of the Notes or Warrants 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 even if the 1934 Act or
the rules and regulations thereunder would permit such termination.
 
(d)  Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, and not for (A) the 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.
 
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(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) on the same day as the
release thereof, facsimile or e-mailed copies of all press releases issued by
the Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders. 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 or the
city of Denver are authorized or required by law to remain closed.
 
(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 maintain, in accordance with the Notes and Warrants, such listing of
all Registrable Securities from time to time issuable under the terms of the
Transaction Documents. The Company shall maintain the Common Stocks'
authorization for quotation on the Principal Market or an Approved Market (as
defined below). 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 the Principal Market or an Approved Market. In
addition, the Company shall use its best efforts to cause its shares of Common
Stock, including all Registrable Securities, to be approved for listing or
quotation (the "Listing") on any Approved Market as promptly as practicable, but
in no event later than one (1) year after the Closing Date (the "Required
Listing Date"). If the Company meets the applicable listing requirements of an
Approved Market and the Listing has not occurred on or prior to the Required
Listing Date (a "Listing Failure"), then, as partial relief for the damages to
any holder of Registrable Securities by reason of any such delay (which remedy
shall not be exclusive of any other remedies available at law or in equity), the
Company shall pay to each holder of Registrable Securities an amount in cash
equal to one-quarter of one percent (0.25%) of the aggregate Purchase Price of
such Investor's Registrable Securities on each of the following dates: the day
of the Listing Failure and on every thirtieth day (pro rated for periods
totaling less than thirty days) thereafter until such Listing Failure is cured;
provided that in no event shall the aggregate payments for all Listing Failures
exceed twenty-four percent (24%) of the Purchase Price paid by such holder of
Registrable Securities. As used herein, "Approved Market" shall mean any of the
following: The New York Stock Exchange, The NASDAQ Global Select Market, The
NASDAQ Global Market, The NASDAQ Capital Market or the American Stock Exchange.
The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).
 
(g)  Fees. Subject to Section 8 below, at Closing, the Company shall pay to
Schulte Roth & Zabel LLP or its designee(s) all reasonable legal fees and
disbursements incurred in connection with the transactions contemplated by the
Transaction Documents, which amount, in whole or in part, may be withheld by LP
Rancher Ltd. (a Buyer) from its Purchase Price at the Closing. The Company shall
be responsible for the payment of any placement agent's fees, financial advisory
fees, or broker's commissions relating to or arising out of the transactions
contemplated hereby, including, without limitation, any fees payable to the
Agent, Source Capital and/or Falcon Capital. 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.
 
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(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, including, without limitation, Section 2(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee. 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. On or before
11:00 a.m., New York City time, on the first Business Day following the date of
this Agreement, the Company shall issue a press release and 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,
the form of the Notes, the form of Warrant and the form of the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the
"8-K Filing"). The Company shall publicly disclose on Form 8-K the terms of the
studies to be conducted by NITEC LLC as requested by the Company of tertiary oil
recovery potential of the fields related to the Acquisition Agreements using
continuous CO2 injection (the "Engineering Report 8-K") and shall attach the
same as exhibit thereto as promptly as practicable upon receipt of same, but in
no event later than June 30, 2007 unless, at such time, the Company has filed a
Registration Statement but such Registration Statement has not yet been declared
effective by the SEC, in which case, the Company may delay the filing of the
Engineering Report 8-K until after such Registration Statement is declared
effective, but in no event shall such Engineering Report 8-K be filed after
September 30, 2007. 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 8-K Filing with the SEC without the express written consent of such Buyer.
From and after the deadlines specified above, if a Buyer has, or believes it
has, received any such material, nonpublic information regarding the Company or
any of its Subsidiaries, it shall provide the Company with written notice
thereof. The Company shall, within five (5) Trading Days (as defined in the
Notes) of receipt of such notice, make public disclosure of such material,
nonpublic information. In the event of a breach of the foregoing covenant by the
Company, any of its Subsidiaries, or any of its or their respective officers,
directors, employees and agents, in addition to any other remedy provided herein
or in the Transaction Documents, a Buyer shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents. No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure. 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 Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations. 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.
 
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(j)  Restriction on Redemption and Cash Dividends. So long as any Notes 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 Notes representing not less than a 60%
of the aggregate principal amount of the then outstanding Notes.
 
(k)  Additional Notes; Variable Securities; Dilutive Issuances. So long as any
Buyer beneficially owns any Securities, the Company will not issue any Notes
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 Notes. For
so long as any Notes or Warrants 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 price which varies or may vary 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 Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable; provided that
anti-dilution provisions similar to those contained in the Notes or Warrants
shall not be deemed for the purposes of this provision to be securities
convertible or exercisable at prices that vary with the market price of the
Common Stock. The Company shall not enter into or affect any Dilutive Issuances
(as defined in the Notes) unless or until Stockholder Approval is obtained. For
so long as any Notes or Warrants remain outstanding, the Company shall not, in
any manner, enter into or affect any Dilutive Issuances (as defined in the
Notes) if the effect of such Dilutive Issuance is to cause the Company to be
required to issue upon conversion of any Note or exercise of any Warrant any
shares of Common Stock in excess of that number of shares of Common Stock which
the Company may issue upon conversion of the Notes and exercise of the Warrants
without breaching the Company's obligations under the rules or regulations of
the Principal Market.
 
(l)  Corporate Existence. So long as any Buyer beneficially owns any Securities,
the Company shall not be party to any Fundamental Transaction (as defined in the
Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants.
 
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(m)  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 (I) prior to the Stockholder Approval Date, 40,900,000 shares of Common
Stock, and (II) from and after the Stockholder Approval Date, 130% of the sum of
the number of shares of Common Stock issuable (i) upon conversion of the Notes
issued at the Closing and (ii) upon exercise of the Warrants issued at the
Closing (without taking into account any limitations on the Conversion of the
Notes or exercise of the Warrants set forth in the Notes and Warrants,
respectively).
 
(n)  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.
 
(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 earlier to occur of (i) the twelve month
anniversary of the Closing Date and (ii) the date sixty days after the Effective
Date of the Registration Statement which caused the registration of the number
Registrable Securities equal to clause (I)(A) of the definition of Initial
Required Registration Amount in the Registration Rights Agreement (the "Trigger
Date"), the Company will not, directly or indirectly, file any registration
statement with the SEC other than the Registration Statement (as defined in the
Registration Rights Agreement). 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").
 
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(iii)  From the Trigger Date until the second anniversary of the Closing Date,
the Company will not, directly or indirectly, effect any Subsequent Placement
unless the Company shall have first complied with this Section 4(o)(iii).
 
(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, which Offer Notice shall (v) identify and describe the
Offered Securities, (w) describe the price 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, (x) identify the persons or entities
(if known) to which or with which the Offered Securities are to be offered,
issued, sold or exchanged, (y) offer to issue and sell to or exchange with such
Buyers at least forty percent (40%) of the Offered Securities, allocated among
such Buyers (a) based on such Buyer's pro rata portion of the aggregate
principal amount of Notes 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 its 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 and (ii) to publicly announce
(a) the execution of such Subsequent Placement Agreement (as defined below), and
(b) either (x) the consummation of the transactions contemplated by such
Subsequent Placement Agreement or (y) the termination of such Subsequent
Placement Agreement, which shall be filed with the SEC on a Current Report on
Form 8-K with such Subsequent Placement Agreement and any documents contemplated
therein filed as exhibits thereto.
 
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(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, as reduced pursuant to Section
4(o)(iii)(4) above if the Buyers have so elected, 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, as reduced pursuant to Section 4(o)(iii)(4) above
if the Buyers have so elected, 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 reasonably
satisfactory in form and substance to the Buyers and their respective counsel.
 
(6)  Any Offered Securities not acquired by the Buyers or other persons in
accordance with Section 4(o)(iii)(3) above may not be issued, sold or exchanged
until they are again offered to the Buyers under the procedures specified in
this Agreement.
 
(7)  The Company and the Buyers agree that if any Buyer elects to participate in
the Offer, (x) neither the operative agreement concerning the Subsequent
Placement (the "Subsequent Placement Agreement" with respect to such Offer nor
any other transaction documents related thereto (collectively, the "Subsequent
Placement Documents") shall include any term or provisions whereby any Buyer
shall be required to agree to any restrictions in trading as to any securities
of the Company owned by such Buyer prior to such Subsequent Placement, and (y)
any registration rights set forth in such Subsequent Placement Documents shall
be similar in all material respects to the registration rights contained in the
Registration Rights Agreement.
 
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(8)  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 nonpublic information, by the fifteen (15th) Business Day
following expiration of the Offer Period. If by the fifteen (15th) following
expiration of the Offer Period 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.
 
(iv)  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 Notes).
 
(p)  Stockholder Approval.
 
(i)  The Company shall provide each stockholder entitled to vote at a special or
annual meeting of stockholders of the Company (the "Stockholder Meeting"), which
initially shall be promptly called and held not later than sixty (60) days after
the Closing Date (or one-hundred twenty (120) days after the Closing Date if the
proxy statement relating to the calling of such Stockholder Meeting is subject
to SEC review) (the "Stockholder Meeting Deadline"), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and
Schulte Roth & Zabel LLP (“SRZ”) at the expense of the Company, soliciting each
such stockholder's affirmative vote at the Stockholder Meeting for approval of
resolutions (the "Resolutions") providing for the increase in the authorized
Common Stock from 100,000,000 shares to no less than 225,000,000 shares (such
affirmative approval being referred to herein as the "Stockholder Approval" and
the date such approval is obtained, the "Stockholder Approval Date"), and the
Company shall use its best efforts to solicit its stockholders' approval of the
Resolutions and to cause the Board of Directors of the Company to recommend to
the stockholders that they approve the Resolutions. The Company shall be
obligated to seek to obtain the Stockholder Approval by the Stockholder Meeting
Deadline. If, despite the Company's best efforts the Stockholder Approval is not
obtained on or prior to the Stockholder Meeting Deadline (the "Stockholder
Approval Failure"), the Company shall cause an additional Stockholder Meeting to
be held each three month period thereafter until such Stockholder Approval is
obtained or the second anniversary of the Closing Date. In addition, if, despite
the Company's best efforts there is a Stockholder Approval Failure, then, as
partial relief for the damages to any holder by reason of any such Stockholder
Approval Failure (which remedy shall not be exclusive of any other remedies
available at law or in equity), the Company shall pay to each holder of
Registrable Securities an amount equal to two percent (2.0%) of the aggregate
Purchase Price of such Investor's Registrable Securities on the day of such
Stockholder Approval Failure and on every thirtieth day (pro rated for periods
totaling less than thirty days) thereafter until such Stockholder Approval
Failure is cured by obtaining the Stockholder Approval. The payments to which an
Investor shall be entitled pursuant to this Section 4(p) are referred to herein
as the "Stockholder Approval Payments." The date such Stockholder Approval
Payments are due shall be referred to herein as the "Stockholder Approval
Payments Payment Date."
 
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(ii)  Stockholder Approval Payments shall be payable on each Stockholder
Approval Payments Payment Date to each holder of Registrable Securities, in
shares of Common Stock (the "Stockholder Approval Payments Shares") so long as
there is no Equity Conditions Failure (as defined below); provided however, that
the Company, at its option following notice to the holder of Registrable
Securities, may pay Stockholder Approval Payments on any Stockholder Approval
Payments Payment Date in cash (the "Cash Stockholder Approval Payments") or in a
combination of Cash Stockholder Approval Payments and Stockholder Approval
Payments Shares. The Company shall deliver a written notice (each, a
"Stockholder Approval Payments Election Notice") to each holder of Registrable
Securities on or prior to the Stockholder Approval Payments Payment Date (the
date such notice is delivered to all of the holders, the "Stockholder Approval
Payments Notice Date") which notice (i) either (A) confirms that Stockholder
Approval Payments to be paid on such Stockholder Approval Payments Payment Date
shall be paid entirely in Stockholder Approval Payments Shares or (B) elects to
pay Stockholder Approval Payments as Cash Stockholder Approval Payments or a
combination of Cash Stockholder Approval Payments and Stockholder Approval
Payments Shares and specifies the amount of Stockholder Approval Payments that
shall be paid as Cash Stockholder Approval Payments and the amount of
Stockholder Approval Payments, if any, that shall be paid in Stockholder
Approval Payments Shares and (ii) certifies that there is no Equity Conditions
Failure. If the Equity Conditions (as defined in the Registration Rights
Agreement) are not satisfied as of the Stockholder Approval Payments Notice
Date, then unless the Company has elected to pay such Stockholder Approval
Payments as Cash Stockholder Approval Payments, the Stockholder Approval
Payments Election Notice shall indicate that unless the holder waives the Equity
Conditions, the Stockholder Approval Payment shall be paid as Cash Stockholder
Approval Payments. If the Equity Conditions were satisfied as of the Stockholder
Approval Payments Notice Date but the Equity Conditions are no longer satisfied
at any time prior to the Stockholder Approval Payments Payment Date, the Company
shall provide the holder a subsequent notice to that effect indicating that
unless the holder waives the Equity Conditions, the Stockholder Approval
Payments shall be paid as Cash Stockholder Approval Payments. Stockholder
Approval Payments to be paid on an Stockholder Approval Payments Payment Date in
Stockholder Approval Payments Shares shall be paid in a number of fully paid and
nonassessable shares (rounded to the nearest whole share) of Common Stock equal
to the quotient of (1) the amount of Stockholder Approval Payments payable on
such Stockholder Approval Payments Payment Date less any Cash Stockholder
Approval Payments paid and (2) the Stockholder Approval Payments Conversion
Price in effect on the applicable Stockholder Approval Payments Payment Date.
Notwithstanding the foregoing, if the Company elects to pay any Stockholder
Approval Payments in Stockholder Approval Payments Shares and the Stockholder
Approval has not been obtained by the applicable Stockholder Approval Payments
Payment Date, the Company may not pay such Stockholder Approval Payments in
Stockholder Approval Payments Shares but instead shall issue to each holder of
Registrable Securities a convertible note with an original principal amount
equal to the amount of such Stockholder Approval Payments in the form attached
hereto as Exhibit A; provided however that the conversion price of such
convertible note shall be equal to the applicable Stockholder Approval Payments
Conversion Price. As used herein, "Stockholder Approval Payments Conversion
Price" means, with respect to any Stockholder Approval Payments Payment Date,
that price which shall be the price computed as 90% of the arithmetic average of
the Weighted Average Price (as defined in the Notes) of the Common Stock on each
of the ten (10) consecutive Trading Days ending on the Trading Day immediately
preceding the applicable Stockholder Approval Payments Payment Date (each, a
"Stockholder Approval Payments Measuring Period"). All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction during such Stockholder Approval Payments Measuring
Period. As used herein, "Equity Conditions Failure" means that on any day during
the period commencing ten (10) Trading Days prior to the applicable Stockholder
Approval Payments Payment Date through the applicable Stockholder Approval
Payments Payment Date the Equity Conditions have not been satisfied (or waived
in writing by the applicable holder of Registrable Securities).
 
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(q)  Each Buyer shall vote in favor of the Resolutions. Notwithstanding the
foregoing, any Buyer who fails vote in favor of the Resolutions shall not be
entitled to any Stockholder Approval Payments.
 
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 Notes and the Warrants in which the
Company shall record the name and address of the Person in whose name the Notes
and the Warrants have been issued (including the name and address of each
transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and the number of
Warrant Shares issuable upon exercise of the Warrants 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 The
Depository Trust Company ("DTC"), registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares and the Warrant Shares issued
at the Closing or upon conversion of the Notes or exercise of the Warrants in
such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Notes or exercise of the Warrants in the form of Exhibit D
attached hereto (the "Transfer Agent Instructions"). The Company warrants that
no instruction other than the 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, and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as 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(f), 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 or Warrant 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.
 
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(c)  Additional Relief. If the Company shall fail for any reason or for no
reason to issue to such holder unlegended certificates or to credit the holder's
balance account with DTC within five (5) Trading Days of (x) receipt of
documents necessary for the removal of legend set forth above or (y) the date of
its obligation to deliver the shares of Common Stock as contemplated pursuant to
clause (ii) below (the "Deadline Date") and if on or after the Trading Day (as
defined in the Warrants) immediately following such Deadline Date, the holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the holder of shares of Common Stock that
the holder anticipated receiving from the Company (a "Buy-In"), then the Company
shall, within three (3) Trading Days after the holder's request and in the
holder's discretion, either (i) pay cash to the holder in an amount equal to the
holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased (the "Buy-In Price"), at which point the
Company's obligation to deliver such certificate (and to issue such shares of
Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver
to the holder a certificate or certificates representing such shares of Common
Stock and pay cash to the holder in an amount equal to the excess (if any) of
the Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the Deadline Date. "Closing Bid Price" means,
for any security as of any date, the last closing price for such security on
Principal Market, as reported by Bloomberg, or, if the Principal Market begins
to operate on an extended hours basis and does not designate the closing bid
price then the last bid price of such security prior to 4:00:00 p.m., New York
Time, as reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing price
of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg, or if the foregoing
do not apply, the last closing price of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Closing Bid Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market value as mutually
determined by the Company and the holder. If the Company and the holder are
unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 12 of the Registration Rights Agreement.
All such determinations to be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the
applicable calculation period.
 
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6.  CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
 
The obligation of the Company hereunder to issue and sell the Common Shares, the
Notes and the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the 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
Purchase Price (less, in the case of LP Rancher, Ltd. (a Buyer), the amounts
withheld pursuant to Section 4(g)) for the Common Shares, the Notes and the
related Warrants being purchased by such Buyer at the Closing by wire transfer
of immediately available funds pursuant to the wire instructions provided by the
Company.
 
(iii)  The representations and warranties of such Buyer 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 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 material 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 Closing Date.
 
7.  CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
 
The obligation of each Buyer hereunder to purchase the Common Shares, the
Notes and the related Warrants at the Closing is subject to the satisfaction, at
or before the 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 (physically or by
electronic copy) to such Buyer (i) each of the Transaction Documents and (ii)
the stock certificates representing the Common Shares (allocated in such numbers
as such Buyer shall request), (iii) the Notes (allocated in such principal
amounts as such Buyer shall request), being purchased by such Buyer at the
Closing pursuant to this Agreement, and (iv) the related Warrants (allocated in
such amounts as such Buyer shall request) being purchased by such Buyer at the
Closing pursuant to this Agreement. The Company shall physically deliver the
foregoing to such Buyer no later than the second (2nd) Business Day following
the Closing.
 
-29-

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(ii)  Such Buyer shall have received the opinion of Patton Boggs LLP, the
Company's outside counsel, dated as of the Closing Date, in substantially the
form of Exhibit E attached hereto.
 
(iii)  The Company shall have delivered to such Buyer a copy of the Transfer
Agent Instructions, in the form of Exhibit D attached hereto, which instructions
shall have been delivered to the Company's transfer agent.
 
(iv)  The Company shall have delivered to such Buyer a certificate evidencing
the formation and good standing of the Company and each of its Subsidiaries in
such entity's jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction, as of a date within 10 days of the
Closing Date.
 
(v)  The Company shall have delivered to such Buyer a certificate evidencing the
Company's qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business, as of a date within 10 days of the Closing Date.
 
(vi)  The Company shall have delivered to such Buyer a certified copy of the
Articles of Incorporation as certified by the Secretary of State of the State of
Nevada within ten (10) days of the Closing Date.
 
(vii)  The Company shall have delivered to such Buyer a certificate, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company's Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Articles of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit F.
 
(viii)  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 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 Closing Date. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the Company,
dated as of the 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 G.
 
(ix)  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 Closing Date.
 
-30-

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(x)  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 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 Closing Date, either (A) in writing by the SEC or the Principal Market or
(B) by falling below the minimum listing maintenance requirements of the
Principal Market.
 
(xi)  The Company shall have obtained all governmental, regulatory or third
party consents and approvals, if any, necessary for the sale of the Securities.
 
(xii)  The Company shall have delivered to each Buyer a lock-up agreement in the
form attached hereto as Exhibit H executed and delivered by each director and
officer of the Company.
 
(xiii)  The Company shall have delivered to each Buyer a voting agreement in the
form attached hereto as Exhibit I with the stockholders listed on Appendix A
thereto.
 
(xiv)  The Company shall have received waivers, in the form attached hereto as
Exhibit J (a "Piggy-Back Waiver"), from holders of not less than 50% of the
securities set forth on Schedule 7(xiv) attached hereto.
 
(xv)  Contemporaneously with the Closing, the Company shall have raised no less
than $50 million pursuant the transaction contemplated hereby.
 
(xvi)  The Company shall have delivered to such Buyer such other documents
relating to the transactions contemplated by this Agreement as such Buyer or its
counsel may reasonably request.
 
8.  TERMINATION. In the event that the 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, that 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 to such
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. 
 
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(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 shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
 
(e)  Entire Agreement; Amendments. 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 60% of the aggregate number of Registrable Securities issued
and issuable hereunder and under the Notes, 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 applicable Securities then
outstanding. 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 of the parties to
the Transaction Documents, holders of Notes or holders of the Warrants, as the
case may be. 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.
 
-32-

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

 
(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:
 
Rancher Energy Corp.
999-18th Street, Suite 1740
Denver, Colorado 80202
Telephone: (303) 629-1122
Facsimile: (720) 904-5698
Attention: John Works, President and CEO
 
Copy to:
 
Patton Boggs LLP
1660 Lincoln Street
Denver, Colorado 80264
Telephone: (303) 830-1776
Facsimile: (303) 894-9239
Attention: Robert M. Bearman, Esq. and Mark R.  Goldschmidt, Esq.
 
If to the Transfer Agent:
 
Pacific Stock Transfer Company
500 E. Warm Springs Road, Suite 240
Las Vegas NV 89119
Telephone: (702) 361-3033
Facsimile: (702) 433-1979
Attention: 
 
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,
 
-33-

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

 
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 any purchasers of the Notes or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least 60% 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 Notes and the
Warrants). A Buyer may assign some or all of its rights hereunder 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. 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.
 
(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")
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 or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby 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, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) 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. The Company shall
not be obligated to indemnify an Indemnitee pursuant to this Section 9(k) for
Indemnified Liabilities to the extent such Indemnified Liabilities are caused by
acts of gross negligence or willful misconduct on the part of such Indemnitee.
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 that 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.
 
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(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.
 
-35-

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

 
(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, and the Company acknowledges that the Buyers do not so
constitute, 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, and the Company will not assert any such claim 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 with respect to such obligations or the transactions contemplated by the
Transaction Documents. The Company acknowledges and 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.
 
