Exhibit 4.1


 


EXECUTION COPY


 


SECURITIES PURCHASE AGREEMENT


 


SECURITIES PURCHASE AGREEMENT
(the “Agreement”), dated as of
July 24, 2006, by and among Earth Biofuels, Inc., a Delaware corporation, with
its corporate headquarters located at 3001
Knox Street, Suite 403, Dallas, Texas 75205 (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 are 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 senior 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 $0.001
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 aggregate principal amount of the Notes set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers attached
hereto (which aggregate amount for all Buyers shall be $52,500,000), (ii)
warrants, in substantially the form attached hereto as Exhibit B-1 (the “Series A Warrants”),
to acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name in column (4) of the Schedule of Buyers (as
exercised, collectively, the “Series A Warrant Shares”) and (iii) warrants,
in substantially the form attached hereto as Exhibit B-2 (the “Series B Warrants”,
and together with the Series A Warrants, 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 “Series B Warrant Shares”, and together with
the Series A Warrant Shares, 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 Notes, the
Conversion Shares, the Warrants and the Warrant Shares collectively are
referred to herein as the “Securities”.


 


F.             The Company and
certain Buyers (the “Initial Bridge Buyers”) acquired certain
notes (the “Initial Bridge Notes”) pursuant to
that certain Securities Purchase Agreement, dated


 

















 


as of May 26,
2006, by and among the Company and the Initial Bridge Buyers signatory thereto
(the “Initial Bridge SPA”), whereby the
Company may elect to cause the Exchange (as defined in the Initial Bridge Note)
of some or all of the Initial Bridge Notes for Notes and Warrants hereunder.


 


G.            The Company and
certain Buyers (the “Additional Bridge Buyers”, and together with
the Initial Bridge Buyers, the “Bridge Buyers”)
acquired certain notes (the “Additional Bridge Notes”,
and together with the Initial Bridge Notes, the “Bridge Notes”)
pursuant to (i) that certain Securities Purchase Agreement, dated as of June 7,
2006, by and among the Company and the Additional Bridge Buyers signatory
thereto and (ii) that certain Securities Purchase Agreement, dated as of July
10, 2006, by and among the Company and the Additional Bridge Buyers signatory
thereto (collectively, the “Additional Bridge
Agreements”, and together with the Initial Bridge Agreements, the “Bridge Agreements”), whereby such Additional Bridge Buyers
may elect in the Exchange Election (as defined in the Additional Bridge Note)
to exchange some or all of the Additional Bridge Notes for Notes and Warrants
hereunder.


 


NOW, THEREFORE, the
Company and each Buyer hereby agree as follows:


 


1.             PURCHASE AND SALE OF NOTES AND WARRANTS.


 


(a)           Purchase
of Notes and Warrants.


 


(i)            Notes
and Warrants. Subject to the satisfaction (or waiver) of the conditions set
forth in Sections 6 and 7 below, on the Closing Date (as defined below), the
Company shall issue and sell to each Buyer, and each Buyer severally, but not
jointly, shall purchase from the Company, (x) a Note in the principal amount as
is set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers, (y) the Series A Warrants to acquire up to that number of Series A
Warrant Shares as is set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers and (z) the Series B Warrants to acquire up to that number
of Series B 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 July 25, 2006 (or
such other 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.


 


(iii)          Purchase
Price. The aggregate purchase price for 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
$1.00 for each $1.00 of principal amount of Notes and related Warrants to be
purchased by such Buyer at the Closing.


 


(iv)          Exchange.
The Company has elected to cause the Exchange of all Obligations (as defined in
the Initial Bridge Notes) outstanding as of the Closing Date in the Initial
Bridge Notes and agrees to take such further acts as is necessary pursuant to
the Initial


 


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Bridge Notes to consummate the Exchange on
the Closing Date (the “Initial Exchange
Transaction”).


 


(b)           Form
of Payment. On the Closing Date, (i) each Buyer shall pay its Purchase
Price to the Company for the Notes and the Warrants to be issued and sold to
such Buyer at the Closing (less, (x) in the case of any Bridge Buyer, the
amount of the Obligations (as defined in the Bridge Notes) outstanding as of
the Closing Date owed to such Bridge Buyer that such Bridge Buyer (or the
Company, as applicable) has elected to exchange in the Exchange Election (or
the Exchange, as applicable) and (y) in the case of Castlerigg, the amounts
withheld pursuant to Section 4(g)), by wire transfer of immediately available
funds in accordance with the Company’s written wire instructions and
(ii) the Company shall deliver to each Buyer Notes (allocated in the
principal amounts as such Buyer shall request) with an aggregate principal
amount as is set forth opposite such Buyer’s name in column (3) on the Schedule
of Buyers along with the Warrants (allocated in the amounts as such Buyer shall
request) to acquire up to an aggregate number of Warrant Shares as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers, in each
case duly executed on behalf of the Company and registered in the name of such
Buyer.


 


2.             BUYER’S REPRESENTATIONS AND WARRANTIES.


 


Each Buyer
represents and warrants to the Company with respect to only itself that:


 


(a)           No
Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and the
Warrants and (ii) upon conversion of the Notes and exercise of the Warrants
will acquire the Conversion Shares issuable upon conversion of the Notes and
the Warrant Shares issuable upon exercise of the Warrants, for investment
purposes, 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. 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. At the time such Buyer was offered the Securities, it was,
and at the date hereof it is, and on each date on which it exercises Notes or
Warrants it will be, an “accredited investor” as defined in Rule 501(a) under
the 1933 Act. Such Buyer is not a registered broker-dealer under Section 15 of
the 1934 Act.


 


(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


 


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determine the
availability of such exemptions and the eligibility of such Buyer to acquire
the Securities.


 


(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 which have been requested by
such Buyer. Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice 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”); (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).


 


(g)           Legends.
Such Buyer understands that the certificates or other instruments representing
the Notes and the Warrants and, until such time as the resale of the


 


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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 (a “Registration
Event”), or (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of counsel, in a
form reasonably acceptable to the Company, to the effect that such sale or
transfer of the Securities may be made without registration under the applicable
requirements of the 1933 Act, or (iii) following a sale of transfer of such
Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of
the Company), or (iv) while such Securities are eligible for sale under Rule
144(k).


 


(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 by such Buyer and 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.


 


(i)            No
Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement to which such Buyer is a party
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


 


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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)           Independent
Investment Decision. Such Buyer has independently evaluated the merits of
its decision to purchase Securities pursuant to the Transaction Documents, and
such Buyer confirms that it has not relied on the advice of