(q)  Sales to Buyers Resident in Canada. Solicitations of and sales to Buyers
resident in or otherwise subject to the securities laws of Canada will be
conducted by a Canadian affiliate of the Agent or other registered dealers in
Canada selected by the Agent. Such Buyers will also need to qualify under a
prospectus exemption in their jurisdiction of residence. The Company is not a
"reporting issuer" in any province of Canada, and the Securities will be subject
to resale restrictions in Canada.
 
[Signature Page Follows]

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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:
 
RANCHER ENERGY CORP.
 
   
   
    By:   /s/ John Works   

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

Name: John Works
Title: President and Chief Executive Officers

 

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

 

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:
 
   
   
    By:      

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

Name:
Title:

 

    Address:    
 

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

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SCHEDULE OF BUYERS

(1)
 
(2)
 
(3)
 
(4)
 
(5)
 
(6)
 
(7)
 
Buyer
 
Address and
Facsimile Number
 
Number of
Common Shares
 
Aggregate
Principal
Amount of
Notes
 
Number of
Warrant Shares
 
Purchase Price
 
Legal Representative's Address
and Facsimile Number
                                         
LP Rancher Ltd
         
1,169,053
   
0
   
1,169,053
 
$
1,753,580.00
   
Schulte Roth & Zabel LLP 919
Third Avenue
New York, New York 10022
Attention: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2376
                                         
Latigo Fund L.P.
         
164,280
   
0
   
164,280
 
$
246,420.00
   
Schulte Roth & Zabel LLP 919
Third Avenue
New York, New York 10022
Attention: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2376
                                         
Old Westbury Real Return Fund
         
6,666,666
   
0
   
6,666,666
 
$
10,000,000.00
                                               
Bank sal. Oppenheim
         
250,000
   
0
   
250,000
 
$
375,000.00
                                               
Millennium Global Natural Resources Fund Limited
         
1,333,333
   
0
   
1,333,333
 
$
1,999,999.50
                                               
Millennium Global Natural Resources Fund Limited
         
4,000,000
   
0
   
4,000,000
 
$
6,000,000.00
                                               
Morgan Stanley Co. for a/c Persistency
         
3,333,333
   
0
   
3,333,333
 
$
5,000,000.00
                                               
Tenor Opportunity Master Fund Ltd.
         
333,333
   
0
   
333,333
 
$
500,000.00
                                               
VR Global Partners L.P.
         
1,333,333
   
0
   
1,333,333
 
$
2,000,000.00
                                               
Affaires Financieres SA
         
666,666
   
0
   
666,666
 
$
1,000,000.00
       

 

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

 
Spartan Arbitrage Fund LP
         
35,000
   
0
   
35,000
 
$
52,500.00
                                               
MMCap International Inc.
         
200,000
   
0
   
200,000
 
$
300,000.00
                                               
NBCN INC. ITF Jane Day
         
30,000
   
0
   
30,000
 
$
45,000.00
                                               
NBCN INC. ITF Purling Holdings
         
35,000
   
0
   
35,000
 
$
52,500.00
                                               
NBCN INC. ITF Scott Paterson
         
100,000
   
0
   
100,000
 
$
150,000.00
                                               
NBCN INC. ITF Don Hovis
         
15,000
   
0
   
15,000
 
$
22,500.00
                                               
NBCN INC. ITF Don McFarlane
         
33,800
   
0
   
33,800
 
$
50,700.00
                                               
Jana Piranha Master Fund LTD
         
5,333,333
   
0
   
5,333,333
 
$
8,000,000.00
                                               
Passport Global Master
         
2,000,000
   
0
   
2,000,000
 
$
3,000,000.00
                                               
Hound Partners Offshore Fund
         
1,340,266
   
0
   
1,340,266
 
$
2,010,400.00
                                               
Hound Partners, L.P.
         
1,326,400
   
0
   
1,326,400
 
$
1,989,600.00
                                               
Jennifer Wisden
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Pierce A Buxton
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Bobby Powell
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Jonathan G Reed
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Patrick Roberts 25 Ambra
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Angus I McIntosh
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Harris N E
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Mr Frederick Mark Tughan
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Malcolm Plaister
         
51,333
   
0
   
51,333
 
$
77,000
                                               
Mr. M.J. Knott
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Louvre RE Fitzwilliam
         
200,000
   
0
   
200,000
 
$
300,000
                                               
Legent Clearing, LLC
         
10,666
   
0
   
10,666
 
$
16,000
       

                                       
Brewin Dolphin
         
100,000
   
0
   
100,000
 
$
150,000
                                               
Abbey National
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Brian Withington
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Mrs. S M Wild
         
20,000
   
0
   
20,000
 
$
30,000
                                               
Legent Clearing, LLC
         
6,666
   
0
   
6,666
 
$
10,000
       

 

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

 
De Heer T. Haddad
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Hornbuckle Mtichell Tst
         
18,666
   
0
   
18,666
 
$
28,000
                                               
Legent Clearing, LLC
         
20,000
   
0
   
20,000
 
$
30,000
                                               
Adrian Cox
         
26,666
   
0
   
26,666
 
$
40,000
                                               
Robert Hughes
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Direct Currency Exchange PLC
         
66,666
   
0
   
66,666
 
$
100,000
                                               
John Howland Jackson, Esq.
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Legent Clearing, LLC
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Resolute Investment Holdings
         
133,333
   
0
   
133,333
 
$
200,000
                                               
Angus I McIntosh
         
3,333
   
0
   
3,333
 
$
5,000
                                               
Picon Consultants Ltd
         
26,666
   
0
   
26,666
 
$
40,000
                                               
Thomas E Teunissen
         
6,666
   
0
   
6,666
 
$
10,000
                                               
RBC Trust Company
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Mr A S Gould
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Legent Clearing, LLC
         
10,000
   
0
   
10,000
 
$
15,000
       

                                       
Jonathan G Reed
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mr Paul Francis Owen Hollowday
         
133,333
   
0
   
133,333
 
$
200,000
                                               
Hornbuckle Mtichell Tst
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Richmond Restaurants Limited
         
26,666
   
0
   
26,666
 
$
40,000
                                               
Rensburg Sheppards Investment Manag
         
16,666
   
0
   
16,666
 
$
25,000
                                               
Pierce A Buxton
         
16,666
   
0
   
16,666
 
$
25,000
                                               
Peter Jonathan Battle
         
10,000
   
0
   
10,000
 
$
15,000
                                               
R T Rivett-Carnac
         
8,333
   
0
   
8,333
 
$
12,500
                                               
MH Clarke
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Ian Bundock, Esq.
         
866
   
0
   
866
 
$
1,300
                                               
Tyrolese Trust Co Ltd G R Bird as T Tees of the ABN
         
100,000
   
0
   
100,000
 
$
150,000
                                               
Malcolm John Lanyon /or Elizabeth
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Philip Martin Davis
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Stuart Canwell
         
100,000
   
0
   
100,000
 
$
150,000
                                               
Legent Clearing, LLC
         
65,800
   
0
   
65,800
 
$
98,700
                                               
Legent Clearing, LLC
         
40,000
   
0
   
40,000
 
$
60,000
                                               
T G Graveney
         
16,666
   
0
   
16,666
 
$
25,000
                                               
Legent Clearing, LLC
         
15,333
   
0
   
15,333
 
$
23,000
       

 

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

 
Paul Gelinas
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Thomas P Gelinas
         
7,000
   
0
   
7,000
 
$
10,500
                                               
Monsieur Paul Turner
         
66,666
   
0
   
66,666
 
$
100,000
                                               
CSTDN for Julia Curtiss Porter Inc.
         
60,000
   
0
   
60,000
 
$
90,000
                                               
PFP Group Limited
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Legent Clearing, LLC
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Legent Clearing, LLC
         
30,000
   
0
   
30,000
 
$
45,000
                                               
Griffin, Sean Timothy (Mr.)
         
20,000
   
0
   
20,000
 
$
30,000
                                               
Miss K. R. Rankin
         
11,333
   
0
   
11,333
 
$
17,000
                                               
Barclays Bank PLC
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Miss H Pearson
         
10,000
   
0
   
10,000
 
$
15,000
                                               
De Heer T. Haddad
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mr. M. Wilson
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Martin Evans
         
50,000
   
0
   
50,000
 
$
75,000
                                               
Calum Cameron
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Mr. Simon Piper
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Van Moer Santerre ET BLD DU Souverain
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Legent Clearing, LLC
         
12,541
   
0
   
12,541
 
$
18,812
                                               
M. Johannesson Johannes Ingi
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Marie Adelhag
         
4,666
   
0
   
4,666
 
$
7,000
                                               
M. Et MME Whalley
         
4,666
   
0
   
4,666
 
$
7,000
                                               
Mr. T.E.E. George
         
792
   
0
   
792
 
$
1,188
                                               
Purbeck Pension
         
133,333
   
0
   
133,333
 
$
200,000
                                               
Direct Currency Exchange PLC
         
33,333
   
0
   
33,333
 
$
50,000
                                               
P J Holland
         
30,000
   
0
   
30,000
 
$
45,000
                                               
Monsieur Jean Pierre Van Den Broeck
         
23,333
   
0
   
23,333
 
$
35,000
                                               
Thomas E Teunissen
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Pelttari Hannu
         
9,333
   
0
   
9,333
 
$
14,000
                                               
Callow D J
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mr. David Alan Streatfield
         
73,333
   
0
   
73,333
 
$
110,000
                                               
De Heer A. Advaney
         
66,666
   
0
   
66,666
 
$
100,000
                                               
John Garvey
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Mr. James W. E. Lewis
         
25,000
   
0
   
25,000
 
$
37,500
                                               
IR Jessett
         
13,333
   
0
   
13,333
 
$
20,000
       

 

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

 
De Heer M.D. Maclure
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mrs. J.C. Maclure
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Cater Allen Bank Romford
         
200,000
   
0
   
200,000
 
$
300,000
                                               
NJ & CJ Bratton
         
13,000
   
0
   
13,000
 
$
19,500
                                               
HR M P Hayes
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Alliance Trust Pensions LTD
         
133,333
   
0
   
133,333
 
$
200,000
                                               
The DirectorsMDL Manx Limited
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Gundersen M.
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Legent Clearing, LLC
         
33,333
   
0
   
33,333
 
$
50,000
                                               
PPE LTD
         
25,000
   
0
   
25,000
 
$
37,500
                                               
PPE LTD
         
25,000
   
0
   
25,000
 
$
37,500
                                               
Phillip Patrick Macdonald
         
32,000
   
0
   
32,000
 
$
48,000
                                               
Farrant
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Legent Clearing, LLC
         
26,666
   
0
   
26,666
 
$
40,000
                                               
Ronald A. Alder
         
25,000
   
0
   
25,000
 
$
37,500
                                               
Mark Douglas Blundell Charles Schwab
         
16,000
   
0
   
16,000
 
$
24,000
                                               
Capelin Financial Management
         
6,666
   
0
   
6,666
 
$
10,000
                                               
James Lawsonbrown
         
5,000
   
0
   
5,000
 
$
7,500
                                               
Robert Hughes
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Mr. Paul Francis Owen Hollowday
         
133,333
   
0
   
133,333
 
$
200,000
                                               
Alliance Trust Pensions LTD
         
72,086
   
0
   
72,086
 
$
108,130
                                               
Ms. Myra Tabor
         
61,246
   
0
   
61,246
 
$
91,870
                                               
Mulhall A M
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Maypole Contracts LTD
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mr. Rudolf Mueller
         
100,000
   
0
   
100,000
 
$
150,000
                                               
Jennifer Wisden
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Resolute Investment Holdings
         
133,333
   
0
   
133,333
 
$
200,000
                                               
Legent Clearing, LLC
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Pierce A Buxton
         
16,666
   
0
   
16,666
 
$
25,000
                                               
S. R. Nelson
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Carol M. Gregory
         
39,333
   
0
   
39,333
 
$
59,000
                                               
Collins Stewart
         
41,666
   
0
   
41,666
 
$
62,500
                                               
Staunton Sports, LTD
         
75,000
   
0
   
75,000
 
$
112,500
                                               
Roy A. Stephenson, Esq.
         
66,666
   
0
   
66,666
 
$
100,000
       

 

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

 
Kevin Mc Leod
         
50,000
   
0
   
50,000
 
$
75,000
                                               
Matthew Joseph Miller
         
30,000
   
0
   
30,000
 
$
45,000
                                               
Andrew C T Gomarsall, Esq.
         
26,666
   
0
   
26,666
 
$
40,000
                                               
Ian M. Fletcher
         
20,000
   
0
   
20,000
 
$
30,000
                                               
Ian Bundock, Esq.
         
16,666
   
0
   
16,666
 
$
25,000
                                               
HSBC Private Bank (Suisse) S.A.
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Private Pension
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Griffin, Sean Timothy (Mr.)
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Jason Carter
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Monsieur Paul Turner
         
66,666
   
0
   
66,666
 
$
100,000
                                               
David Clews
         
40,000
   
0
   
40,000
 
$
60,000
                                               
Cat All LTD Re Cater Allen Priv Bk
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Mr. Michael Carlin
         
53,333
   
0
   
53,333
 
$
80,000
                                               
Mark McVeigh
         
33,333
   
0
   
33,333
 
$
50,000
                                               
P J Holland
         
30,000
   
0
   
30,000
 
$
45,000
                                               
Robin Syrett, Esq.
         
16,666
   
0
   
16,666
 
$
25,000
                                               
Monsieur Jean Pierre Van Den Broeck
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Hornbuckle Mitchell
         
6,666
   
0
   
6,666
 
$
10,000
                                               
De Heer M.D. Maclure
         
3,333
   
0
   
3,333
 
$
5,000
                                               
Wueger Andreas/Chiaran
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Herr Andreas Wueger
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Terry Farrow
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Richard Rivett-Carnac
         
3,333
   
0
   
3,333
 
$
5,000
                                               
R W Pettitt
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Legent Clearing, LLC
         
27,466
   
0
   
27,466
 
$
41,200
                                               
Mr Steven Minkey
         
16,666
   
0
   
16,666
 
$
25,000
                                               
De Heer T. M. Bosch
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Mr. L F Butler
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Adrian Cox
         
20,000
   
0
   
20,000
 
$
30,000
                                               
Dr. Elizabeth J. Todd
         
16,000
   
0
   
16,000
 
$
24,000
                                               
PFP Group Limited
         
33,333
   
0
   
33,333
 
$
50,000
                                               
Legent Clearing, LLC
         
16,000
   
0
   
16,000
 
$
24,000
                                               
Christopher Sheasby
         
10,000
   
0
   
10,000
 
$
15,000
                                               
Parasol FX Client A/C
         
6,666
   
0
   
6,666
 
$
10,000
       

 

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

 
Osiris Tsts Re D Barker Life 1
         
66,666
   
0
   
66,666
 
$
100,000
                                               
Hornbuckle Mitchell
         
13,333
   
0
   
13,333
 
$
20,000
                                               
Mr Derek Capelin
         
6,666
   
0
   
6,666
 
$
10,000
                                               
Torben Maersk
         
349,993
         
349,993
 
$
524,990
                                               
PFP Group Limited
         
66,653
         
66,653
 
$
99,980
                                               
Legent Clearing, LLC
         
29,969
         
29,969
 
$
44,954
                                               
Hans F. Voegeli
         
14,660
         
14,660
 
$
21,990
                                               
Martin Evans
         
33,333
         
33,333
 
$
50,000
       

 

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

 

EXHIBITS

Exhibit A
Form of Notes
Exhibit B
Form of Warrant
Exhibit C
Form of Registration Rights Agreement
Exhibit D
Form of Transfer Agent Instructions
Exhibit E
Form of Opinion of Company’s Counsel
Exhibit F
Form of Secretary's Certificate
Exhibit G
Form of Officers Certificate
Exhibit H
Form of Lock-Up Agreement
Exhibit I
Form of Voting Agreement
Exhibit J
Form of Waiver Letter

 
SCHEDULES

Schedule 3(a)
Subsidiaries
Schedule 3(d)
No Conflicts
Schedule 3(j)
Application of Takeover Protections
Schedule 3(k)
SEC Documents
Schedule 3(l)(i) &(ii)
Absence of Certain Changes
Schedule 3(n)
Regulatory Permits
Schedule 3(q)
Transactions with Affiliates
Schedule 3(r)
Equity Capitalization
Schedule 3(s)
Indebtedness and Other Contracts
Schedule 3(t)
Absence of Litigation
Schedule 3(u)
Insurance
Schedule 3(w)
Title
Schedule 3(y)
Environmental Laws
Schedule 3(aa)
Tax Status
Schedule 3(cc)
Ranking of Notes
Schedule 3(jj)
Material Acquisition Agreements
Schedule 4(r)
Anadarko Delivery Agreement
Schedule 7(xiv)
List of Unitholders

 

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

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

RANCHER ENERGY CORP.

CONVERTIBLE NOTE
 
Issuance Date: December [__], 2006
Original Principal Amount: U.S. $_____________

FOR VALUE RECEIVED, Rancher Energy Corp., a Nevada corporation (the "Company"),
hereby promises to pay to [BUYERS] or registered assigns ("Holder") the amount
set out above as the Original Principal Amount (as reduced pursuant to the terms
hereof pursuant to conversion or otherwise, the "Principal") when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest
("Interest"), if any, on any outstanding Principal at the Interest Rate as may
be required by Section 2 hereof. This Convertible Note (including all
Convertible Notes issued in exchange, transfer or replacement hereof, this
"Note") is one of an issue of Convertible Notes issued pursuant to the
Securities Purchase Agreement (as defined below) on the Closing Date
(collectively, the "Notes" and such other Convertible Notes, the "Other Notes").
Certain capitalized terms used herein are defined in Section 26.
 
(1)  PAYMENTS OF PRINCIPAL. On the Maturity Date, the Company shall pay to the
Holder an amount in cash representing all outstanding Principal, accrued and
unpaid Interest, if any, and accrued and unpaid Late Charges, if any, on such
Principal and Interest. The "Maturity Date" shall be [INSERT DATE THAT IS 120
DAYS FROM ISSUANCE DATE], as may be extended at the option of the Holder (i) in
the event that, and for so long as, a Trigger Event (as defined in Section 4(a))
shall have occurred and be continuing on the Maturity Date (as may be extended
pursuant to this Section 1) or any event that shall have occurred and be
continuing that with the passage of time and the failure to cure would result in
a Trigger Event, (ii) through the date that is ten (10) Business Days after the
consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(b)) is
delivered prior to the Maturity Date and (iii) for an additional ninety (90) day
period in the event that as of the Maturity Date the Stockholder Approval has
not been obtained. Other than as specifically permitted by the Note, the Company
may not prepay any portion of the outstanding Principal, accrued and unpaid
Interest or accrued and unpaid Late Charges, if any, on Principal and Interest.
 

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

 
(2)  INTEREST; INTEREST RATE. Prior to the occurrence of a Trigger Event, no
Interest shall accrue on the outstanding Principal of this Note. From and after
the occurrence and during the continuance of a Trigger Event, Interest shall
accrue on such outstanding Principal at an interest rate equal to twelve percent
(12.0%) per annum commencing on the date of the occurrence of such Trigger
Event. In the event that such Trigger Event is subsequently cured, and no other
Trigger Events have occurred and are continuing, Interest shall cease to accrue
hereunder as of the date of such cure; provided that the Interest as calculated
and unpaid at such interest rate during the continuance of such Trigger Event
shall continue to apply to the extent relating to the days after the occurrence
of such Trigger Event through and including the date of cure of such Trigger
Event. Any Interest that shall accrue hereunder shall be payable upon any
conversion or redemption of this Note in accordance with the terms set forth
herein and on the Maturity Date.
 
(3)  CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company's common stock, par value $0.00001 per share (the "Common Stock"), on
the terms and conditions set forth in this Section 3.
 
(a)  Conversion Right. At any time or times on or after the Stockholder Approval
Date, the Holder shall be entitled to convert any portion of the outstanding and
unpaid Conversion Amount (as defined below) into fully paid and nonassessable
shares of Common Stock in accordance with Section 3(c), at the Conversion Rate
(as defined below). The Company shall not issue any fraction of a share of
Common Stock upon any conversion. If the issuance would result in the issuance
of a fraction of a share of Common Stock, the Company shall round such fraction
of a share of Common Stock up to the nearest whole share. The Company shall pay
any and all taxes that may be payable with respect to the issuance and delivery
of Common Stock upon conversion of any Conversion Amount; provided that the
Company shall not be required to pay any tax that may be payable in respect of
any issuance of Common Stock to any Person other than the converting Holder or
with respect to any income tax due by the Holder with respect to such Common
Stock.
 
(b)  Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"Conversion Rate").
 
(i)  "Conversion Amount" means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest with respect to such Principal, if
any, and (C) accrued and unpaid Late Charges with respect to such Principal and
Interest, if any.
 
2

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

 
(ii)  "Conversion Price" means, as of any Conversion Date (as defined below) or
other date of determination, $1.50, subject to adjustment as provided herein.
 
(c)  Mechanics of Conversion.
 
(i)  Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a "Conversion Date"), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the "Conversion Notice") to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the second (2nd) Trading Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the
Company's transfer agent (the "Transfer Agent"). On or before the third (3rd)
Trading Day following the date of receipt of a Conversion Notice (the "Share
Delivery Date"), the Company shall (X) provided that the Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer Program, credit such aggregate number of shares of Common Stock to
which the Holder shall be entitled to the Holder's or its designee's balance
account with DTC through its Deposit Withdrawal Agent Commission system or (Y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the address as specified in the
Conversion Notice, a certificate, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder shall be
entitled. If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 16(d)) representing the
outstanding Principal not converted. The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.
 
(ii)  If within five (5) Trading Days after the Company's receipt of the
facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder's balance account with
DTC for the number of shares of Common Stock to which the Holder is entitled
upon such holder's conversion of any Conversion Amount (a "Conversion Failure"),
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a "Buy-In"), then the Company shall,
within three (3) Trading Days after the Holder's request and in the Holder's
discretion, either (i) pay cash to the Holder in an amount equal to the Holder's
total purchase price (including brokerage commissions and other out-of-pocket
expenses, if any) for the shares of Common Stock so purchased (the "Buy-In
Price"), at which point the Company's obligation to deliver such certificate
(and to issue such Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such Common Stock and pay cash to the Holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of shares of
Common Stock, times (B) the Closing Bid Price on the Conversion Date.
 
3

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

 
(iii)  Registration; Book-Entry. The Company shall maintain a register (the
"Register") for the recordation of the names and addresses of the holders of
each Note and the principal amount of the Notes held by such holders (the
"Registered Notes"). The entries in the Register shall be conclusive and binding
for all purposes absent manifest error. The Company and the holders of the Notes
shall treat each Person whose name is recorded in the Register as the owner of a
Note for all purposes, including, without limitation, the right to receive
payments of principal and interest hereunder, notwithstanding notice to the
contrary. A Registered Note may be assigned or sold in whole or in part only by
registration of such assignment or sale on the Register. Upon its receipt of a
request to assign or sell all or part of any Registered Note by a Holder, the
Company shall record the information contained therein in the Register and issue
one or more new Registered Notes in the same aggregate principal amount as the
principal amount of the surrendered Registered Note to the designated assignee
or transferee pursuant to Section 16. Notwithstanding anything to the contrary
set forth herein, upon conversion of any portion of this Note in accordance with
the terms hereof, the Holder shall not be required to physically surrender this
Note to the Company unless (A) the full Conversion Amount represented by this
Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting
reissuance of this Note upon physical surrender of this Note. The Holder and the
Company shall maintain records showing the Principal, Interest and Late Charges,
if any, converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Company, so as not to
require physical surrender of this Note upon conversion.
 
(iv)  Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company shall convert from each holder of
Notes electing to have Notes converted on such date a pro rata amount of such
holder's portion of its Notes submitted for conversion based on the principal
amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such
date. In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the Company
shall issue to the Holder the number of shares of Common Stock not in dispute
and resolve such dispute in accordance with Section 21.
 
(v)  Automatic Conversion. On the Stockholder Approval Date all of the
Conversion Amount then remaining under this Note shall be converted into fully
paid, validly issued and nonassessable shares of Common Stock in accordance with
Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date
(as defined below) with respect to the Conversion Amount (the "Automatic
Conversion"). The Company shall deliver, within not more than one (1) Trading
Day following the Stockholder Approval Date, a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of
Notes and the Transfer Agent (the "Automatic Conversion Notice" and the date all
of the holders received such notice is referred to as the "Automatic Conversion
Notice Date"). The Mandatory Conversion Notice shall state (1) the aggregate
Conversion Amount of the Notes that shall be subject to the Automatic Conversion
pursuant hereto (and analogous provisions under the Other Notes) and (2) the
number of shares of Common Stock to be issued to the Holder on the applicable
Conversion Date. The mechanics of conversion set forth in Section 3(c) shall
apply to the Automatic Conversion as if the Company and the Transfer Agent had
received from the Holder on the Stockholder Approval Date a Conversion Notice
with respect to the Conversion Amount remaining under this Note.
 
4

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

 
(4)  RIGHTS UPON TRIGGER EVENT.
 
(a)  Trigger Event. Each of the following events shall constitute a "Trigger
Event":
 
(i)  the failure of the applicable Registration Statement required to be filed
pursuant to the Registration Rights Agreement to be declared effective by the
SEC on or prior to the date that is sixty (60) days after the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement), or,
while the applicable Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to any holder of the Notes for sale of all of such holder's Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive days or for more than an
aggregate of thirty (30) days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));
 
(ii)  the suspension from trading or failure of the Common Stock to be listed on
the Principal Market or an Eligible Market for a period of five (5) consecutive
Trading Days or for more than an aggregate of ten (10) Trading Days in any
365-day period;
 
(iii)  the Company's (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock within ten (10) Trading Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including by way of public announcement or through any of its agents, at
any time, of its intention not to comply with a request for conversion of any
Notes into shares of Common Stock that is tendered in accordance with the
provisions of the Notes;
 
(iv)  at any time following the tenth (10th) consecutive Business Day that the
Holder's Authorized Share Allocation is less than the number of shares of Common
Stock that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Note (without regard to any limitations on
conversion);
 
5

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

 
(v)  the Company's failure to pay to the Holder any amount of Principal
(including, without limitation, any redemption payments), Interest, Late Charges
or other amounts when and as due under this Note or any other Transaction
Document (as defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated hereby and thereby to which the Holder is a
party, except, in the case of a failure to pay any Interest and Late Charges
when and as due, in which case only if such failure continues for a period of at
least five (5) Business Days;
 
(vi)  A) any payment default or other default occurs under any Indebtedness of
the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) (other than Permitted Senior Indebtedness) that
results in a redemption of or acceleration prior to maturity of $1,000,000 or
more of such Indebtedness in the aggregate, (B) any material default occurs
under any Indebtedness of the Company (other than Permitted Senior Indebtedness)
or any of its Subsidiaries having an aggregate outstanding balance in excess of
$1,000,000 and such default continues uncured for more than ten (10) Business
Days, other than, in each case (A) or (B) above, a default with respect to any
Other Notes, or (C) any "event of default" occurs under the Permitted Senior
Indebtedness;
 
(vii)  the Company or any of its Subsidiaries, pursuant to or within the meaning
of Title 11, U.S. Code, or any similar Federal, foreign or state law for the
relief of debtors (collectively, "Bankruptcy Law"), (A) commences a voluntary
case, (B) consents to the entry of an order for relief against it in an
involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a "Custodian"), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;
 
(viii)  a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Company or any of its
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries or (C) orders the liquidation of the Company or any of
its Subsidiaries;
 
(ix)  a final judgment or judgments for the payment of money aggregating in
excess of $1,000,000 are rendered against the Company or any of its Subsidiaries
and which judgments are not, within sixty (60) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $1,000,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment;
 
(x)  the Company breaches any representation, warranty, covenant or other term
or condition of any Transaction Document, except, in the case of a breach of a
covenant which is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days;
 
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(xi)  any breach or failure in any respect to comply with Section 12 of this
Note; or
 
(xii)  any Trigger Event (as defined in the Other Notes) occurs with respect to
any Other Notes.
 
(b)  Redemption Right. Upon the occurrence of a Trigger Event with respect to
this Note or any Other Note, the Company shall within (1) Business Day deliver
written notice thereof via facsimile or e-mail and overnight courier (a "Trigger
Event Notice") to the Holder. At any time after the earlier of the Holder's
receipt of a Trigger Event Notice and the Holder becoming aware of a Trigger
Event, the Holder may require the Company to redeem all or any portion of this
Note by delivering written notice thereof (the "Trigger Event Redemption
Notice") to the Company, which Trigger Event Redemption Notice shall indicate
the portion of this Note the Holder is electing to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the Conversion Amount to be redeemed
(the "Trigger Event Redemption Price"). Redemptions required by this Section
4(b) shall be made in accordance with the provisions of Section 10. To the
extent redemptions required by this Section 4(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. The parties hereto
agree that in the event of the Company's redemption of any portion of the Note
under this Section 4(b), the Holder's damages would be uncertain and difficult
to estimate because of the parties' inability to predict future interest rates
and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any Redemption Premium due under this
Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder's actual loss of its investment opportunity and not as a
penalty.
 
(5)  RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
 
(a)  Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i)  the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a) pursuant to written
agreements in form and substance satisfactory to the Required Holders and
approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts then outstanding and the interest rates of the Notes held by such
holder, having similar conversion rights as the Notes and having similar ranking
to the Notes, and satisfactory to the Required Holders and (ii) the Successor
Entity (including its Parent Entity) is a publicly traded corporation whose
common stock is quoted on or listed for trading on an Eligible Market. Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Company's Common Stock (or
other securities, cash, assets or other property) issuable upon the conversion
or redemption of the Notes prior to such Fundamental Transaction, such shares of
the publicly traded common stock (or their equivalent) of the Successor Entity
(including its Parent Entity), as adjusted in accordance with the provisions of
this Note. The provisions of this Section shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without regard to any
limitations on the conversion or redemption of this Note.
 
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(b)  Redemption Right. No sooner than fifteen (15) days nor later than ten (10)
days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a "Change of
Control Notice"). At any time during the period beginning on the date of the
Holder's receipt of a Change of Control Notice and ending twenty (20) Trading
Days after the consummation of such Change of Control, the Holder may require
the Company to redeem all or any portion of this Note by delivering written
notice thereof ("Change of Control Redemption Notice") to the Company, which
Change of Control Redemption Notice shall indicate the Conversion Amount the
Holder is electing to redeem. The portion of this Note subject to redemption
pursuant to this Section 5 shall be redeemed by the Company in cash at a price
equal to the greater of (i) the product of (x) the Conversion Amount being
redeemed and (y) the quotient determined by dividing (A) the greater of the
Closing Sale Price of the Common Stock immediately prior to the consummation of
the Change of Control, the Closing Sale Price immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price of
the Common Stock immediately prior to the public announcement of such proposed
Change of Control by (B) the Conversion Price and (ii) 125% of the Conversion
Amount being redeemed (the "Change of Control Redemption Price"). Redemptions
required by this Section 5 shall be made in accordance with the provisions of
Section 10 and shall have priority to payments to stockholders in connection
with a Change of Control. To the extent redemptions required by this Section
5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price is paid in full, the Conversion
Amount submitted for redemption under this Section 5(c) may be converted, in
whole or in part, by the Holder into Common Stock pursuant to Section 3. The
parties hereto agree that in the event of the Company's redemption of any
portion of the Note under this Section 5(b), the Holder's damages would be
uncertain and difficult to estimate because of the parties' inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption
premium due under this Section 5(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder's actual loss of its investment
opportunity and not as a penalty.
 
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(6)  RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
 
(a)  Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
 
(b)  Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "Corporate Event"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder
would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of
Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Required Holders. The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.
 
(7)  ADJUSTMENT OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON
STOCK. If the Company at any time on or after the Subscription Date subdivides
(by any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the
Subscription Date combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination will be proportionately increased.
 
(8)  NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
 
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(9)  RESERVATION OF AUTHORIZED SHARES.
 
(a)  Reservation. Following the Stockholder Approval Date, so long as any of the
Notes are outstanding, the Company shall take all action necessary to reserve
and keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Notes, 130% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding; provided that at no time shall
the number of shares of Common Stock so reserved be less than the number of
shares required to be reserved by the previous sentence (without regard to any
limitations on conversions) (the "Required Reserve Amount"). The number of
shares of Common Stock reserved for conversions of the Notes and each increase
in the number of shares so reserved shall be allocated pro rata among the
holders of the Notes based on the principal amount of the Notes held by each
holder at the Closing (as defined in the Securities Purchase Agreement) or
increase in the number of reserved shares, as the case may be (the "Authorized
Share Allocation"). In the event that a holder shall sell or otherwise transfer
any of such holder's Notes, each transferee shall be allocated a pro rata
portion of such holder's Authorized Share Allocation. Any shares of Common Stock
reserved and allocated to any Person which ceases to hold any Notes shall be
allocated to the remaining holders of Notes, pro rata based on the principal
amount of the Notes then held by such holders.
 
(b)  Insufficient Authorized Shares. If at any time following the Stockholder
Approval Date while any of the Notes remain outstanding the Company does not
have a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an "Authorized Share Failure"), then the Company shall immediately take all
action necessary to increase the Company's authorized shares of Common Stock to
an amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement and shall use its best efforts
to solicit its stockholders' approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.
 
(10)  HOLDER'S REDEMPTIONS.
 
(a)  Mechanics. The Company shall deliver the applicable Trigger Event
Redemption Price to the Holder within five (5) Business Days after the Company's
receipt of the Holder's Trigger Event Redemption Notice. If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(b),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five (5) Business Days after the Company's receipt of such notice
otherwise. In the event of a redemption of less than all of the Conversion
Amount of this Note, the Company shall promptly cause to be issued and delivered
to the Holder a new Note (in accordance with Section 16(d)) representing the
outstanding Principal which has not been redeemed. In the event that the Company
does not pay the applicable Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Note representing the Conversion Amount that was submitted for
redemption and for which the applicable Redemption Price (together with any Late
Charges thereon) has not been paid. Upon the Company's receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such Conversion
Amount, (y) the Company shall immediately return this Note, or issue a new Note
(in accordance with Section 16(d)) to the Holder representing such Conversion
Amount and (z) the Conversion Price of this Note or such new Notes shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the Redemption Notice is voided and (B) the lowest Closing Bid Price of
the Common Stock during the period beginning on and including the date on which
the Redemption Notice is delivered to the Company and ending on and including
the date on which the Redemption Notice is voided. The Holder's delivery of a
notice voiding a Redemption Notice and exercise of its rights following such
notice shall not affect the Company's obligations to make any payments of Late
Charges which have accrued prior to the date of such notice with respect to the
Conversion Amount subject to such notice.
 
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(b)  Redemption by Other Holders. Upon the Company's receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b) or Section 5(b) (each, an "Other Redemption Notice"), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice. If the
Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day period beginning on and including the date
which is three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.
 
(11)  VOTING RIGHTS. The Holder shall have no voting rights as the holder of
this Note, except as required by law, including, but not limited to, Chapter 78
of the Nevada Revised Statutes, and as expressly provided in this Note.
 
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(12)  COVENANTS.
 
(a)  Rank. All payments due under this Note (A) shall rank pari passu with all
Other Notes and (B) shall be senior to all other Indebtedness of the Company and
its Subsidiaries, other than Permitted Senior Indebtedness.
 
(b)  Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the
Other Notes and (ii) other Permitted Indebtedness.
 
(c)  Existence of Liens. So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "Liens") other than Permitted Liens.
 
(d)  Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness (other than this Note and the Other Notes), whether by
way of payment in respect of principal of (or premium, if any) or interest on
such Indebtedness, if at the time such payment is due or is otherwise made or,
after giving effect to such payment, an event constituting, or that with the
passage of time and without being cured would constitute, a Trigger Event has
occurred and is continuing.
 
(e)  Restriction on Redemption and Cash Dividends. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.
 
(13)  PARTICIPATION. The Holder, as the holder of this Note, shall be entitled
to receive such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.
 
(14)  VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes. No consideration shall be offered or paid to any holder of
Notes to amend or consent to a waiver or modification of the Notes unless the
same consideration also is offered to all of the holders of Notes.
 
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(15)  TRANSFER. This Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement.
 
(16)  REISSUANCE OF THIS NOTE.
 
(a)  Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Note (in accordance with Section 16(d)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 16(d)) to
the Holder representing the outstanding Principal not being transferred. The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii) following conversion or
redemption of any portion of this Note, the outstanding Principal represented by
this Note may be less than the Principal stated on the face of this Note.
 
(b)  Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 16(d)) representing the outstanding Principal.
 
(c)  Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 16(d) and in principal
amounts of at least $100,000) representing in the aggregate the outstanding
Principal of this Note, and each such new Note will represent such portion of
such outstanding Principal as is designated by the Holder at the time of such
surrender.
 
(d)  Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 16(a) or Section 16(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, if any,
from the Issuance Date.
 
(17)  REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
 
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(18)  PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
financial advisory fees and attorneys' fees and disbursements.
 
(19)  CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.
 
(20)  FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
 
(21)  DISPUTE RESOLUTION. In the case of a dispute as to the determination of
the Closing Bid Price, the Closing Sale Price or the Weighted Average Price or
the arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt, or deemed receipt, of the
Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within one (1) Business
Day of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within one (1) Business Day submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or any Redemption Price to the
Company's independent, outside accountant. The Company, at the Company's
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
 
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(22)  NOTICES; PAYMENTS.
 
(a)  Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section
9(f) of the Securities Purchase Agreement. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Conversion
Price, setting forth in reasonable detail, and certifying, the calculation of
such adjustment and (ii) at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (A) with respect to any dividend
or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
 
(b)  Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents which is not
paid when due shall result in a late charge being incurred and payable by the
Company in an amount equal to interest on such amount at the rate of twelve
percent (12%) per annum from the date such amount was due until the same is paid
in full ("Late Charge").
 
(23)  CANCELLATION. After all Principal, accrued Interest and other amounts at
any time owed on this Note have been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.
 
(24)  WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in connection
with the delivery, acceptance, performance, default or enforcement of this Note
and the Securities Purchase Agreement.
 
15

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(25)  GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL. This Note shall be
construed and enforced in accordance with, and all questions concerning the
construction, validity, interpretation and performance of this Note shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. The Company hereby
irrevocably submits to the 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. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company's obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.
 
(26)  CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:
 
(a)  "Approved Stock Plan" means any employee benefit plan which has been or
hereafter is approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer or
director for services provided to the Company.
 
(b)  "Bloomberg" means Bloomberg Financial Markets.
 
(c)  "Business Day" means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York or The City of Denver are
authorized or required by law to remain closed.
 
(d)  "Change of Control" means any Fundamental Transaction other than (A) any
reorganization, recapitalization or reclassification of Common Stock, in which
holders of the Company's voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities, or (B)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company.
 
16

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(e)  "Closing Bid Price" and "Closing Sale Price" means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 21. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.
 
(f)  "Closing Date" shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Notes pursuant to
the terms of the Securities Purchase Agreement.
 
(g)  "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.
 
(h)  "Convertible Securities" means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.
 
(i)  "Eligible Market" means The New York Stock Exchange, Inc., the American
Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The
NASDAQ Capital Market.
 
17

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(j)  "Effective Date" has the meaning ascribed to such term in the Registration
Rights Agreement.
 
(k)  "Excluded Securities" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Notes or
the exercise of the Warrants; (iii) upon conversion of any Options or
Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date; (iv) in connection with mergers, acquisitions, strategic business
partnerships or joint ventures, in each case with non-affiliated third parties
and otherwise on an arm's-length basis, the primary purpose of which is not to
raise additional capital and (v) upon the issuance of Options or the exercise of
any Options issued to financial institutions in connection with commercial
credit agreements or issuance of non-convertible debt by the Company.
 
(l)  "Fundamental Transaction" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another Person
or Persons, or (ii) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (iv)
consummate a stock purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Voting Stock (not including any shares of
Voting Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), (v) reorganize, recapitalize
or reclassify its Common Stock or (vi) any "person" or "group" (as these terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock.
 
(m)  "GAAP" means United States generally accepted accounting principles,
consistently applied.
 
(n)  "Indebtedness" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) 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), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the Trigger Event are limited to
repossession or sale of such property), (vi) 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, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (i) through (vii) above.
 
18

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

 
(o)  "Options" means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.
 
(p)  "Parent Entity" of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.
 
(q)  "Permitted Indebtedness" means (i) the Indebtedness evidenced by this Note
and the Other Notes and (ii) Permitted Senior Indebtedness and (iii) bonds
required to be posted by the company to obtain regulatory permits, licenses or
insurance as part of conducting its business.
 
(r)  "Permitted Senior Indebtedness" the principal of (and premium, if any),
interest on, and all fees and other amounts (including, without limitation, any
reasonable out-of-pocket costs, enforcement expenses (including reasonable
out-of-pocket legal fees and disbursements), collateral protection expenses and
other reimbursement or indemnity obligations relating thereto) payable by
Company and/or its Subsidiaries under or in connection with (1) [INSERT
DESCRIPTION OF DEBT FINANCING] and (2) [INSERT DESCRIPTION OF PRODUCTION BASED
DEBT FINANCING]; provided, however, that the aggregate amount of Indebtedness
outstanding at any time under clause (2) of the foregoing does not exceed
$7,500,000.
 
(s)  "Permitted Liens" means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen's liens, mechanics' liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens (A) upon or in any equipment acquired or
held by the Company or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such equipment, or (B) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment, (v) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (i) and (iv) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the Indebtedness being extended, renewed or refinanced does
not increase, (vi) leases or subleases and licenses and sublicenses granted to
others in the ordinary course of the Company's business, not interfering in any
material respect with the business of the Company and its Subsidiaries taken as
a whole, (vii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of custom duties in connection with the
importation of goods, (viii) Liens arising from judgments, decrees or
attachments in circumstances not constituting a Trigger Event under Section
4(a)(vii), and (ix) Liens securing Permitted Senior Indebtedness.
 
19

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

 
(t)  "Person" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.
 
(u)  "Principal Market" means the NASD OTC Bulletin Board.
 
(v)  "Redemption Notices" means, collectively, the Trigger Event Redemption
Notices and the Change of Control Redemption Notices, each of the foregoing,
individually, a Redemption Notice.
 
(w)  "Redemption Premium" means (i) in the case of the Trigger Events described
in Section 4(a)(i) - (vi) and (ix) - (xii), 125% or (ii) in the case of the
Trigger Events described in Section 4(a)(vii) - (viii), 100%.
 
(x)  "Redemption Prices" means, collectively, the Trigger Event Redemption Price
and the Change of Control Redemption Price, each of the foregoing, individually,
a Redemption Price.
 
(y)  "Registration Rights Agreement" means that certain registration rights
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes and
exercise of the Warrants.
 
(z)  "Required Holders" means the holders of Notes representing at least
two-thirds (2/3rd) of the aggregate principal amount of the Notes then
outstanding.
 
(aa)  "SEC" means the United States Securities and Exchange Commission. 
 
(bb)  "Securities Purchase Agreement" means that certain securities purchase
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.
 
(cc)  "Stockholder Approval" has the meaning ascribed to such term in the
Securities Purchase Agreement.
 
20

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

 
(dd)  "Stockholder Approval Date" has the meaning ascribed to such term in the
Securities Purchase Agreement.
 
(ee)  "Subscription Date" means December [__], 2006.
 
(ff)  "Subsidiary" means any entity in which the Company, directly or
indirectly, owns any of the capital stock or holds an equity or similar
interest.
 
(gg)  "Successor Entity" means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person's Parent Entity.
 
(hh)  "Trading Day" means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
"Trading Day" shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).
 
(ii)  "Voting Stock" of a Person means capital stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time capital stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
 
(jj)  "Warrants" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
 
(kk)  "Weighted Average Price" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading) as reported by
Bloomberg through its "Volume at Price" functions, or, if the foregoing does not
apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the "pink sheets" by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 21. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period.
 
21

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

 
(27)  DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within four (4) Business Days after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.
 
[Signature Page Follows]
 
22

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

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

       
RANCHER ENERGY CORP.
 
   
   
    By:      

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

Name:
Title:

 

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

 

EXHIBIT I
 
RANCHER ENERGY CORP.
 
CONVERSION NOTICE
 
Reference is made to the Convertible Note (the "Note") issued to the undersigned
by Rancher Energy Corp. (the "Company"). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined
in the Note) of the Note indicated below into shares of Common Stock par value
$0.00001 per share (the "Common Stock") of the Company, as of the date specified
below.

Date of Conversion:
___________________________________________________________________________________
Aggregate Conversion Amount to be converted: 
_____________________________________________________________
Please confirm the following information:
Conversion Price:
_____________________________________________________________________________________
Number of shares of Common Stock to be issued:
_____________________________________________________________
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
Issue to: 
____________________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
Facsimile Number:
_____________________________________________________________________________________
Authorization:
________________________________________________________________________________________
By:
__________________________________________________________________________________________
Title:
___________________________________________________________________________________
Dated:
_____________________________________________________________________________________________________
Account Number:
______________________________________________________________________________________
  (if electronic book entry transfer)
Transaction Code Number:
_______________________________________________________________________________
  (if electronic book entry transfer)

 

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

 
 
ACKNOWLEDGMENT
 
The Company hereby acknowledges this Conversion Notice and hereby directs
Pacific Stock Transfer Company to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated November
__, 2006 from the Company and acknowledged and agreed to by Pacific Stock
Transfer Company.

       
RANCHER ENERGY CORP.
 
   
   
    By:      

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

Name:
Title:

 

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[FORM OF WARRANT]

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

RANCHER ENERGY CORP.
 
WARRANT TO PURCHASE COMMON STOCK

Warrant No.:    
Number of Shares of Common Stock:_____________
Date of Issuance: December __, 2006 ("Issuance Date")

Rancher Energy Corp., a Nevada corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, [BUYERS], the registered holder hereof or its permitted
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company, at the Exercise Price (as defined below) then in
effect, upon surrender of this Warrant to Purchase Common Stock (including any
Warrants to Purchase Common Stock issued in exchange, transfer or replacement
hereof, the "Warrant"), at any time or times on or after the date hereof, but
not after 11:59 p.m., New York time, on the Expiration Date (as defined below),
______________ (_____________)1  fully paid nonassessable shares of Common Stock
(as defined below) (the "Warrant Shares"). Except as otherwise defined herein,
capitalized terms in this Warrant shall have the meanings set forth in Section
15. This Warrant is one of the Warrants to purchase Common Stock (the "SPA
Warrants") issued pursuant to Section 1 of that certain Securities Purchase
Agreement, dated as of December __, 2006 (the "Subscription Date"), by and among
the Company and the investors (the "Buyers") referred to therein (the
"Securities Purchase Agreement").
 

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

1 Insert an amount equal to the sum of (x) the number of Common Shares and (y)
the Conversion Shares underlying the Notes being issued to the Holder pursuant
to the Securities Purchase Agreement.
 

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

 
1.  EXERCISE OF WARRANT.
 
(a)  Mechanics of Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this
Warrant may be exercised by the Holder on any day on or after the date hereof,
in whole or in part, by (i) delivery of a written notice, in the form attached
hereto as Exhibit A (the "Exercise Notice"), of the Holder's election to
exercise this Warrant and (ii) (A) payment to the Company of an amount equal to
the applicable Exercise Price multiplied by the number of Warrant Shares as to
which this Warrant is being exercised (the "Aggregate Exercise Price") in cash
or by wire transfer of immediately available funds or (B) by notifying the
Company that this Warrant is being exercised pursuant to a Cashless Exercise (as
defined in Section 1(d)). The Holder shall not be required to deliver the
original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant
Shares shall have the same effect as cancellation of the original Warrant and
issuance of a new Warrant evidencing the right to purchase the remaining number
of Warrant Shares. On or before the first (1st) Business Day following the date
on which the Company has received each of the Exercise Notice and the Aggregate
Exercise Price (or notice of a Cashless Exercise) (the "Exercise Delivery
Documents"), the Company shall transmit by facsimile an acknowledgment of
confirmation of receipt of the Exercise Delivery Documents to the Holder and the
Company's transfer agent (the "Transfer Agent"). On or before the third (3rd)
Business Day following the date on which the Company has received all of the
Exercise Delivery Documents (the "Share Delivery Date"), the Company shall (X)
provided that the Transfer Agent is participating in The Depository Trust
Company ("DTC") Fast Automated Securities Transfer Program, upon the request of
the Holder, credit such aggregate number of shares of Common Stock to which the
Holder is entitled pursuant to such exercise to the Holder's or its designee's
balance account with DTC through its Deposit Withdrawal Agent Commission system,
or (Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and dispatch by overnight courier to the
address as specified in the Exercise Notice, a certificate, registered in the
Company's share register in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder is entitled pursuant to
such exercise. Upon delivery of the Exercise Notice and Aggregate Exercise Price
referred to in clause (ii)(A) above or notification to the Company of a Cashless
Exercise referred to in Section 1(d), the Holder shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the date
of delivery of the certificates evidencing such Warrant Shares. If this Warrant
is submitted in connection with any exercise pursuant to this Section 1(a) and
the number of Warrant Shares represented by this Warrant submitted for exercise
is greater than the number of Warrant Shares being acquired upon an exercise,
then the Company shall as soon as practicable and in no event later than three
Business Days after any exercise and at its own expense, issue a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this
Warrant, less the number of Warrant Shares with respect to which this Warrant is
exercised. No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock to be
issued shall be rounded up to the nearest whole number. The Company shall pay
any and all taxes which may be payable with respect to the issuance and delivery
of Warrant Shares upon exercise of this Warrant. NOTWITHSTANDING ANY PROVISION
OF THIS WARRANT TO THE CONTRARY, UNTIL THE STOCKHOLDER APPROVAL DATE (AS DEFINED
IN THE SECURITIES PURCHASE AGREEMENT), THIS WARRANT NOT BE EXERCISABLE.
 
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(b)  Exercise Price. For purposes of this Warrant, "Exercise Price" means $1.50,
subject to adjustment as provided herein.
 
(c)  Company's Failure to Timely Deliver Securities. If within five (5) Trading
Days after the Company's receipt of the facsimile copy of a Exercise Notice the
Company shall fail to issue and deliver a certificate to the Holder and register
such shares of Common Stock on the Company's share register or credit the
Holder's balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon the Holder's exercise hereunder, and if on or
after such Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of shares of Common Stock issuable upon such exercise that the Holder
anticipated receiving from the Company (a "Buy-In"), then the Company shall,
within three (3) Business Days after the Holder's request and in the Holder's
discretion, either (i) pay cash to the Holder in an amount equal to the Holder's
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the "Buy-In Price"), at which point the Company's
obligation to deliver such certificate (and to issue such shares of Common
Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such shares of Common Stock
and pay cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Weighted Average Price on the date of exercise.
 
(d)  Cashless Exercise.  Notwithstanding anything contained herein to the
contrary, if at any time after the twelve (12) month anniversary of the Issuance
Date, a Registration Statement (as defined in the Registration Rights Agreement)
covering the Warrant Shares that are the subject of an Exercise Notice (the
"Unavailable Warrant Shares") is not available for the resale of such
Unavailable Warrant Shares, the Holder may, in its sole discretion, exercise
this Warrant in whole or in part and, in lieu of making the cash payment
otherwise contemplated to be made to the Company upon such exercise in payment
of the Aggregate Exercise Price, elect instead to receive upon such exercise the
"Net Number" of shares of Common Stock determined according to the following
formula (a "Cashless Exercise"):
 
Net Number = (A x B) - (A x C)
B
 
For purposes of the foregoing formula:
 
A = the total number of shares with respect to which this Warrant is then being
exercised.
 
B = the arithmetic average of the Weighted Average Prices of the shares of
Common Stock (as reported by Bloomberg) for the five (5) consecutive Trading
Days ending on the date immediately preceding the date of the Exercise Notice.
 

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

(e)  Disputes. In the case of a dispute as to the determination of the Exercise
Price or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the Holder the number of Warrant Shares that are not disputed
and resolve such dispute in accordance with Section 12.
 
(f)  Limitations on Exercises.
 
(1)  Beneficial Ownership. The Company shall not effect the exercise of this
Warrant, and the Holder shall not have the right to exercise this Warrant, to
the extent that after giving effect to such exercise, such Person (together with
such Person's affiliates) would beneficially own in excess of 9.99% (the
"Maximum Percentage") of the shares of Common Stock outstanding immediately
after giving effect to such exercise. For purposes of the foregoing sentence,
the aggregate number of shares of Common Stock beneficially owned by such Person
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude shares of Common Stock which would be
issuable upon (i) exercise of the remaining, unexercised portion of this Warrant
beneficially owned by such Person and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company beneficially owned by such Person and its affiliates (including,
without limitation, any convertible notes or convertible preferred stock or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Warrant, in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (1) the Company's most recent Form 10-K, Form
10-KSB, Form 10-Q, Form 10-QSB, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2) a
more recent public announcement by the Company or (3) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written or oral request of the
Holder, the Company shall within one Business Day confirm orally and in writing
to the Holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company,
including the SPA Notes and the SPA Warrants, by the Holder and its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. By written notice to the Company, the Holder may from time to time
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only
to the Holder and not to any other holder of SPA Warrants.
 
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(2)  Principal Market Regulation. The Company shall not be obligated to issue
any shares of Common Stock upon exercise of this Warrant or conversion of SPA
Notes and no Buyer shall be entitled to receive any shares of Common Stock if
the issuance of such shares of Common Stock would exceed that number of shares
of Common Stock which the Company may issue upon exercise or conversion, as
applicable, of the SPA Warrants and SPA Notes or otherwise without breaching the
Company's obligations under the rules or regulations of any applicable Eligible
Market (the "Exchange Cap"), except that such limitation shall not apply in the
event that the Company (A) obtains the approval of its stockholders as required
by the applicable rules of the Eligible Market for issuances of shares of Common
Stock in excess of such amount or (B) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the Required Holders. Until such approval or
written opinion is obtained, no Buyer shall be issued in the aggregate, upon
exercise or conversion, as applicable, of any SPA Warrants or SPA Notes, shares
of Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the total number of shares
of Common Stock underlying the SPA Warrants issued to such Buyer pursuant to the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate number of shares of Common Stock underlying the SPA Warrants
issued to the Buyers pursuant to the Securities Purchase Agreement on the
Issuance Date (with respect to each Buyer, the "Exchange Cap Allocation"). In
the event that any Buyer shall sell or otherwise transfer any of such Buyer's
SPA Warrants, the transferee shall be allocated a pro rata portion of such
Buyer's Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee. In the event that any holder of SPA
Warrants shall exercise all of such holder's SPA Warrants into a number of
shares of Common Stock which, in the aggregate, is less than such holder's
Exchange Cap Allocation, then the difference between such holder's Exchange Cap
Allocation and the number of shares of Common Stock actually issued to such
holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of SPA Warrants on a pro rata basis in proportion to the
shares of Common Stock underlying the SPA Warrants then held by each such
holder. In the event that the Company is prohibited from issuing any Warrant
Shares for which an Exercise Notice has been received as a result of the
operation of this Section 1(f)(2), the Company shall pay cash in exchange for
cancellation of such Warrant Shares, at a price per Warrant Share equal to the
difference between the Weighted Average Price and the Exercise Price as of the
date of the attempted exercise.

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(g)  Insufficient Authorized Shares. If at any time from and after the
Stockholder Approval Date and while any of the Warrants remain outstanding the
Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon exercise of
the Warrants no less than 130% of the number of shares of Common Stock as shall
from time to time be necessary to effect the exercise of all of the Warrants
then outstanding (the "Required Reserve Amount") (an "Authorized Share
Failure"), then the Company shall immediately take all action necessary to
increase the Company's authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Warrants
then outstanding. Without limiting the generality of the foregoing sentence, as
soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than sixty (60) days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders' approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal.
 
(h)  Accelerated Maturity. Notwithstanding the foregoing, in the event that the
Conditions to Accelerated Maturity (as defined below) are satisfied, then the
Company shall have the right to send a written notice (the "Accelerated Maturity
Notice") to the Holder on the Business Day immediately after the Measuring
Period (as defined below) (the "Accelerated Maturity Notice Date") indicating
that the Expiration Date shall be accelerated to not earlier than the thirtieth
(30th) day (the "Warrant Cancellation Date") following receipt of such written
notice; provided, that nothing in this subsection shall prevent the Holder from
exercising this Warrant, in whole or part, prior to such accelerated Expiration
Date. "Conditions to Accelerated Maturity" means the following conditions: (i)
the Common Stock shall have traded at or above $3.50 per share on each day
during the twenty (20) consecutive Trading Days immediately prior to the
Accelerated Maturity Notice Date; (ii) on each day during the period beginning
forty-five (45) days prior to the applicable date of determination and ending on
and including the applicable date of determination (the "Measuring Period"), (x)
the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Warrant Shares
in accordance with the terms of the Registration Rights Agreement and there
shall not have been any Grace Periods (as defined in the Registration Rights
Agreement) or (y) all shares of Common Stock issuable upon exercise of the
Warrants shall be eligible for sale without restriction and without the need for
registration under any applicable federal or state securities laws; (iii) the
Company shall have no knowledge of any fact that would cause (x) the
Registration Statement required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of all remaining Warrant Shares
in accordance with the terms of the Registration Rights Agreement or (y) any
shares of Common Stock issuable upon exercise of the Warrants not to be eligible
for sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; (iv) during the twenty (20) consecutive Trading Days
immediately prior to the Accelerated Maturity Notice Date an average of 500,000
shares of Common Stock shall have traded per day; provided, that all trades
executed by the Holder or any Affiliate thereof shall be disregarded for
purposes of determining compliance with clause (iv) of the Conditions to
Accelerated Maturity; (v) on each day during the Measuring Period, the Common
Stock is designated for quotation on its principal market and shall not have
been suspended from trading on such market; (vi) any applicable shares of Common
Stock that may be issuable upon exercise of this Warrant after the Accelerated
Maturity Notice (without regard to any limitation on exercise of the Warrants),
may be issued in full without violating Section 1(f) hereof and the rules or
regulations of the Principal Market or any applicable Eligible Market; (vii) the
Company otherwise shall have been in material compliance with and shall not have
materially breached any provision, covenant, representation or warranty of any
Transaction Document (as defined in the Securities Purchase Agreement) and
(viii) the Stockholder Approval has been obtained.
 
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2.  ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise
Price and the number of Warrant Shares shall be adjusted from time to time as
follows:
 
(a)  Adjustment upon Issuance of shares of Common Stock. If and whenever on or
after the Subscription Date and through the first anniversary of the later to
occur of (i) the Additional Effective Date and (ii) the Initial Effective Date
(each as defined in the Registration Rights Agreement) (the "Full Rachet
Period"), the Company issues or sells, or in accordance with this Section 2 is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
by the Company in connection with any Excluded Securities (as defined in the SPA
Notes) for a consideration per share (the "New Issuance Price") less than a
price (the "Applicable Price") equal to the Exercise Price in effect immediately
prior to such issue or sale or deemed issuance or sale (the foregoing a
"Dilutive Issuance"), then immediately after such Dilutive Issuance, the
Exercise Price then in effect shall be reduced to an amount equal to the New
Issuance Price. In the event of any Dilutive Issuance after the end of the Full
Ratchet Period, then immediately after such Dilutive Issuance, the Exercise
Price then in effect shall be reduced to an amount equal to the product of (A)
the Exercise Price in effect immediately prior to such Dilutive Issuance and (B)
the quotient determined by dividing (1) the sum of (I) the product derived by
multiplying the Exercise Price in effect immediately prior to such Dilutive
Issuance and the number of shares of Common Stock Deemed Outstanding immediately
prior to such Dilutive Issuance plus (II) the consideration, if any, received by
the Company upon such Dilutive Issuance, by (2) the product derived by
multiplying (I) the Exercise Price in effect immediately prior to such Dilutive
Issuance by (II) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance. Upon each such adjustment of the
Exercise Price hereunder, the number of Warrant Shares shall be adjusted to the
number of shares of Common Stock determined by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment. For purposes of determining the adjusted Exercise Price under this
Section 2(a), the following shall be applicable:

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

(ii)   Issuance of Convertible Securities. If the Company in any manner issues
or sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 2(a)(ii), the "lowest price per
share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to one
share of Common Stock upon the issuance or sale of the Convertible Security and
upon conversion, exercise or exchange of such Convertible Security. No further
adjustment of the Exercise Price or number of Warrant Shares shall be made upon
the actual issuance of such shares of Common Stock upon conversion, exercise or
exchange of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment
of this Warrant has been or is to be made pursuant to other provisions of this
Section 2(a), no further adjustment of the Exercise Price or number of Warrant
Shares shall be made by reason of such issue or sale.
 
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(iii)   Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or exercisable
or exchangeable for shares of Common Stock increases or decreases at any time,
the Exercise Price and the number of Warrant Shares in effect at the time of
such increase or decrease shall be adjusted to the Exercise Price and the number
of Warrant Shares which would have been in effect at such time had such Options
or Convertible Securities provided for such increased or decreased purchase
price, additional consideration or increased or decreased conversion rate, as
the case may be, at the time initially granted, issued or sold. For purposes of
this Section 2(a)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the shares of Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such increase or decrease. No adjustment pursuant
to this Section 2(a) shall be made if such adjustment would result in an
increase of the Exercise Price then in effect or a decrease in the number of
Warrant Shares.
 
(iv)   Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction, the Options will be deemed to have been
issued for the difference of (x) the aggregate fair market value of such Options
and other securities issued or sold in such integrated transaction, less (y) the
fair market value of the securities other than such Option, issued or sold in
such transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any shares of Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Weighted Average Price of such security on the date of receipt. If
any shares of Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which the
Company is the surviving entity, the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders. If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the
"Valuation Event"), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be final and binding
upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company.
 
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(v)   Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in shares of Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
 
(b)  Adjustment upon Subdivision or Combination of Common Stock. If the Company
at any time on or after the Subscription Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If
the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
 
(c)  Other Events. If any event occurs of the type contemplated by the
provisions of this Section 2 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(c) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant
to this Section 2.

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3.  RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a "Distribution"), at any time after the issuance of this
Warrant, then, in each such case:
 
(a)  any Exercise Price in effect immediately prior to the close of business on
the record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Weighted
Average Price of the shares of Common Stock on the Trading Day immediately
preceding such record date minus the value of the Distribution (as determined in
good faith by the Company's Board of Directors) applicable to one share of
shares of Common Stock, and (ii) the denominator shall be the Weighted Average
Price of the shares of Common Stock on the Trading Day immediately preceding
such record date; and

(b)  the number of Warrant Shares shall be increased to a number of shares equal
to the number of shares of Common Stock obtainable immediately prior to the
close of business on the record date fixed for the determination of holders of
shares of Common Stock entitled to receive the Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding paragraph (a);
provided that in the event that the Distribution is of shares of Common Stock
(or common stock) ("Other Shares of Common Stock") of a company whose common
shares are traded on a national securities exchange or a national automated
quotation system, then the Holder may elect to receive a warrant to purchase
Other Shares of Common Stock in lieu of an increase in the number of Warrant
Shares, the terms of which shall be identical to those of this Warrant, except
that such warrant shall be exercisable into the number of shares of Other Shares
of Common Stock that would have been payable to the Holder pursuant to the
Distribution had the Holder exercised this Warrant immediately prior to such
record date and with an aggregate exercise price equal to the product of the
amount by which the exercise price of this Warrant was decreased with respect to
the Distribution pursuant to the terms of the immediately preceding paragraph
(a) and the number of Warrant Shares calculated in accordance with the first
part of this paragraph (b).
 
4.  PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.
 
(a)  Purchase Rights. In addition to any adjustments pursuant to Section 2
above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of shares of Common
Stock (the "Purchase Rights"), then the Holder will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which the Holder could have acquired if the Holder had held the number of shares
of Common Stock acquirable upon complete exercise of this Warrant (without
regard to any limitations on the exercise of this Warrant) immediately before
the date on which a record is taken for the grant, issuance or sale of such
Purchase Rights, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the grant, issue or
sale of such Purchase Rights.

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(b)  Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless (i)  the Successor Entity assumes in writing all
of the obligations of the Company under this Warrant and the other Transaction
Documents in accordance with the provisions of this Section (4)(b) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Warrants in exchange for such
Warrants a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant, including, without
limitation, an adjusted exercise price equal to the value for the shares of
Common Stock reflected by the terms of such Fundamental Transaction, and
exercisable for a corresponding number of shares of capital stock equivalent to
the shares of Common Stock acquirable and receivable upon exercise of this
Warrant (without regard to any limitations on the exercise of this Warrant)
prior to such Fundamental Transaction, and satisfactory to the Required Holders.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant referring to the
"Company" shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under this Warrant with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon exercise of this Warrant at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the Common
Stock (or other securities, cash, assets or other property) issuable upon the
exercise of the Warrant prior to such Fundamental Transaction, such shares of
stock, securities, cash, assets or any other property whatsoever (including
warrants or other purchase or subscription rights) which the Holder would have
been entitled to receive upon the happening of such Fundamental Transaction had
this Warrant been converted immediately prior to such Fundamental Transaction,
as adjusted in accordance with the provisions of this Warrant. In addition to
and not in substitution for any other rights hereunder, prior to the
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a "Corporate Event"), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon an exercise of this Warrant at any time after the
consummation of the Fundamental Transaction but prior to the Expiration Date, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) issuable upon the exercise of this Warrant prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Warrant been exercised immediately
prior to such Fundamental Transaction. Provision made pursuant to the preceding
sentence shall be in a form and substance reasonably satisfactory to the
Required Holders. The provisions of this Section shall apply similarly and
equally to successive Fundamental Transactions and Corporate Events and shall be
applied without regard to any limitations on the exercise of this Warrant.
 

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(c)  Notwithstanding the foregoing, in the event of a Fundamental Transaction
other than one in which a Successor Entity that is a publicly traded corporation
whose stock is quoted or listed for trading on an Eligible Market assumes this
Warrant such that the Warrant shall be exercisable for the publicly traded
Common Stock of such Successor Entity, at the request of the Holder delivered
before the 90th day after such Fundamental Transaction, the Company (or the
Successor Entity) shall purchase this Warrant from the Holder by paying to the
Holder, within five Business Days after such request (or, if later, on the
effective date of the Fundamental Transaction), cash in an amount equal to the
Black Scholes Value of the remaining unexercised portion of this Warrant on the
date of such Fundamental Transaction.
 
5.  NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, and will at all times in good faith carry out all the
provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the
Company (i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as any of the SPA Warrants are outstanding, subsequent to
the Stockholder Approval Date take all action necessary to reserve and keep
available out of its authorized and unissued shares of Common Stock, solely for
the purpose of effecting the exercise of the SPA Warrants, 130% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
exercise of the SPA Warrants then outstanding (without regard to any limitations
on exercise).
 
6.  WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically
provided herein, the Holder, solely in such Person's capacity as a holder of
this Warrant, shall not be entitled to vote or receive dividends or be deemed
the holder of share capital of the Company for any purpose, nor shall anything
contained in this Warrant be construed to confer upon the Holder, solely in such
Person's capacity as the Holder of this Warrant, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the Holder of the Warrant Shares which such Person is then entitled
to receive upon the due exercise of this Warrant. In addition, nothing contained
in this Warrant shall be construed as imposing any liabilities on the Holder to
purchase any securities (upon exercise of this Warrant or otherwise) or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company
shall provide the Holder with copies of the same notices and other information
given to the stockholders of the Company generally, contemporaneously with the
giving thereof to the stockholders.
 

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7.  REISSUANCE OF WARRANTS.
 
(a)  Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Warrant (in accordance with
Section 7(d)), registered as the Holder may request, representing the right to
purchase the number of Warrant Shares being transferred by the Holder and, if
less then the total number of Warrant Shares then underlying this Warrant is
being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder
representing the right to purchase the number of Warrant Shares not being
transferred.
 
(b)  Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this Warrant,
the Company shall execute and deliver to the Holder a new Warrant (in accordance
with Section 7(d)) representing the right to purchase the Warrant Shares then
underlying this Warrant.
 
(c)  Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Warrant or Warrants (in accordance with Section 7(d)) representing in the
aggregate the right to purchase the number of Warrant Shares then underlying
this Warrant, and each such new Warrant will represent the right to purchase
such portion of such Warrant Shares as is designated by the Holder at the time
of such surrender; provided, however, that no Warrants for fractional shares of
Common Stock shall be given.
 
(d)  Issuance of New Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added
to the number of shares of Common Stock underlying the other new Warrants issued
in connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an issuance date, as indicated
on the face of such new Warrant which is the same as the Issuance Date, and (iv)
shall have the same rights and conditions as this Warrant.
 
8.  NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with Section
9(f) of the Securities Purchase Agreement. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Warrant,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Exercise Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least fifteen days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the shares of Common Stock, (B) with respect to
any grants, issuances or sales of any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property to holders of shares
of Common Stock or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.

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9.  AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of
this Warrant may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Required Holders;
provided that no such action may increase the exercise price of any SPA Warrant
or decrease the number of shares or class of stock obtainable upon exercise of
any SPA Warrant without the written consent of the Holder. No such amendment
shall be effective to the extent that it applies to less than all of the holders
of the SPA Warrants then outstanding.
 
10.  GOVERNING LAW. This Warrant shall be governed by and construed and enforced
in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Warrant shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.
 
11.  CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted
by the Company and all the Buyers and shall not be construed against any person
as the drafter hereof. The headings of this Warrant are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Warrant.
 
12.  DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company
shall submit the disputed determinations or arithmetic calculations via
facsimile within two Business Days of receipt of the Exercise Notice giving rise
to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within two Business Days submit via facsimile (a) the disputed
determination of the Exercise Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company's independent,
outside accountant. The Company shall cause at its expense the investment bank
or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
ten Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
 
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13.  REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and the other Transaction Documents, at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder right
to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
 
14.  TRANSFER.This Warrant may be offered for sale, sold, transferred or
assigned without the consent of the Company, except as may otherwise be required
by Section 2(f) of the Securities Purchase Agreement.
 
15.  CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms
shall have the following meanings:
 
(a)  "Black Scholes Value" means the value of this Warrant based on the Black
and Scholes Option Pricing Model obtained from the "OV" function on Bloomberg
determined as of the day immediately following the public announcement of the
applicable Fundamental Transaction and reflecting (i) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term
of this Warrant as of such date of request and (ii) an expected volatility equal
to the greater of 60% and the 100 day volatility obtained from the HVT function
on Bloomberg.
 
(b)  "Bloomberg" means Bloomberg Financial Markets.
 
(c)  "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.
 
(d)  "Common Stock" means (i) the Company's shares of Common Stock, par value
$0.00001 per share, and (ii) any share capital into which such Common Stock
shall have been changed or any share capital resulting from a reclassification
of such Common Stock.
 
(e)  "Common Stock Deemed Outstanding" means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 2(a)(i) and
2(a)(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any shares of Common Stock
owned or held by or for the account of the Company or issuable upon exercise of
the SPA Warrants.
 

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(f)  "Convertible Securities" means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
shares of Common Stock.
 
(g)  "Eligible Market" means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange, The NASDAQ Global Market, The NASDAQ Global
Select Market or The NASDAQ Capital Market.
 
(h)  "Expiration Date" means the date sixty (60) months after the date the
Stockholder Approval (as defined in the Securities Purchase Agreement) is
obtained or, if such date falls on a day other than a Business Day or on which
trading does not take place on the Principal Market (a "Holiday"), the next date
that is not a Holiday.
 
(i)  "Fundamental Transaction" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of the outstanding shares of
Common Stock (not including any shares of Common Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), (v) reorganize, recapitalize
or reclassify its Common Stock, or (vi) any "person" or "group" (as these terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock.
 
(j)  "Options" means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.
 
(k)  "Parent Entity" of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.
 
(l)  "Person" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.
 
(m)  "Principal Market" means the NASD OTC Bulletin Board.

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(n)  "Registration Rights Agreement" means that certain registration rights
agreement by and among the Company and the Buyers.
 
(o)  "Required Holders" means the holders of the SPA Warrants representing at
least a majority of shares of Common Stock underlying the SPA Warrants then
outstanding.
 
(p)  "SPA Notes" means the Notes (as defined in the Securities Purchase
Agreement).
 
(q)  "Successor Entity" means the Person (or, if so elected by the Required
Holders, the Parent Entity) formed by, resulting from or surviving any
Fundamental Transaction or the Person (or, if so elected by the Required
Holders, the Parent Entity) with which such Fundamental Transaction shall have
been entered into.
 
(r)  "Trading Day" means any day on which the Common Stock are traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
"Trading Day" shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).
 
(s)  "Weighted Average Price" means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00
p.m., New York City time, as reported by Bloomberg through its "Volume at Price"
function or, if the foregoing does not apply, the dollar volume-weighted average
price of such security in the over-the-counter market on the electronic bulletin
board for such security during the period beginning at 9:30:01 a.m., New York
City time, and ending at 4:00:00 p.m., New York City time, as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the "pink sheets" by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the Required Holders. If the
Company and the Required Holders are unable to agree upon the fair market value
of the such security, then such dispute shall be resolved pursuant to Section 12
with the term "Weighted Average Price" being substituted for the term "Exercise
Price." All such determinations shall be appropriately adjusted for any share
dividend, share split or other similar transaction during such period.
 
[Signature Page Follows]

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

       
RANCHER ENERGY CORP.
 
   
   
  By:    

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Name: 
Title: 

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EXHIBIT A

EXERCISE NOTICE
 
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK

RANCHER ENERGY CORP.
 
The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock ("Warrant Shares") of Rancher Energy Corp., a
Nevada corporation (the "Company"), evidenced by the attached Warrant to
Purchase Common Stock (the "Warrant"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

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

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

____________ a "Cashless Exercise" with respect to _______________ Warrant
Shares.

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

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

Date: _______________ __, ______

______________________________
Name of Registered Holder

        By:    

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Name:
Title:
   

   

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ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice and hereby directs
[Transfer Agent] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated December __, 2006 from
the Company and acknowledged and agreed to by [Transfer Agent].
 

       
RANCHER ENERGY CORP.
 
   
   
  By:    

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Name: 
Title: 

 

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REGISTRATION RIGHTS AGREEMENT
 
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of December __, 2006,
by and among Rancher Energy Corp., a Nevada corporation, with headquarters
located at 999-18th Street, Suite 1740, Denver, Colorado 80202 (the "Company"),
and the undersigned buyers (each, a "Buyer", and collectively, the "Buyers").

WHEREAS:
 
A. In connection with the Securities Purchase Agreement by and among the parties
hereto of even date herewith (the "Securities Purchase Agreement"), the Company
has agreed, upon the terms and subject to the conditions set forth in the
Securities Purchase Agreement, to issue and sell to each Buyer (i) convertible
notes of the Company (the "Notes") which will, among other things, be
convertible into shares of the Company's common stock, par value $.00001 value
per share (the "Common Stock") (as converted, the "Conversion Shares") in
accordance with the terms of the Notes, (ii) shares (the "Common Shares") of
Common Stock and (iii) warrants (the "Warrants") which will be exercisable to
purchase shares of Common Stock (as exercised collectively, the "Warrant
Shares").
 
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.

NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:
 
1.  Definitions.
 
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement. As used in
this Agreement, the following terms shall have the following meanings:
 
a.  "Additional Effectiveness Date" means the date the Additional Registration
Statement is declared effective by the SEC.
 
b.  "Additional Effectiveness Deadline" means the earlier to occur of (i) the
date which is five (5) days after the Company learns that no review of the
Additional Registration Statement will be made by the staff of the SEC or that
the staff has no further comments on the Additional Registration Statement, and
(ii) the date which is one hundred and twenty (120) days after the Additional
Filing Date (as defined below), or if there is a full review of the Additional
Registration Statement by the SEC, one hundred and fifty (150) days after the
Additional Filing Date.
 
c.  "Additional Filing Date" means the date on which the Additional Registration
Statement (as defined below) is filed with the SEC.
 
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d.  "Additional Filing Deadline" means (i) if the Stockholder Approval (as
defined in the Securities Purchase Agreement) is not obtained by the Initial
Filing Deadline and no Cutback Shares are required to be included in the
Additional Registration Statement, the date five (5) days after the Stockholder
Approval is obtained or (ii) if Cutback Shares are required to be included in
the Additional Registration Statement, the date six (6) months from the Initial
Filing Date.
 
e.  "Additional Registrable Securities" means, (i) if the Stockholder Approval
is not obtained by the Initial Filing Deadline, (x) the Conversion Shares
issuable upon conversion or redemption of the Notes and (y) any Warrant Shares
issued or issuable upon exercise of the Warrants not previously included on a
Registration Statement, (ii) any Cutback Shares not previously included on a
Registration Statement and (iii) any share capital of the Company issued or
issuable with respect to the Notes, the Conversion Shares, the Warrants, the
Warrant Shares or Cutback Shares, as applicable, as a result of any stock split,
stock dividend, recapitalization, exchange or similar event or otherwise,
without regard to any limitations on conversions of Notes or exercises of the
Warrants.
 
f.  "Additional Registration Statement" means a registration statement or
registration statements of the Company filed under the 1933 Act covering any
Additional Registrable Securities.
 
g.  "Additional Required Registration Amount" means the sum of 130% of (i) if
the Stockholder Approval is not obtained by the Initial Filing Deadline, (x) the
number of Conversion Shares issuable pursuant to the Notes as of the trading day
immediately preceding the applicable date of determination, and (y) the number
of Warrant Shares issued and issuable pursuant to the Warrants as of the trading
day immediately preceding the applicable date of determination not previously
included on a Registration Statement and (ii) any Cutback Shares not previously
included on a Registration Statement, all subject to adjustment as provided in
Section 2(e), without regard to any limitations on conversions of the Notes or
exercises of the Warrants.
 
h.  "Business Day" means any day other than Saturday, Sunday or any other day on
which commercial banks in the City of New York or the City of Denver are
authorized or required by law to remain closed.
 
i.  "Closing Date" shall mean the initial Closing Date, as set forth in the
Securities Purchase Agreement.
 
j.  "Effective Date" means the Initial Effective Date and the Additional
Effective Date, as applicable.
 
k.  "Effectiveness Deadline" means the Initial Effectiveness Deadline (as
defined below) and the Additional Effectiveness Deadline (as defined below), as
applicable.
 
l.  "Equity Conditions" means each of the following conditions on each
applicable date of determination: (i) the Common Stock is designated for
quotation on the Principal Market or any applicable Eligible Market (each as
defined in the Securities Purchase Agreement) and shall not have been suspended
from trading on such exchange or market (other than suspensions of not more than
two (2) days and occurring prior to the applicable date of determination due to
business announcements by the Company) nor shall delisting or suspension by such
exchange or market been threatened or pending either (A) in writing by such
exchange or market or (B) by falling below the then effective minimum listing
maintenance requirements of such exchange or market; (ii) the Company shall have
delivered Conversion Shares upon conversion of the Notes and Warrant Shares upon
exercise of the Warrants to the holders on a timely basis as set forth in
Section 2(c)(ii) of the Notes and Sections 2(a) of the Warrants; (iii) any
applicable shares of Common Stock to be issued in connection with the event
requiring determination may be issued in full without violating the rules or
regulations of the exchange or market upon which the Company's Common Stock is
then listed or quoted; (iv) the Company shall not have failed to timely make any
payments within five (5) Business Days of when such payment is due pursuant to
any Transaction Document (as defined in the Securities Purchase Agreement; (v)
there shall not have occurred either (A) the public announcement of a pending,
proposed or intended Fundamental Transaction (as defined in the Notes) which has
not been abandoned, terminated or consummated, or (B) an Event of Default (as
defined in the Notes) or (C) an event that with the passage of time or giving of
notice would constitute an Event of Default; and (vi) the Company otherwise
shall have been in material compliance with and shall not have materially
breached any provision, covenant, representation or warranty of any Transaction
Document.
 
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m.  "Equity Conditions Failure" means that on any day during the period
commencing ten (10) Trading Days prior to the applicable Registration Delay
Payments Payment Date through the applicable Registration Delay Payments Payment
Date, the Equity Conditions have not been satisfied (or waived in writing by the
applicable holder of Registrable Securities).
 
n.  "Filing Deadline" means the Initial Filing Deadline (as defined below) and
the Additional Filing Deadline, as applicable.
 
o.  "Initial Effective Date" means the date the Initial Registration Statement
is declared effective by the SEC.
 
p.  "Initial Effectiveness Deadline" means the earlier to occur of (i) the date
which is five (5) days after the Company learns that no review of the Initial
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Initial Registration Statement, (ii) the date
which is one hundred and twenty (120) days after the Closing Date, or if there
is a full review of the Initial Registration Statement by the SEC, one hundred
and fifty (150) days after the Closing Date.
 
q.  "Initial Filing Date" means the date on which the Initial Registration
Statement (as defined below) is filed with the SEC.
 
r.  "Initial Filing Deadline" means the date seventy-five (75) days after the
Closing Date.
 
s.  "Initial Registrable Securities" means (A) if the Stockholder Approval is
obtained by the Initial Filing Deadline, (i) the Conversion Shares issued or
issuable upon conversion or redemption of the Notes, (ii) the Common Shares,
(iii) the Warrant Shares issued or issuable upon exercise of the Warrants and
(iv) any share capital of the Company issued or issuable with respect to the
Common Shares, the Warrant Shares or the Warrants, the Conversion Shares and the
Notes, as a result of any stock split, stock dividend, recapitalization,
exchange or similar event or otherwise, without regard to any limitations on
conversions of the Notes or exercises of the Warrants and (B) if the Stockholder
Approval is not obtained by the Initial Filing Deadline, the Common Shares.
 
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t.  "Initial Required Registration Amount" means (I) (A) if the Stockholder
Approval is obtained by the Initial Filing Deadline, 130% of the sum of (i), the
number of Conversion Shares issued or issuable pursuant to the Notes as of the
trading day immediately preceding the applicable date of determination, (ii) the
number of Common Shares issued and (iii) the number of Warrant Shares issued and
issuable pursuant to the Warrants as of the trading day immediately preceding
the applicable date of determination, all subject to adjustment as provided in
Section 2(e), without regard to any limitations on conversions of the Notes or
exercises of the Warrants, and (B) if the Stockholder Approval is not obtained
by the Initial Filing Deadline, the number of Common Shares issued or (II) such
other amount as may be required by the staff of the SEC. Any shares included
under clause (I) of the immediately preceding sentence but excluded from the
definition of Initial Required Registration Amount because of clause (II), are
referred to herein as the "Cutback Shares".
 
u.  "Initial Registration Statement" means a registration statement or
registration statements of the Company filed under the 1933 Act covering the
Initial Registrable Securities.
 
v.  "Investor" means a Buyer or any transferee or assignee thereof to whom a
Buyer assigns its rights under this Agreement and who agrees to become bound by
the provisions of this Agreement in accordance with Section 9 and any transferee
or assignee thereof to whom a transferee or assignee assigns its rights under
this Agreement and who agrees to become bound by the provisions of this
Agreement in accordance with Section 9.
 
w.  "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.
 
x.  "register," "registered," and "registration" refer to a registration
effected by preparing and filing one or more Registration Statements (as defined
below) in compliance with the 1933 Act and pursuant to Rule 415 and the
declaration or ordering of effectiveness of such Registration Statement(s) by
the SEC.
 
y.  "Registrable Securities" means the Initial Registrable Securities and the
Additional Registrable Securities.
 
z.  "Registration Delay Payments Conversion Price" means, with respect to any
Registration Delay Payments Payment Date, that price which shall be the price
computed as 90% of the arithmetic average of the Weighted Average Price (as
defined in the Notes) of the Common Stock on each of the ten (10) consecutive
Trading Days ending on the Trading Day immediately preceding the applicable
Registration Delay Payments Payment Date (each, a "Registration Delay Payments
Measuring Period"). All such determinations to be appropriately adjusted for any
stock split, stock dividend, stock combination or other similar transaction
during such Registration Delay Payments Measuring Period.
 
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aa.  "Registration Statement" means a registration statement or registration
statements of the Company filed under the 1933 Act covering the Registrable
Securities.
 
bb.  "Required Holders" means the holders of at least a majority of the
Registrable Securities.
 
cc.  "Rule 415" means Rule 415 under the 1933 Act or any successor rule
providing for offering securities on a continuous or delayed basis.
 
dd.  "SEC" means the United States Securities and Exchange Commission.
 
2.  Registration.
 
a.  Initial Mandatory Registration. The Company shall prepare, and, as soon as
practicable, but in no event later than the Initial Filing Deadline, file with
the SEC the Initial Registration Statement on Form S-3 covering the resale of
all of the Initial Registrable Securities. In the event that Form S-3 is
unavailable for such a registration, the Company shall use such other form as is
available for such a registration on another appropriate form reasonably
acceptable to the Required Holders, subject to the provisions of Section 2(e).
The Initial Registration Statement prepared pursuant hereto shall register for
resale at least the number of shares of Common Stock equal to the Initial
Required Registration Amount determined as of date the Registration Statement is
initially filed with the SEC. The Initial Registration Statement shall contain
(except if otherwise directed by the Required Holders) the "Selling
Stockholders" and "Plan of Distribution" sections in substantially the form
attached hereto as Exhibit B. The Company shall use its best efforts to have the
Initial Registration Statement declared effective by the SEC as soon as
practicable, but in no event later than the Initial Effectiveness Deadline. By
9:30 am on the date following the Initial Effective Date, the Company shall file
with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus
to be used in connection with sales pursuant to such Registration Statement.
 
b.  Additional Mandatory Registrations. The Company shall prepare, and, as soon
as practicable but in no event later than the Additional Filing Deadline, file
with the SEC an Additional Registration Statement on Form S-3 covering the
resale of all of the Additional Registrable Securities not previously registered
on an Additional Registration Statement hereunder. To the extent the staff of
the SEC does not permit the Additional Required Registration Amount to be
registered on the Additional Registration Statement, which are Cutback Shares
hereunder, the Company shall file Additional Registration Statements
successively trying to register on each such Additional Registration Statement
the maximum number of remaining Additional Registrable Securities until the
Additional Required Registration Amount has been registered with the SEC. In the
event that Form S-3 is unavailable for such a registration, the Company shall
use such other form as is available for such a registration on another
appropriate form reasonably acceptable to the Required Holders, subject to the
provisions of Section 2(e). Each Additional Registration Statement prepared
pursuant hereto shall register for resale at least that number of shares of
Common Stock equal to the Additional Required Registration Amount as of date the
Registration Statement is initially filed with the SEC. Each Additional
Registration Statement shall contain (except if otherwise directed by the
Required Holders) the "Selling Stockholders" and "Plan of Distribution" sections
in substantially the form attached hereto as Exhibit B. The Company shall use
its best efforts to have each Additional Registration Statement declared
effective by the SEC as soon as practicable, but in no event later than the
Additional Effectiveness Deadline. By 9:30 am on the date following the
Additional Effective Date, the Company shall file with the SEC in accordance
with Rule 424 under the 1933 Act the final prospectus to be used in connection
with sales pursuant to such Registration Statement.
 
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c.  Allocation of Registrable Securities. The initial number of Registrable
Securities included in any Registration Statement and any increase in the number
of Registrable Securities included therein shall be allocated pro rata among the
Investors based on the number of Registrable Securities held by each Investor at
the time the Registration Statement covering such initial number of Registrable
Securities or increase thereof is declared effective by the SEC. In the event
that an Investor sells or otherwise transfers any of such Investor's Registrable
Securities, each transferee shall be allocated a pro rata portion of the then
remaining number of Registrable Securities included in such Registration
Statement for such transferor. Any shares of Common Stock included in a
Registration Statement and which remain allocated to any Person which ceases to
hold any Registrable Securities covered by such Registration Statement shall be
allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement. In no event shall the Company include any securities
other than Registrable Securities on any Registration Statement filed with the
SEC during the 12-month period following the Closing Date without the prior
written consent of the Required Holders except for those shares of Common Stock
and warrants to purchase shares of Common Stock identified on Schedule 2(c)(i)
attached hereto (which shall exclude any securities for which the Company has
obtained waivers pursuant to Section 7(xiv) of the Securities Purchase
Agreement). In no event shall the Company include any securities other than
Registrable Securities on any Registration Statement filed with the SEC after
the 12-month period following the Closing Date without the prior written consent
of the Required Holders except for up to 3,500,000 shares of Common Stock
issuable by the Company upon exercise of warrants issued by the Company to
Knight Capital Markets, LLC, and the Company's other placement agents on the
Closing Date, no more than 5,000,000 shares of Common Stock issuable by the
Company upon exercise of warrants to be issued by the Company to the Company's
secured lenders and those shares of Common Stock and warrants to purchase shares
of Common Stock identified on Schedule 2(c)(ii) attached hereto. If the SEC
requires that the Company register less than the amount of shares of Common
Stock originally included on any Registration Statement at the time it was
filed, the Registrable Securities on such registration statement and any other
securities allowed to be registered on such Registration Statement (as set forth
below) shall be decreased on a pro rata basis.
 
d.  Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have
the right to select one legal counsel to review and oversee any registration
pursuant to this Section 2 ("Legal Counsel"), which shall be Schulte Roth &
Zabel LLP or such other counsel as thereafter designated by the Required
Holders. The Company and Legal Counsel shall reasonably cooperate with each
other in performing the Company's obligations under this Agreement.
 
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e.  Ineligibility for Form S-3. In the event that Form S-3 is not available for
the registration of the resale of Registrable Securities hereunder, the Company
shall (i) register the resale of the Registrable Securities on another
appropriate form reasonably acceptable to the Required Holders and (ii)
undertake to register the Registrable Securities on Form S-3 as soon as such
form is available, provided that the Company shall maintain the effectiveness of
the Registration Statement then in effect until such time as a Registration
Statement on Form S-3 covering the Registrable Securities has been declared
effective by the SEC.
 
f.  Sufficient Number of Shares Registered. In the event the number of shares
available under a Registration Statement filed pursuant to Section 2(a) is
insufficient to cover all of the Registrable Securities required to be covered
by such Registration Statement or an Investor's allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall amend the
applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least
the Required Registration Amount as of the trading day immediately preceding the
date of the filing of such amendment or new Registration Statement, in each
case, as soon as practicable, but in any event not later than fifteen (15) days
after the necessity therefor arises. The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed "insufficient to cover all of the Registrable Securities" if at any
time the number of shares of Common Stock available for resale under the
Registration Statement is less than the product determined by multiplying (i)
the Required Registration Amount as of such time by (ii) 0.90. The calculation
set forth in the foregoing sentence shall be made without regard to any
limitations on the conversion of the Notes or the exercise of the Warrants and
such calculation shall assume that the Notes are then convertible into shares of
Common Stock at the then prevailing Conversion Rate (as defined in the Notes)
and that the Warrants are then exercisable for shares of Common Stock at the
then prevailing Exercise Price (as defined in the Warrants).
 
g.  Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement.
 
(a)  If (i) a Registration Statement covering all of the Registrable Securities
required to be covered thereby and required to be filed by the Company pursuant
to this Agreement is (A) not filed with the SEC on or before the respective
Filing Deadline (a "Filing Failure") or (B) not declared effective by the SEC on
or before the respective Effectiveness Deadline (an "Effectiveness Failure") or
(ii) on any day after the Effective Date sales of all of the Registrable
Securities required to be included on such Registration Statement cannot be made
(other than during an Allowable Grace Period (as defined in Section 3(r))
pursuant to such Registration Statement or otherwise (including, without
limitation, because of a failure to keep such Registration Statement effective,
to disclose such information as is necessary for sales to be made pursuant to
such Registration Statement, to register a sufficient number of shares of Common
Stock or to maintain the listing of the shares of Common Stock) (a "Maintenance
Failure") then, as liquidated damages and not as a penalty to any holder by
reason of any such delay in or reduction of its ability to sell the underlying
shares of Common Stock (which remedy shall be the exclusive economic remedy
available with respect to Filing Failures, Effectiveness Failures and
Maintenance Failures), the Company shall pay to each holder of Registrable
Securities relating to such Registration Statement an amount equal to one
percent (1.0%) of the aggregate Purchase Price (as such term is defined in the
Securities Purchase Agreement) of such Investor's Registrable Securities
included in such Registration Statement on each of the following dates: (i) the
day of a Filing Failure and on every thirtieth day (pro rated for periods
totaling less than thirty days) thereafter until such Filing Failure is cured;
(ii) the day of an Effectiveness Failure and on every thirtieth day (pro rated
for periods totaling less than thirty days) thereafter until such Effectiveness
Failure is cured; (iii) the initial day of a Maintenance Failure and on every
thirtieth day (pro rated for periods totaling less than thirty days) thereafter
until such Maintenance Failure is cured. If all of the Cutback Shares, if any,
have not been registered on a Registration Statement which has been declared
effective by the SEC on or before the six (6) month anniversary of the Closing
Date (a "Cutback Failure") then, as liquidated damages and not as a penalty to
any holder by reason of any such delay in or reduction of its ability to sell
any Cutback Shares (which remedy shall be the exclusive economic remedy
available with respect to Cutback Failures), the Company shall pay to each
holder of Cutback Shares relating to such Registration Statement an amount equal
to one half of a percent (0.5%) of the aggregate Purchase Price (as such term is
defined in the Securities Purchase Agreement) of such Investor's Cutback Shares
included in such Registration Statement on the day of a Cutback Failure and on
every thirtieth day (pro rated for periods totaling less than thirty days)
thereafter until such Cutback Failure is cured. The payments to which a holder
shall be entitled pursuant to this Section 2(g) are referred to herein as
"Registration Delay Payments." Registration Delay Payments shall be paid on the
day of the Filing Failure, Effectiveness Failure, Cutback Failure or the initial
day of Maintenance Failure, as applicable, and thereafter on the earlier of (I)
on the thirtieth day after the event or failure giving rise to the Registration
Delay Payments are incurred and (II) the third Business Day after the event or
failure giving rise to the Registration Delay Payments is cured. The date such
Registration Delay Payments are due shall be referred to herein as a
"Registration Delay Payments Payment Date." In the event the Company fails to
make Registration Delay Payments in a timely manner, such Registration Delay
Payments shall bear interest at the rate of one and one-half percent (1.5%) per
month (prorated for partial months) until paid in full. Notwithstanding anything
herein or in the Securities Purchase Agreement to the contrary, in no event
shall the aggregate amount of Registration Delay Payments (other than
Registration Delay Payments payable pursuant to events that are within the
control of the Company) exceed, in the aggregate, 24% of the aggregate Purchase
Price.
 
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(b)  Registration Delay Payments shall be payable on each Registration Delay
Payments Payment Date, to each holder of Registrable Securities relating to such
Registration Statement, in shares of Common Stock ("Registration Delay Payments
Shares") so long as there is no Equity Conditions Failure; provided however,
that the Company, at its option following notice to the holder of Registrable
Securities, may pay Registration Delay Payments on any Registration Delay
Payments Payment Date in cash ("Cash Registration Delay Payments") or in a
combination of Cash Registration Delay Payments and Registration Delay Payments
Shares. The Company shall deliver a written notice (each, an "Registration Delay
Payments Election Notice") to each holder of Registrable Securities relating to
such Registration Statement on or prior to the Registration Delay Payments
Payment Date (the date such notice is delivered to all of the holders, the
"Registration Delay Payments Notice Date") which notice (i) either (A) confirms
that Registration Delay Payments to be paid on such Registration Delay Payments
Payment Date shall be paid entirely in Registration Delay Payments Shares or (B)
elects to pay Registration Delay Payments as Cash Registration Delay Payments or
a combination of Cash Registration Delay Payments and Registration Delay
Payments Shares and specifies the amount of Registration Delay Payments that
shall be paid as Cash Registration Delay Payments and the amount of Registration
Delay Payments, if any, that shall be paid in Registration Delay Payments Shares
and (ii) certifies that there is no Equity Conditions Failure. If the Equity
Conditions are not satisfied as of the Registration Delay Payments Notice Date,
then unless the Company has elected to pay such Registration Delay Payments as
Cash Registration Delay Payments, the Registration Delay Payments Election
Notice shall indicate that unless the holder waives the Equity Conditions, the
Registration Delay Payment shall be paid as Cash Registration Delay Payments. If
the Equity Conditions were satisfied as of the Registration Delay Payments
Notice Date but the Equity Conditions are no longer satisfied at any time prior
to the Registration Delay Payments Payment Date, the Company shall provide the
holder a subsequent notice to that effect indicating that unless the holder
waives the Equity Conditions, the Registration Delay Payments shall be paid as
Cash Registration Delay Payments. Registration Delay Payments to be paid on an
Registration Delay Payments Payment Date in Registration Delay Payments Shares
shall be paid in a number of fully paid and nonassessable shares (rounded to the
nearest whole share in accordance) of Common Stock equal to the quotient of (1)
the amount of Registration Delay Payments payable on such Registration Delay
Payments Payment Date less any Cash Registration Delay Payments paid and (2) the
Registration Delay Payments Conversion Price in effect on the applicable
Registration Delay Payments Payment Date. Notwithstanding the foregoing, if the
Company elects to pay any Registration Delay Payments in Registration Delay
Payment Shares and the Stockholder Approval (as defined in the Securities
Purchase Agreement) has not been obtained by the applicable Registration Delay
Payments Payment Date, the Company may not pay such Registration Delay Payments
in Registration Delay Payments Shares but instead shall issue to each holder of
Registrable Securities relating to such Registration Statement a convertible
note with an original principal amount equal to the amount of such Registration
Delay Payments in the form attached hereto as Exhibit A to the Securities
Purchase Agreement; provided however that the conversion price of such
convertible note shall be equal to the applicable Registration Delay Payments
Conversion Price.
 
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3.  Related Obligations.
 
At such time as the Company is obligated to file a Registration Statement with
the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:
 
a.  The Company shall submit to the SEC, within two (2) Business Days after the
Company learns that no review of a particular Registration Statement will be
made by the staff of the SEC or that the staff has no further comments on a
particular Registration Statement, as the case may be, a request for
acceleration of effectiveness of such Registration Statement to a time and date
not later than 48 hours after the submission of such request. The Company shall
keep each Registration Statement effective pursuant to Rule 415 at all times
until the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) (or any successor thereto) promulgated under
the 1933 Act or (ii) the date on which the Investors shall have sold all of the
Registrable Securities covered by such Registration Statement (the "Registration
Period"). The Company shall ensure that each Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein
(in the case of prospectuses, in the light of the circumstances in which they
were made) not misleading.
 
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b.  The Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which prospectus
is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be
necessary to keep such Registration Statement effective at all times during the
Registration Period, and, during such period, comply with the provisions of the
1933 Act with respect to the disposition of all Registrable Securities of the
Company covered by such Registration Statement until such time as all of such
Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement. In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement
(including pursuant to this Section 3(b)) by reason of the Company filing a
report on Form 10-QSB, Form 10-KSB or any analogous report under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the Company shall have
incorporated such report by reference into such Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on the
same day on which the 1934 Act report is filed which created the requirement for
the Company to amend or supplement such Registration Statement.
 
c.  The Company shall (A) permit Legal Counsel to review and comment upon (i) a
Registration Statement at least five (5) Business Days prior to its filing with
the SEC and (ii) all amendments and supplements to all Registration Statements
(except for Annual Reports on Form 10-KSB, and Reports on Form 10-QSB and any
similar or successor reports) within a reasonable number of days prior to their
filing with the SEC, and (B) not file any Registration Statement or amendment or
supplement thereto in a form to which Legal Counsel reasonably objects. The
Company shall not submit a request for acceleration of the effectiveness of a
Registration Statement or any amendment or supplement thereto without the prior
approval of Legal Counsel, which consent shall not be unreasonably withheld. The
Company shall furnish to Legal Counsel, without charge, (i) copies of any
correspondence from the SEC or the staff of the SEC to the Company or its
representatives relating to any Registration Statement, (ii) promptly after the
same is prepared and filed with the SEC, one copy of any Registration Statement
and any amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, if requested by an Investor, and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall reasonably cooperate with
Legal Counsel in performing the Company's obligations pursuant to this Section
3.
 
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d.  The Company shall furnish to each Investor whose Registrable Securities are
included in any Registration Statement, without charge, (i) promptly after the
same is prepared and filed with the SEC, at least one copy of such Registration
Statement and any amendment(s) thereto, including financial statements and
schedules, all documents incorporated therein by reference, if requested by an
Investor, all exhibits and each preliminary prospectus, (ii) upon the
effectiveness of any Registration Statement, ten (10) copies of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably request)
and (iii) such other documents, including copies of any preliminary or final
prospectus, as such Investor may reasonably request from time to time in order
to facilitate the disposition of the Registrable Securities owned by such
Investor.
 
e.  The Company shall use its best efforts to (i) register and qualify, unless
an exemption from registration and qualification applies, the resale by
Investors of the Registrable Securities covered by a Registration Statement
under such other securities or "blue sky" laws of all applicable jurisdictions
in the United States, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (x) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify Legal Counsel and each Investor
who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threatening of any proceeding for such purpose.
 
f.  The Company shall notify Legal Counsel and each Investor in writing of the
happening of any event, as promptly as practicable after becoming aware of such
event, as a result of which the prospectus included in a Registration Statement,
as then in effect, includes an untrue statement of a material fact or omission
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and, subject to Section 3(r), promptly prepare
a supplement or amendment to such Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to Legal Counsel and each Investor (or such other number of copies as
Legal Counsel or such Investor may reasonably request). The Company shall also
promptly notify Legal Counsel and each Investor in writing (i) when a prospectus
or any prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to Legal
Counsel and each Investor by facsimile on the same day of such effectiveness and
by overnight mail), (ii) of any request by the SEC for amendments or supplements
to a Registration Statement or related prospectus or related information, and
(iii) of the Company's reasonable determination that a post-effective amendment
to a Registration Statement would be appropriate.
 
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g.  The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement, or the
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest possible moment and to
notify Legal Counsel and each Investor who holds Registrable Securities being
sold of the issuance of such order and the resolution thereof or its receipt of
actual notice of the initiation or threat of any proceeding for such purpose.
 
h.  If any Investor is required under applicable securities laws to be described
in the Registration Statement as an underwriter, at the reasonable request of
such Investor, the Company shall furnish to such Investor, on the date of the
effectiveness of the Registration Statement and thereafter from time to time on
such dates as an Investor may reasonably request (i) a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the Investors, and
(ii) an opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Investors.
 
i.  Upon the request of any Investor in connection with such Investor's due
diligence requirements, if any, the Company shall make available for inspection
by (i) any Investor, (ii) Legal Counsel and (iii) one firm of accountants or
other agents retained by the Investors (collectively, the "Inspectors"), all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall be reasonably
deemed necessary by each Inspector, and cause the Company's officers, directors
and employees to supply all information which any Inspector may reasonably
request; provided, however, that each Inspector shall agree to hold in strict
confidence and shall not make any disclosure (except to an Investor) or use of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential. Nothing herein (or in any
other confidentiality agreement between the Company and any Investor) shall be
deemed to limit the Investors' ability to sell Registrable Securities in a
manner which is otherwise consistent with applicable laws and regulations.
 
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j.  The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
 
k.  The Company shall use its best efforts either to (i) cause all of the
Registrable Securities covered by a Registration Statement to be listed on the
Principal Market or each securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange.
The Company shall pay all fees and expenses in connection with satisfying its
obligation under this Section 3(k).
 
l.  The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investors may reasonably request and registered in
such names as the Investors may request.
 
m.  If requested by an Investor, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as an Investor reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering;
(ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
(iii) as soon as practicable, supplement or make amendments to any Registration
Statement if reasonably requested by an Investor holding any Registrable
Securities.
 
n.  The Company shall use its best efforts to cause the Registrable Securities
covered by a Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.
 
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o.  The Company shall make generally available to its security holders as soon
as practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with, and in the
manner provided by, the provisions of Rule 158 under the 1933 Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of a Registration Statement.
 
p.  The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
 
q.  Within two (2) Business Days after a Registration Statement which covers
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit A.
 
r.  Notwithstanding anything to the contrary herein, at any time after the
Effective Date, the Company may delay the disclosure of material, non-public
information concerning the Company the disclosure of which at the time is not,
in the good faith opinion of the Board of Directors of the Company and its
counsel, in the best interest of the Company and, in the opinion of counsel to
the Company, otherwise required (a "Grace Period"); provided, that the Company
shall promptly (i) notify the Investors in writing of the existence of material,
non-public information giving rise to a Grace Period (provided that in each
notice the Company will not disclose the content of such material, non-public
information to the Investors) and the date on which the Grace Period will begin,
and (ii) notify the Investors in writing of the date on which the Grace Period
ends; and, provided further, that no Grace Period shall exceed fifteen (15)
consecutive days and during any three hundred sixty five (365) day period such
Grace Periods shall not exceed an aggregate of forty (40) days and the first day
of any Grace Period must be at least five (5) trading days after the last day of
any prior Grace Period (each, an "Allowable Grace Period"). For purposes of
determining the length of a Grace Period above, the Grace Period shall begin on
and include the date the Investors receive the notice referred to in clause (i)
and shall end on and include the later of the date the Investors receive the
notice referred to in clause (ii) and the date referred to in such notice. The
provisions of Section 3(g) hereof shall not be applicable during the period of
any Allowable Grace Period. Upon expiration of the Grace Period, the Company
shall again be bound by the first sentence of Section 3(f) with respect to the
information giving rise thereto unless such material, non-public information is
no longer applicable. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which an Investor has entered into a contract for sale, and delivered
a copy of the prospectus included as part of the applicable Registration
Statement (unless an exemption from such prospectus delivery requirements
exists), prior to the Investor's receipt of the notice of a Grace Period and for
which the Investor has not yet settled.
 
s.  The Company shall make any filing as may be required by NASD Rule 2710 in
connection with the offering under any Registration Statement of the applicable
Registrable Securities and shall make any such filing concurrently with its
initial filing of such Registration Statement with the SEC.
 
14

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t.  Until the twelve month anniversary of the later to occur of (i) the Initial
Effective Date and (ii) the Additional Effective Date, the Company shall not
enter into any Subsequent Placement (as defined in the Securities Purchase
Agreement) where such Subsequent Placement provides for registration rights
(including piggy-back registration right) to any one or more of the investors in
such Subsequent Placement, without the prior written consent of the Required
Holders.
 
u.  From the date hereof until the date that is ninety (90) days following the
later to occur of (i) the Initial Effective Date and (ii) the Additional
Effective Date, the Company will not, directly or indirectly, file any
registration statement (other than on Form S-8 or the filing of any
post-effective amendments filed solely for the purpose of updating financial or
other information in any registration statement of the Company that has been
declared effective by the SEC prior to the date of this Agreement) with the SEC
other than the Registration Statement.
 
4.  Obligations of the Investors.
 
a.  At least five (5) Business Days prior to the first anticipated filing date
of a Registration Statement, the Company shall notify each Investor in writing
of the information the Company requires from each such Investor if such Investor
elects to have any of such Investor's Registrable Securities included in such
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the
effectiveness of the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
 
b.  Each Investor, by such Investor's acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Investor has notified the Company in writing of such
Investor's election to exclude all of such Investor's Registrable Securities
from such Registration Statement.
 
c.  Each Investor agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3(g) or the first
sentence of 3(f), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(g) or the first
sentence of 3(f) or receipt of notice that no supplement or amendment is
required. Notwithstanding anything to the contrary, the Company shall cause its
transfer agent to deliver unlegended shares of Common Stock to a transferee of
an Investor in accordance with the terms of the Securities Purchase Agreement in
connection with any sale of Registrable Securities with respect to which an
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(g) or the first sentence of 3(f) and for which the Investor has not
yet settled.
 
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d.  Each Investor covenants and agrees that it will comply with the prospectus
delivery requirements of the 1933 Act as applicable to it or an exemption
therefrom in connection with sales of Registrable Securities pursuant to the
Registration Statement.
 
5.  Expenses of Registration.
 
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company shall be paid by the Company. The Company shall also
reimburse the Investors for the fees and disbursements of Legal Counsel in
connection with registration, filing or qualification pursuant to Sections 2 and
3 of this Agreement which amount shall be limited to $20,000.
 
6.  Indemnification.
 
In the event any Registrable Securities are included in a Registration Statement
under this Agreement:
 
a.  To the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Investor, the directors, officers,
members, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the 1934
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys'
fees, amounts paid in settlement or expenses, joint or several, (collectively,
"Claims") incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in the light of the circumstances under which the statements therein
were made, not misleading, (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement or (iv) any violation of this Agreement (the matters in
the foregoing clauses (i) through (iv) being, collectively, "Violations").
Subject to Section 6(c), the Company shall reimburse the Indemnified Persons,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
for such Indemnified Person expressly for use in connection with the preparation
of the Registration Statement or any such amendment thereof or supplement
thereto, if such prospectus was timely made available by the Company pursuant to
Section 3(d) and (ii) shall not be available to the extent such Claim is based
on a failure of the Investor to deliver or to cause to be delivered the
prospectus made available by the Company, including a corrected prospectus, if
such prospectus or corrected prospectus was timely made available by the Company
pursuant to Section 3(d); and (iii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld or
delayed. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
 
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b.  In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (each, an
"Indemnified Party"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(c), such Investor will
reimburse any legal or other expenses reasonably incurred by an Indemnified
Party in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
 
c.  Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding at least a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or Claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or Claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
reasonably apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent, provided, however, that the indemnifying party shall
not unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the prior written consent of the Indemnified Party or Indemnified
Person, consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such Claim or litigation, and such
settlement shall not include any admission as to fault on the part of the
Indemnified Party. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
 
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d.  The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or Indemnified Damages are incurred.
 
e.  The indemnity agreements contained herein shall be in addition to (i) any
cause of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
 
18

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7.  Contribution.
 
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no Person
involved in the sale of Registrable Securities which Person is guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) in connection with such sale shall be entitled to contribution from any
Person involved in such sale of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities pursuant to such
Registration Statement.
 
8.  Reports Under the 1934 Act.
 
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration ("Rule 144"), the Company agrees to:
 
a.  make and keep public information available, as those terms are understood
and defined in Rule 144;
 
b.  file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements and the filing of such reports and
other documents is required for the applicable provisions of Rule 144; and
 
c.  furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144, the 1933
Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
 
9.  Assignment of Registration Rights.
 
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor's Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned; (iii) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.
 
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10.  Amendment of Registration Rights.
 
Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Required
Holders. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. 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 this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.
 
11.  Miscellaneous.
 
a.  A Person is deemed to be a holder of Registrable Securities whenever such
Person owns or is deemed to own of record such Registrable Securities. If the
Company receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the such record
owner of such Registrable Securities.
 
b.  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 a nationally recognized overnight
delivery 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:

Rancher Energy Corp.
999-18th Street, Suite 1740
Denver, Colorado 80202
Telephone: (303) 629-1122
Facsimile: (720) 904-5698
Attention: John Works, President and CEO

With a copy to:

Patton Boggs LLP
1660 Lincoln Street
Denver, Colorado 80264
Telephone: (303) 830-1776
Facsimile: (303) 894-9239
Attention: Robert Bearman, Esq. and Mark Goldschmidt, Esq.

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If to Legal Counsel:

   
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.

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers, 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 a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
 
c.  Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not
operate as a waiver thereof.
 
d.  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 to such 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.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. 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 HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
 
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e.  This Agreement, the other Transaction Documents (as defined in the
Securities Purchase Agreement) and the instruments referenced herein and therein
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the other Transaction Documents and the instruments
referenced herein and therein supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
 
f.  Subject to the requirements of Section 9, this Agreement shall inure to the
benefit of and be binding upon the permitted successors and assigns of each of
the parties hereto.
 
g.  The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
 
h.  This Agreement may be executed in identical counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.
 
i.  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.
 
j.  All consents and other determinations required to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by the Required Holders.
 
k.  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.
 
l.  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.
 
m.  The obligations of each Investor hereunder are several and not joint with
the obligations of any other Investor, and no provision of this Agreement is
intended to confer any obligations on any Investor vis-à-vis any other Investor.
Nothing contained herein, and no action taken by any Investor pursuant hereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated herein.
 
* * * * * *

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

       
COMPANY:
     
RANCHER ENERGY CORP.
 
   
   
  By:    

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

Name:  
 
Title:    

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

       
BUYERS:

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

 
   
   
  By:            

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

Name:
Title:
 

     
Address:
 

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SCHEDULE OF BUYERS
 
 
Buyer
 
Buyer's Address
and Facsimile Number
 
Buyer's Representative's Address
and Facsimile Number
         
[                                ]
     
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attn: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2000
 
 
[Other Buyers]
       

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EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
 
[Transfer Agent]
[Address]
Attention:

Re: Rancher Energy Corp.
 
Ladies and Gentlemen:
 
 
[We are][I am] counsel to Rancher Energy Corp., a Nevada corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Securities Purchase Agreement") entered into
by and among the Company and the buyers named therein (collectively, the
"Holders") pursuant to which the Company issued to the Holders (i) senior
convertible notes (the "Notes") convertible into the Company's common stock, par
value $0.00001 per share (the "Common Stock), (ii) shares (the "Common Shares")
of Common Stock and (iii) warrants exercisable for shares of Common Stock (the
"Warrants"). Pursuant to the Securities Purchase Agreement, the Company also has
entered into a Registration Rights Agreement with the Holders (the "Registration
Rights Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the Common Shares, the shares of Common Stock issuable
upon conversion of the Notes and the shares of Common Stock issuable upon
exercise of the Warrants, under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the Registration
Rights Agreement, on ____________ ___, 200_, the Company filed a Registration
Statement on Form SB-2 (File No. 333-_____________) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") relating to
the Registrable Securities which names each of the Holders as a selling
stockholder thereunder.
 
In connection with the foregoing, [we][I] advise you that a member of the SEC's
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC's staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
 
This letter shall serve as our standing instruction to you that the shares of
Common Stock are freely transferable by the Holders pursuant to the Registration
Statement. You need not require further letters from us to effect any future
legend-free issuance or reissuance of shares of Common Stock to the Holders as
contemplated by the Company's Transfer Agent Instructions dated December __,
2006.
 
1

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Very truly yours,
 
[ISSUER'S COUNSEL]
 
   
   
    By:      

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

CC: [LIST NAMES OF HOLDERS]

 
2

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EXHIBIT B

SELLING STOCKHOLDERS
 
The shares of Common Stock being offered by the selling stockholders are common
stock previously issued and shares of common stock issuable upon conversion of
the convertible notes and upon exercise of the warrants. For additional
information regarding the issuance of those convertible notes and warrants, see
"Private Placement of Convertible Notes Common Shares and Warrants" above. We
are registering the shares of Common Stock in order to permit the selling
stockholders to offer the shares for resale from time to time. Except for the
ownership of the Common Shares, Convertible Notes and Warrants issued pursuant
to the Securities Purchase Agreement, the selling stockholders have not had any
material relationship with us within the past three years.
 
The table below lists the selling stockholders and other information regarding
the beneficial ownership of the shares of Common Stock by each of the selling
stockholders. The second column lists the number of shares of Common Stock
beneficially owned by each selling stockholder, based on its ownership of the
shares of common stock previously, the convertible notes and warrants, as of
________, 200_, assuming conversion of all convertible notes and exercise of the
warrants held by the selling stockholders on that date, without regard to any
limitations on conversions or exercise.
 
The third column lists the shares of Common Stock being offered by this
prospectus by each selling stockholder.
 
In accordance with the terms of a registration rights agreement among the
Company and the selling stockholders, this prospectus generally covers the
resale of at least 130% of the sum of (i) the number of shares of Common Stock
issuable upon conversion of the convertible notes as of the trading day
immediately preceding the date the registration statement is initially filed
with the SEC, (ii) the shares of common stock previously issued and (iii) the
number of shares of Common Stock issuable upon exercise of the related warrants
as of the trading day immediately preceding the date the registration statement
is initially filed with the SEC. Because the conversion price of the convertible
notes and the exercise price of the warrants may be adjusted, the number of
shares that will actually be issued may be more or less than the number of
shares being offered by this prospectus. The fourth column assumes the sale of
all of the shares offered by the selling stockholders pursuant to this
prospectus.
 
Under the terms of the convertible notes and the warrants, a selling stockholder
may not convert the convertible notes or exercise the warrants to the extent
such conversion or exercise would cause such selling stockholder, together with
its affiliates, to beneficially own a number of shares of Common Stock which
would exceed [9.99][4.99]% of our then outstanding shares of Common Stock
following such conversion or exercise, excluding for purposes of such
determination shares of Common Stock issuable upon conversion of the convertible
notes which have not been converted and upon exercise of the warrants which have
not been exercised. The number of shares in the second column does not reflect
this limitation. The selling stockholders may sell all, some or none of their
shares in this offering. See "Plan of Distribution."
 
1

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Name of Selling Stockholder
 
Number of Shares Owned Prior to Offering
 
Maximum Number of
Shares to be Sold Pursuant to this Prospectus
 
Number of Shares Owned
After Offering
             
[                          ] (1)
         
0
                           
(1) 
           

 
2

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PLAN OF DISTRIBUTION
 
We are registering the shares of Common Stock previously issued and the shares
of common stock issuable upon conversion of the convertible notes and upon
exercise of the warrants to permit the resale of these shares of Common Stock by
the holders of the shares of common stock, the convertible notes and warrants
from time to time after the date of this prospectus. We will not receive any of
the proceeds from the sale by the selling stockholders of the shares of Common
Stock. We will bear all fees and expenses incident to our obligation to register
the shares of Common Stock.
 
The selling stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent's commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
 

·  
on any national securities exchange or quotation service on which the securities
may be listed or quoted at the time of sale;

 

·  
in the over-the-counter market;

 

·  
in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

 

·  
through the writing of options, whether such options are listed on an options
exchange or otherwise;

 

·  
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

 

·  
block trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction;

 

·  
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

 

·  
an exchange distribution in accordance with the rules of the applicable
exchange;

 

·  
privately negotiated transactions;

 

·  
short sales;

 

·  
sales pursuant to Rule 144;

 
1

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

 

·  
broker-dealers may agree with the selling securityholders to sell a specified
number of such shares at a stipulated price per share;

 

·  
a combination of any such methods of sale; and

 

·  
any other method permitted pursuant to applicable law.

 
If the selling stockholders effect such transactions by selling shares of Common
Stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of Common Stock or otherwise, the selling stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of Common Stock in the course of hedging in positions they
assume. The selling stockholders may also sell shares of Common Stock short and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
selling stockholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.
 
The selling stockholders may pledge or grant a security interest in some or all
of the shares of common stock, convertible notes or warrants or shares of Common
Stock owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares of
Common Stock from time to time pursuant to this prospectus or any amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933, as amended, amending, if necessary, the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also may
transfer and donate the shares of Common Stock in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be
the selling beneficial owners for purposes of this prospectus.
 
The selling stockholders and any broker-dealer participating in the distribution
of the shares of Common Stock may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the shares of Common Stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of Common Stock being offered and the terms of the offering, including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.
 
Under the securities laws of some states, the shares of Common Stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of Common Stock may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
 
2

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

 
There can be no assurance that any selling stockholder will sell any or all of
the shares of Common Stock registered pursuant to the registration statement, of
which this prospectus forms a part.
 
The selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of Common Stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of Common
Stock to engage in market-making activities with respect to the shares of Common
Stock. All of the foregoing may affect the marketability of the shares of Common
Stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of Common Stock.
 
We will pay all expenses of the registration of the shares of Common Stock
pursuant to the registration rights agreement, estimated to be $[     ] in
total, including, without limitation, Securities and Exchange Commission filing
fees and expenses of compliance with state securities or "blue sky" laws;
provided, however, that a selling stockholder will pay all underwriting
discounts and selling commissions, if any. We will indemnify the selling
stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholder specifically for use in this prospectus, in
accordance with the related registration rights agreement, or we may be entitled
to contribution.
 
Once sold under the registration statement, of which this prospectus forms a
part, the shares of Common Stock will be freely tradable in the hands of persons
other than our affiliates.
 
3

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

 
TRANSFER AGENT INSTRUCTIONS
 
RANCHER ENERGY CORP.
 
December __, 2006
 
Pacific Stock Transfer Company
Las Vegas, Nevada

Ladies and Gentlemen:
 
Reference is made to that certain Securities Purchase Agreement, dated as of
December __, 2006 (the "Agreement"), by and among Rancher Energy Corp., a Nevada
corporation (the "Company"), and the investors named on the Schedule of Buyers
attached thereto (collectively, the "Holders"), pursuant to which the Company is
issuing to the Holders (i) convertible notes of the Company (the "Notes"), which
will be convertible into shares of the Company's common stock, $0.00001 par
value per share (the "Common Stock"), (i) share (the "Common Shares") of Common
Stock and (iii) warrants (the "Warrants"), which are exercisable to purchase
shares of Common Stock.
 
This letter shall serve as our authorization and direction to you (provided that
you are the transfer agent of the Company at such time), subject to any stop
transfer instructions that we may issue to you from time to time, if at all:
 
(i)  to issue shares of Common Stock upon transfer or resale of the Common
Shares; and
 
(ii)  to issue shares of Common Stock upon conversion of the Notes (the
"Conversion Shares") to or upon the order of a Holder from time to time upon
delivery to you of a properly completed and duly executed Conversion Notice, in
the form attached hereto as Exhibit I, which has been acknowledged by the
Company as indicated by the signature of a duly authorized officer of the
Company thereon;
 
(iii)  to issue shares of Common Stock upon exercise of the Warrants (the
"Warrant Shares") to or upon the order of a Holder from time to time upon
delivery to you of a properly completed and duly executed Exercise Notice, in
the form attached hereto as Exhibit II, which has been acknowledged by the
Company as indicated by the signature of a duly authorized officer of the
Company thereon.
 
You acknowledge and agree that so long as you have previously received (a)
written confirmation from the General Counsel of the Company (or its outside
legal counsel) that either (i) a registration statement covering resales of the
Common Shares, the Conversion Shares or the Warrant Shares has been declared
effective by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "1933 Act"), or (ii) that sales of the
Common Shares, the Conversion Shares and the Warrant Shares may be made in
conformity with Rule 144 under the 1933 Act, and (b) if applicable, a copy of
such registration statement, then, within three (3) business days after your
receipt of a notice of transfer, Conversion Notice or the Exercise Notice, you
shall issue the certificates representing the Common Shares, Conversion Shares
and/or the Warrant Shares, as applicable, and such certificates shall not bear
any legend restricting transfer of the Common Shares, Conversion Shares or the
Warrant Shares thereby and should not be subject to any stop-transfer
restriction; provided, however, that if such Common Shares, Conversion Shares
and Warrant Shares are not registered for resale under the 1933 Act or able to
be sold under Rule 144, then the certificates for such Common Shares, Conversion
Shares and/or Warrant Shares shall bear the following legend:
 

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

 
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 FORM
REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
 
A form of written confirmation from the General Counsel of the Company or the
Company's outside legal counsel that a registration statement covering resales
of the Common Shares, Conversion Shares and the Warrant Shares has been declared
effective by the SEC under the 1933 Act is attached hereto as Exhibit III.

Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at (866) 375-7624.

       
Very truly yours,
 
RANCHER ENERGY CORP.
 
   
   
    By:      

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

Name: 
Title: 

 
Enclosures
 

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

 
EXHIBIT I
 
RANCHER ENERGY CORP.
 
CONVERSION NOTICE
 
Reference is made to the Convertible Note (the "Note") issued to the undersigned
by Rancher Energy Corp. (the "Company"). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined
in the Note) of the Note indicated below into shares of Common Stock par value
$0.00001 per share (the "Common Stock") of the Company, as of the date specified
below.
 

Date of Conversion:
__________________________________________________________________________________
Aggregate Conversion Amount to be converted:
____________________________________________________________
Please confirm the following information:
Conversion Price:
____________________________________________________________________________________
Number of shares of Common Stock to be issued:
____________________________________________________________
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
Issue to:
___________________________________________________________________________________________
         
________________________________________________________________________________
 ________________________________________________________________________________
Facsimile Number: 
____________________________________________________________________________________
Authorization:
_______________________________________________________________________________________
By:
_________________________________________________________________________________________
Title:
___________________________________________________________________________________
Dated:
_____________________________________________________________________________________________________
Account Number:
______________________________________________________________________________________
  (if electronic book entry transfer)
Transaction Code Number:
_______________________________________________________________________________
  (if electronic book entry transfer)

 

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

 

ACKNOWLEDGMENT
 
The Company hereby acknowledges this Conversion Notice and hereby directs
Pacific Stock Transfer Company to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated December
20, 2006 from the Company and acknowledged and agreed to by Pacific Stock
Transfer Company.

       
RANCHER ENERGY CORP.
 
   
   
    By:      

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

Name:
Title:

 

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

 

EXHIBIT II
EXERCISE NOTICE
 
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK

RANCHER ENERGY CORP.
 
The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock ("Warrant Shares") of Rancher Energy Corp., a
Nevada corporation (the "Company"), evidenced by the attached Warrant to
Purchase Common Stock (the "Warrant"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

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

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

____________ a "Cashless Exercise" with respect to _______________ Warrant
Shares.

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

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

Date: _______________ __, ______
 
_____________________________
Name of Registered Holder
 

          By:          

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

Name:
Title:
   

 

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

 

ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice and hereby directs Pacific
Stock Transfer Company to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated December 20, 2006
from the Company and acknowledged and agreed to by Pacific Stock Transfer
Company.

        RANCHER ENERGY CORP.  
   
   
    By:      

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

Name:
Title:

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

 
 
EXHIBIT III
 
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
 
Pacific Stock Transfer Company 
Las Vegas, Nevada

Re: Rancher Energy Corp.
 
Ladies and Gentlemen:
 
[We are][I am] counsel to Rancher Energy Corp., a Nevada corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Securities Purchase Agreement") entered into
by and among the Company and the buyers named therein (collectively, the
"Holders") pursuant to which the Company issued to the Holders (i) senior
convertible notes (the "Notes") convertible into the Company's common stock, par
value $0.00001 per share (the "Common Stock), (ii) shares (the "Common Shares")
of Common Stock and (iii) warrants exercisable for shares of Common Stock (the
"Warrants"). Pursuant to the Securities Purchase Agreement, the Company also has
entered into a Registration Rights Agreement with the Holders (the "Registration
Rights Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the Common Shares, the shares of Common Stock issuable
upon conversion of the Notes and the shares of Common Stock issuable upon
exercise of the Warrants, under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the Registration
Rights Agreement, on ____________ ___, 200_, the Company filed a Registration
Statement on Form SB-2 (File No. 333-_____________) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") relating to
the Registrable Securities which names each of the Holders as a selling
stockholder thereunder.
 
In connection with the foregoing, [we][I] advise you that a member of the SEC's
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC's staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
 
This letter shall serve as our standing instruction to you that the shares of
Common Stock are freely transferable by the Holders pursuant to the Registration
Statement. You need not require further letters from us to effect any future
legend-free issuance or reissuance of shares of Common Stock to the Holders as
contemplated by the Company's Irrevocable Transfer Agent Instructions dated
December 20, 2006.
 

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

 

   
Very truly yours,
 
[ISSUER'S COUNSEL]
 
  By:    

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

CC: [LIST NAMES OF HOLDERS]  

 

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

FORM OF LEGAL OPINION
 
1.  The Company and each of its Subsidiaries is a corporation duly incorporated,
validly existing and in good standing under the laws of the state of its
incorporation. The Company has the requisite corporate power to own, lease and
operate its properties and to conduct its business as presently conducted. The
Company and each of its Subsidiaries is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which such
qualification is necessary to conduct its business.
 
2.  The Company has the requisite corporate power and authority to execute,
deliver and perform all of its obligations under the Transaction Documents,
including the issuance of the Common Shares, the Notes, the Conversion Shares,
the Warrants and the Warrant Shares in accordance with the terms thereof. The
execution and delivery of the Transaction Documents by the Company and the
consummation of the transactions contemplated therein (including without
limitation, the issuance and sale of the Common Shares, Notes and Warrants) have
been duly authorized by the Company's Board of Directors, and no further consent
or authorization of the Company, its Board of Directors or its stockholders is
required therefor. The Transaction Documents have been duly executed and
delivered by the Company. The Transaction Documents constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms.
 
3.  The execution, delivery and performance by the Company of the Transaction
Documents, including without limitation, the issuance of the Common Shares, the
Notes, the Warrants, the Conversion Shares, and the Warrant Shares, and the
consummation by the Company of the transactions contemplated by the Transaction
Documents and the compliance by the Company with the terms thereof (a) do not
and will not violate, conflict with or constitute a default (or an event which,
with the giving of notice or lapse of time or both, constitutes or would
constitute a default) under, give rise to any right of termination, cancellation
or acceleration under, (i) the Certificate of Incorporation or By-laws of the
Company; (ii) any agreement, note, lease, mortgage, deed or other instrument to
which the Company is a party or by which the Company is bound or affected that
has been publicly filed (the "Publicly Filed Documents"); or (iii) any statute,
law, rule or regulation of the United States, the Principal Market or the State
of Nevada applicable to the Company or any order, writ, injunction or decree;
and (b) do not and will not result in or require the creation of any lien,
security interest or other charge or encumbrance (other than pursuant to the
Transactions Documents) upon or with respect to any of its respective
properties.
 
4.  When so issued, Common Shares, the Notes, the Warrants, the Conversion
Shares and the Warrant Shares will be duly authorized and validly issued, fully
paid and nonassessable, and free of any all liens and charges and preemptive or
similar rights contained in the Company's Certificate of Incorporation or Bylaws
or any agreement, note, lease, publicly filed mortgage deed or other instrument
to which the Company is a party or by which the Company is bound that are
Publicly Filed Documents. Subject to obtaining the Stockholder Approval, the
Common Shares, the Conversion Shares and the Warrant Shares have been duly and
validly authorized and reserved for issuance by all proper corporate action.
 

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

 
5.  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,
[            ] are issued and outstanding, [                         ] shares
are reserved for issuance pursuant to the Company's stock option and purchase
plans and [            ] shares are reserved for issuance pursuant to securities
(other than the aforementioned options, the Common Shares, the Notes and the
Warrants) exercisable or exchangeable for, or convertible into, shares of Common
Stock. None of such Common Stock is subject to preemptive rights or other rights
of the stockholders of the Company pursuant to the Certificate of Incorporation
or the By-laws or under the Nevada Corporation Law or pursuant to any agreement,
note, lease, mortgage deed or other instrument to which the Company is a party
or by which the Company is bound. There are no securities or instruments of the
Company containing anti-dilution or similar provisions that will be triggered by
the issuance of the Common Shares, the Notes, the Conversion Shares, the
Warrants or the Warrant Shares.
 
6.  The offer and sale of the Common Shares, the Notes and the Warrants in
accordance with the Securities Purchase Agreement and the issuance of the
Conversion Shares and the Warrant Shares in accordance with the Transaction
Documents constitute transactions exempt from the registration requirements of
the Securities Act of 1933, as amended.
 
7.  No authorization, approval, consent, filing, or other order of any federal
or state governmental body, regulatory agency, self-regulatory organization or
stock exchange or market, or the stockholders of the Company, or any court, or
to our knowledge, any third party is required to be obtained by the Company to
enter into and perform its obligations under the Transaction Documents or for
the issuance and sale of the Common Shares, the Notes, the Conversion Shares,
the Warrants or the Warrant Shares in accordance with the Transaction Documents,
or for the exercise of any rights and remedies under any Transaction Documents
except (i) the filing of a Form D under Regulation D of the Securities Act of
1933, as amended, (ii) obtaining the Stockholder Approval, and (iii) the filing
of a Form 8-K pursuant to the Securities Exchange Act of 1934, as amended.
 
8.  To our knowledge, no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body or any governmental agency or
self-regulatory organization is pending or threatened against the Company or any
of its Subsidiaries or any of the properties or assets of the Company or any of
its Subsidiaries.
 
9.  The Company is not an "investment company" or any entity controlled by an
"investment company," as such term is defined in the Investment Company Act of
1940, as amended.
 

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

RANCHER ENERGY CORP.

SECRETARY’S CERTIFICATE

The undersigned hereby certifies that he is the duly elected, qualified and
acting Secretary of Rancher Energy Corp., a Nevada corporation (the "Company"),
and that as such he is authorized to execute and deliver this certificate in the
name and on behalf of the Company and in connection with the Securities Purchase
Agreement, dated as of December 21, 2006, by and among the Company and the
investors listed on the Schedule of Buyers attached thereto (the "Securities
Purchase Agreement"), and further certifies in his official capacity, in the
name and on behalf of the Company, the items set forth below. Capitalized terms
used but not otherwise defined herein shall have the meaning set forth in the
Securities Purchase Agreement.
 

1.  
Attached hereto as Exhibit A is a true, correct and complete copy of the
resolutions duly adopted by the Board of Directors of the Company at a meeting
of the Board of Directors held on December 20, 2006. Such resolutions have not
in any way been amended, modified, revoked or rescinded, have been in full force
and effect since their adoption to and including the date hereof and are now in
full force and effect.

 

2.  
Attached hereto as Exhibit B is a true, correct and complete copy of the
Certificate of Incorporation of the Company, together with any and all
amendments thereto currently in effect, and no action has been taken to further
amend, modify or repeal such Certificate of Incorporation, the same being in
full force and effect in the attached form as of the date hereof.

 

3.  
Attached hereto as Exhibit C is a true, correct and complete copy of the Bylaws
of the Company and any and all amendments thereto currently in effect, and no
action has been taken to further amend, modify or repeal such Bylaws, the same
being in full force and effect in the attached form as of the date hereof.

 

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

 

4.  
Each person listed below has been duly elected or appointed to the position(s)
indicated opposite his name and is duly authorized to sign the Securities
Purchase Agreement and each of the Transaction Documents on behalf of the
Company, and the signature appearing opposite such person’s name below is such
person’s genuine signature.

 
Name
Position
Signature
John Works
Chief Executive Officer
_________________________
Andrew Casazza
Chief Operating Officer
 

 
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21 day
of December, 2006.
 

           

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

John Works
Secretary, Chief Executive Officer

 
I, Andrew Casazza, Chief Operating Officer, hereby certify that [Name] is the
duly elected, qualified and acting Secretary of the Company and that the
signature set forth above is his true signature.
 

           

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

Andrew Casazza
Chief Operating Officer

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

 

EXHIBIT A
 
Resolutions

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

 

EXHIBIT B
 
Certificate of Incorporation

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

EXHIBIT C
 
Bylaws
 

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

RANCHER ENERGY CORPORATION
 
OFFICER'S CERTIFICATE

The undersigned, the Chief Executive Officer of Rancher Energy Corporation, a
Nevada corporation (the "Company"), pursuant to Section 7(viii) of the
Securities Purchase Agreement, dated as of December 20, 2006, by and among the
Company and the investors identified on the Schedule of Buyers attached thereto
(the "Securities Purchase Agreement"), hereby represents, warrants and certifies
to the Buyers as follows (capitalized terms used but not otherwise defined
herein shall have the meaning set forth in the Securities Purchase Agreement):

 
1.
The representations and warranties made by the Company as set forth in Section 3
of the Securities Purchase Agreement are 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 hereof (except for representations and warranties that
speak as of a specific date, which shall be true and correct as of such
specified date which shall be true and correct as of such specified date).

 
2.
The Company has, in all respects, performed or complied with all covenants,
agreements and conditions required to be performed or complied with by it at or
prior to the date hereof under the Transaction Documents.

 
IN WITNESS WHEREOF, the undersigned has executed this certificate this 21 day of
December, 2006.

         

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

John Works
 
Chief Executive Officer

 

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

 
RANCHER ENERGY CORP.
 
Form of Lock-Up Agreement
 
December __, 2006
 
Rancher Energy Corp.
999-18th Street, Suite 1740
Denver, Colorado 80202
 
Re: Rancher Energy Corp. - Lock-Up Agreement
 
Dear Sirs:
 
This Lock-Up Agreement is being delivered to you in connection with the
Securities Purchase Agreement (the "Purchase Agreement"), dated as of December
__, 2006 by and among Rancher Energy Corp. (the "Company") and the investors
party thereto (the "Buyers"), with respect to the issuance of (i) convertible
notes of the Company (the "Notes") which Notes shall be convertible into the
common stock, par value $0.00001 per share, of the Company (the "Common Stock")
(ii) shares of Common Stock and (iii) warrants to acquire additional shares of
Common Stock. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Purchase Agreement.
 
In order to induce you to enter into the Purchase Agreement, the undersigned
agrees that commencing on the date hereof and ending on the later of (i) the
date 180 days from the Closing Date (as defined in the Purchase Agreement) and
(ii) the date the Initial Registration Statement (as defined in the Registration
Rights Agreement) filed by the Company pursuant to the Registration Rights
Agreement is declared effective by the United States Securities and Exchange
Commission, but in no event later than the one year anniversary of the Closing
Date (the "Lock-Up Period"), the undersigned will not, without the written
consent of the Required Holders (as defined in the Registration Rights
Agreement), (i) sell, offer to sell, contract or agree to sell, hypothecate,
hedge, pledge, grant any option to purchase, make any short sale or otherwise
dispose of or agree to dispose of, directly or indirectly, any shares of Common
Stock, owned directly by the undersigned (including holding as a custodian) or
with respect to which the undersigned has beneficial ownership within the rules
and regulations of the Securities and Exchange Commission, or (ii) enter into
any swap or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of any shares of Common Stock,
owned directly by the undersigned (including holding as a custodian) or with
respect to which the undersigned has beneficial ownership within the rules and
regulations of the Securities and Exchange Commission, whether any such
transaction is to be settled by delivery of such securities, in cash or
otherwise, (collectively, the "Undersigned’s Shares"). This Lock-Up Agreement
shall not apply to any shares of Common Stock acquired by the undersigned on the
open market or otherwise after the Closing Date.
 
The foregoing restriction is expressly agreed to preclude the undersigned or any
affiliate of the undersigned from engaging in, without the written consent of
the Required Holders, any hedging or other transaction which is designed to or
which reasonably could be expected to lead to or result in a sale or disposition
of the Undersigned’s Shares even if the Undersigned’s Shares would be disposed
of by someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any of the Undersigned’s Shares or with respect to any
security that includes, relates to, or derives any significant part of its value
from the Undersigned’s Shares.
 

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

 
Notwithstanding the foregoing, the undersigned may transfer the Undersigned’s
Shares (i) as a bona fide gift or gifts, provided that the donee or donees
thereof agree to be bound in writing by the restrictions set forth herein or
(ii) to any trust for the direct or indirect benefit of the undersigned or the
immediate family of the undersigned, provided that the trustee of the trust
agrees to be bound in writing by the restrictions set forth herein, and provided
further that any such transfer shall not involve a disposition for value. For
purposes of this Lock-Up Agreement, “immediate family” shall mean any
relationship by blood, marriage or adoption, not more remote than first cousin.
The undersigned now has, and, except as contemplated by clauses (i) and (ii)
above, for the duration of this Lock-Up Agreement will have, good and marketable
title to the Undersigned’s Shares, free and clear of all liens, encumbrances,
and claims whatsoever. The undersigned also agrees and consents to the entry of
stop transfer instructions with the Company’s transfer agent and registrar
against the transfer of the Undersigned’s Shares except in compliance with the
foregoing restrictions.
 
The undersigned understands and agrees that this Lock-Up Agreement is
irrevocable and shall be binding upon the undersigned’s heirs, legal
representatives, successors, and assigns.
 
This Lock-Up Agreement may be executed in two counterparts, each of which shall
be deemed an original but both of which shall be considered one and the same
instrument.
 
This Lock-Up Agreement will be governed by and construed in accordance with the
laws of the State of New York, without giving effect to any choice of law or
conflicting provision or rule (whether of the State of New York, or any other
jurisdiction) that would cause the laws of any jurisdiction other than the State
of New York to be applied. In furtherance of the foregoing, the internal laws of
the State of New York will control the interpretation and construction of this
Lock-Up Agreement, even if under such jurisdiction's choice of law or conflict
of law analysis, the substantive law of some other jurisdiction would ordinarily
apply.
 
The Buyers shall be intended third party beneficiaries of this Agreement to the
same extent as if they were parties hereto, and shall be entitled to enforce the
provisions hereof. No provision of this Agreement may be amended or waived
without the written consent of the Required Holders.

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

 

       
  Very truly yours,
 
   
   
   

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

Exact Name of Stockholder
 
 

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

Authorized Signature
 
 

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

Title

        Agreed to and Acknowledged:              
RANCHER ENERGY CORP.
              By:      

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

Name:
Title:
   

 

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

VOTING AGREEMENT
 
VOTING AGREEMENT, dated as of December __, 2006 (this "Agreement"), by and among
Rancher Energy Corp., a Nevada corporation (the "Company"), and the stockholders
listed on the signature pages hereto under the heading "Stockholders" (each a
"Stockholder" and collectively, the "Stockholders").
 
WHEREAS, the Company and certain investors (each, an "Investor", and
collectively, the "Investors") have entered into a Securities Purchase
Agreement, dated as December __, 2006 (the "Securities Purchase Agreement"),
pursuant to which, among other things, the Company has agreed to issue and sell
to the Investors and the Investors have agreed to purchase, (i) convertible
notes of the Company (the "Notes") which will, among other things, be
convertible into shares of the Company's common stock, par value $.00001 value
per share (the "Common Stock") in accordance with the terms of the Notes, (ii)
shares of Common Stock and (iii) warrants which will be exercisable to purchase
shares of Common Stock.
 
WHEREAS, as of the date hereof, the Stockholders own collectively __________
shares of Common Stock, which represent in the aggregate approximately ___% of
the total issued and outstanding capital stock of the Company; and
 
WHEREAS, as a condition to the willingness of the Investors to enter into the
Securities Purchase Agreement and to consummate the transactions contemplated
thereby (collectively, the "Transaction"), the Investors have required that each
Stockholder agree, and in order to induce the Investors to enter into the
Securities Purchase Agreement, each Stockholder has agreed, to enter into this
Agreement with respect to all the Common Stock now owned and which may hereafter
be acquired by the Stockholder and any other securities, if any, which such
Stockholder is currently entitled to vote, or after the date hererof becomes
entitled to vote, at any meeting of stockholders of the Company (the "Other
Securities").
 
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
 
ARTICLE I
 
VOTING AGREEMENT OF THE STOCKHOLDER
 
SECTION 1.01.  Voting Agreement. Subject to the last sentence of this
Section 1.01, each Stockholder hereby agrees that at any meeting of the
stockholders of the Company, however called, and in any action by written
consent of the Company's stockholders, each of the Stockholders shall vote the
Common Stock and the Other Securities: (a) in favor of the Stockholder Approval
(as defined in the Securities Purchase Agreement) as described in Section 4(p)
of the Securities Purchase Agreement; and (b) against any proposal or any other
corporate action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Securities Purchase Agreement or which could result in any of the
conditions to the Company's obligations under the Securities Purchase Agreement
not being fulfilled. Each Stockholder acknowledges receipt and review of a copy
of the Securities Purchase Agreement and the other Transaction Documents (as
defined in the Securities Purchase Agreement). The obligations of the
Stockholders under this Section 1.01 shall terminate immediately following the
occurrence of the Stockholder Approval.
 

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

 
ARTICLE II
 
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
 
Each Stockholder hereby represents and warrants, severally but not jointly, to
each of the Investors as follows:
 
SECTION 2.01.  Authority Relative to This Agreement. Each Stockholder has all
necessary power and authority to execute and deliver this Agreement, to perform
his or its obligations hereunder and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by such Stockholder
and constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms, except (a) as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or similar laws now or
hereafter in effect relating to, or affecting generally the enforcement of
creditors' and other obligees' rights, (b) where the remedy of specific
performance or other forms of equitable relief may be subject to certain
equitable defenses and principles and to the discretion of the court before
which the proceeding may be brought, and (c) where rights to indemnity and
contribution thereunder may be limited by applicable law and public policy.
 
SECTION 2.02.  No Conflict. (a) The execution and delivery of this Agreement by
such Stockholder does not, and the performance of this Agreement by such
Stockholder shall not, (i) conflict with or violate any federal, state or local
law, statute, ordinance, rule, regulation, order, judgment or decree applicable
to any Stockholder or by which the Common Stock or the Other Securities owned by
such Stockholder are bound or affected or (ii) result in any breach of or
constitute a default (or an event that 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, or result in the creation of a lien
or encumbrance on any of the Common Stock or the Other Securities owned by such
Stockholder pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Stockholder is a party or by which such Stockholder or the Common
Stock or Other Securities owned by such Stockholder are bound.
 
(b)  The execution and delivery of this Agreement by such Stockholder does not,
and the performance of this Agreement by such Stockholder shall not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental entity or other third party by such Stockholder.
 
SECTION 2.03.  Title to the Stock. As of the date hereof, each Stockholder is
the owner of the number of shares of Common Stock set forth opposite its name on
Appendix A attached hereto, entitled to vote, without restriction, on all
matters brought before holders of capital stock of the Company, which Common
Stock represent on the date hereof the percentage of the outstanding stock and
voting power of the Company set forth on such Appendix. Such Common Stock are
all the securities of the Company owned, either of record or beneficially, by
such Stockholder. Such Common Stock are owned free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on such Stockholder's voting rights, charges and other encumbrances
of any nature whatsoever. No Stockholder has appointed or granted any proxy,
which appointment or grant is still effective, with respect to the Common Stock
or Other Securities owned by such Stockholder.
 
2

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

 
ARTICLE III

 
COVENANTS
 
SECTION 3.01.  No Disposition or Encumbrance of Stock. Each Stockholder hereby
covenants and agrees that, until the Stockholder Approval has been obtained,
except as contemplated by this Agreement, such Stockholder shall not offer or
agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of,
grant a proxy or power of attorney with respect to, or create or permit to exist
any security interest, lien, claim, pledge, option, right of first refusal,
agreement, limitation on such Stockholder's voting rights, charge or other
encumbrance of any nature whatsoever ("Encumbrance") with respect to the Common
Stock or Other Securities, or directly or indirectly, initiate, solicit or
encourage any person to take actions which could reasonably be expected to lead
to the occurrence of any of the foregoing; provided, however, that any such
Stockholder may assign, sell or transfer any Common Stock or Other Securities
provided that any such recipient of the Common Stock or Other Securities has
delivered to the Company and each Investor a written agreement in a form
reasonably satisfactory to the Investors that the recipient shall be bound by,
and the Common Stock and/or Other Securities so transferred, assigned or sold
shall remain subject to this Agreement.
 
SECTION 3.02.  Company Cooperation. The Company hereby covenants and agrees that
it will not, and each Stockholder irrevocably and unconditionally acknowledges
and agrees that the Company will not (and waives any rights against the Company
in relation thereto), recognize any Encumbrance or agreement on any of the
Common Stock or Other Securities subject to this Agreement unless the provisions
of Section 3.01 have been complied with.
 
ARTICLE IV

 
MISCELLANEOUS
 
SECTION 4.01.  Further Assurances. Each Stockholder will execute and deliver
such further documents and instruments and take all further action as may be
reasonably necessary in order to consummate the transactions contemplated
hereby.
 
SECTION 4.02.  Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that any Investor (without
being joined by any other Investor) shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or in equity. Any
Investor shall be entitled to its reasonable attorneys' fees in any action
brought to enforce this Agreement in which it is the prevailing party.
 
SECTION 4.03.  Entire Agreement. This Agreement constitutes the entire agreement
among the Company and the Stockholders (other than the Securities Purchase
Agreement and the other Transaction Documents) with respect to the subject
matter hereof and supersedes all prior agreements and understandings, both
written and oral, among the Company and the Stockholders with respect to the
subject matter hereof.
 
3

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

 
SECTION 4.04.  Amendment. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
 
SECTION 4.05.  Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
this Agreement is not affected in any manner materially adverse to any party.
Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the terms of
this Agreement remain as originally contemplated to the fullest extent possible.
 
SECTION 4.06.  Governing Law. 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. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall be litigated only in the Supreme Court of the State of
New York or the United States District Court for the Southern District of New
York located in New York County, New York. The parties consent to the
jurisdiction and venue of the foregoing courts and consent that any process or
notice of motion or other application to any of said courts or a judge thereof
may be served inside or outside the State of New York or the Southern District
of New York by registered mail, return receipt requested, directed to the party
being served at its address set forth on the signature ages to this Agreement
(and service so made shall be deemed complete three (3) days after the same has
been posted as aforesaid) or by personal service or in such other manner as may
be permissible under the rules of said courts. Each of the Company and each
Stockholder irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action, or proceeding brought in such a court and any claim that
suit, action, or proceeding has been brought in an inconvenient forum. 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.
 
SECTION 4.07.  Third-Party Beneficiaries. The Investors shall be intended third
party beneficiaries of this Agreement to the same extent as if they were parties
hereto, and shall be entitled to enforce the provisions hereof.
 
SECTION 4.08.  Termination. This Agreement shall terminate immediately following
the occurrence of the Stockholder Approval or upon the mutual consent of each
Stockholder and the Investors.
 
[Signature Page Follows]
 
4

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IN WITNESS WHEREOF, each Stockholder and the Company has duly executed this
Agreement.
 

   
THE COMPANY:
         
RANCHER ENERGY CORP.
               
By:
       
Name:
     
Title:
Dated: December __, 2006
         
Address:
999-18th Street, Suite 1740
Denver, Colorado 80202

 

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

 

   
STOCKHOLDER:
   
[                                              ]
               

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

     
Dated: December __, 2006
             
Address:
         

 

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APPENDIX A
 
Stockholder
 
Common Stock
Owned
 
Percentage of Stock Outstanding
 
Voting Percentage
of Stock
Outstanding
                                                       

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 RANCHER [logo.jpg]
 

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08 December 2006

To:
The holders of units (individually a “Unit Holder” and collectively the “Unit
Holders”) consisting of shares (the “Shares”) of common stock, $.0001 par value
(the “Common Stock”), and warrants (the “Warrants”) to purchase shares of Common
Stock (the Shares and Warrants together are collectively the “Units” and each a
“Unit”) of Rancher Energy Corp. (the “Company”)

 
Dear Unit Holder:

This letter agreement (the “Agreement”) sets forth the terms and conditions
under which certain of the Unit Holders who participated in the Company’s
Regulation S offering from approximately 10 July 2006 through 02 November 2006
(the “Unit Offering”) agree to (i) waive temporarily the ability to exercise
Warrants received as part of the Unit Offering, and (ii) to modify the
registration rights concerning the Warrants and Shares received in the Unit
Offering. Capitalized terms used herein and not defined herein shall have the
meanings set forth in the Warrant Certificate (as defined below) or the Unit
Purchase Agreement (as defined below).

As you may be aware, the Company has entered into agreements to (i) acquire
certain property located in Big Muddy Field (located in the Powder River Basin
in Wyoming), and (ii) acquire working interests in Cole Creek South Field and
South Glenrock B Field (both of which are located in the Powder River Basin) and
is in the process of obtaining funds through one or more financings (each a
“Financing”) sufficient to consummate one or more acquisitions (the
“Acquisitions”).

The Company currently has 100,000,000 shares of Common Stock, $.0001 par value
(“Common Stock”), authorized under its Articles of Incorporation, as amended
(the “Articles”), and such amount of authorized shares is insufficient to
accomplish the Financing(s) required to obtain funds sufficient to consummate
the Acquisitions. The Company intends to amend the Articles to increase its
authorized shares of Common Stock to 225,000,000 shares of Common Stock as
promptly as practicable after the closing of the Financing(s).

Each of the Unit Holders is a party to (i) a Warrant Certificate from the
Company (the “Warrant Certificate”), which states that (A) the Unit Holder,
pursuant to Section 2 thereof, may exercise the Warrants at any time prior to
the Expiration Date, and (B) the Company, pursuant to Section 4 of the Warrant
Certificate, shall keep available out of its authorized stock a sufficient
number of shares as shall then be issuable upon the exercise of all outstanding
Warrants, and (ii) a Unit Purchase Agreement with the Company (the “Unit
Purchase Agreement”) which provides for certain registration rights, pursuant to
Section 3 thereof (the “Registration Rights”), concerning certain securities
(the “Securities”).

To facilitate the Company’s ability to accomplish the Financing(s) and to raise
funds sufficient to consummate the Acquisitions, the undersigned Unit Holder
agrees to waive certain rights under the Warrant Certificate and Unit Purchase
Agreement and enter into certain other agreements as further described below.
 

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

Address 999-18th Street, Suite 1740, Denver, Colorado 80202 USA ● Phone
+1.303.629.1122
Fax +1.720.904.5698 ● Email--johnworks@rancherenergy.com●
Web--www.rancherenergy.com

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

 

In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees as follows:

1. Waiver and Agreement. Each of the undersigned Unit Holders, severally and not
jointly with the other Unit Holders, hereby waives certain rights and makes
certain agreements as described as follows:

(a) Warrant Exercise. Such Unit Holder (i) hereby waives its right and ability
to exercise its Warrants, pursuant to Section 2 of the Warrant Certificate,
until such time as the Company has amended its Articles to increase its
authorized shares of Common Stock to at least 225,000,000 shares; and (ii)
hereby waives its rights under Section 4 of the Warrant Certificate, which
requires the Company to reserve and keep available out of its authorized stock
such number of shares of Common Stock as shall be issuable upon the exercise of
all outstanding Warrants, until such time as the Company has amended its
Articles to increase its authorized shares of Common Stock to at least
225,000,000 shares.

(b) Registration Rights.

(i) Each of the undersigned Unit Holders, severally and not jointly with the
other Unit Holders, hereby waives, any claims against the Company for failing to
register such Unit Holder’s Securities within the 90 day period specified in
Section 3 of the Unit Purchase Agreement.

(ii) Each of the undersigned Unit Holders hereby agrees, severally and not
jointly with the other Unit Holders, with the Company that the Registration
Rights set forth in the Unit Purchase Agreement are hereby terminated and
superseded by the registration rights set forth in this subsection 1(b)(ii). The
Company shall register (A) the shares of Common Stock issued to the Unit Holder
as part of the Unit, and (B) the shares of Common Stock issued or issuable upon
exercise of the Warrants issued to the Unit Holder as part of the Unit
(collectively, the “Registrable Securities”) by filing (unless at such time the
Registrable Securities may be resold pursuant to Rule 144(k) of the Securities
Act of 1933, as amended, or any other rule of similar effect) with the
Securities and Exchange Commission (the “SEC”) and using the Company’s best
efforts to cause to become effective one or more registration statements
beginning 12 months following the closing of the Financing. If the SEC requires
that the Company reduce the number of shares so registered, then the Registrable
Securities shall be decreased pro rata with the other shares included in any
such registration, based on the number of Registrable Securities held by the
Unit Holders and the number of other registrable securities held by the other
participants in such registration. Each of the Unit Holders acknowledges that
the foregoing registration rights may be amended, or compliance by the Company
with the terms thereof waived, with the written consent of two-thirds in
interest of the undersigned Unit Holders.

2. Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF COLORADO, WITHOUT REGARD TO
THE CONFLICT OF LAWS PROVISIONS THEREOF.

3. Captions. Section captions and headings used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.

4. Severability.  Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
such law, such provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.

5. Counterparts & Execution of Agreement. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute one and the same agreement. The
exchange of copies of this Agreement and of signature pages by facsimile
transmission shall constitute effective execution and delivery of this Agreement
as to the parties and may be used in lieu of the original Agreement for all
purposes. Signatures of the parties transmitted by facsimile shall be deemed to
be their original signatures of all purposes.

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

 

6. Successors & Assigns. This Agreement shall be binding upon the parties hereto
and their respective successors and assigns, and shall inure to the benefit of
such parties and their respective successors and assigns.
 
7. Enforceability. The parties further acknowledge and agree that the
enforceability of this Agreement as it pertains to the undersigned Unit Holder
shall not be dependent upon obtaining an executed Agreement from any other Unit
Holder or any other holder of the Company’s securities.

8. Full Force & Effect. Except as specifically stated in this Agreement (i) this
Agreement shall not limit, diminish or waive the obligations of the parties
under the Warrant Certificate or Unit Purchase Agreement, and (ii) the parties
reaffirm their obligations under the Warrant Certificate and Unit Purchase
Agreement to which they are a party and agree that the Warrant Certificate and
Unit Purchase Agreement remain in full force.

9. Information. The Unit Holder acknowledges that it has all information needed
to enter into the agreements and make the waivers contemplated by this Agreement
and if it has requested any information from the Company it acknowledges
receiving the same.

[Remainder of Page Intentionally Left Blank]

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

 

If you accept the foregoing terms, please execute in the space provided below
and return one copy to the Company at the above fax number.

Sincerely,

RANCHER ENERGY CORP.

By:  __________________________ 
Name: John Works
Title: President & Chief Executive Officer

AGREED & ACCEPTED effective as of the date set forth above:

UNIT HOLDER:

Signature of Individual Unit Holder: ________________________________________
       
Printed Name of Individual Unit Holder: _____________________________________

______________________________________

Printed Name of Entity (if applicable)

By (Signature): _____________________________________      

Name (printed) _____________________________________      

Title: _______________________________        

__________________________________________________
Address

__________________________________________________
City, State, Postal or Zip Code, Country

[Signature Page to Unit Holder Letter Agreement]
 

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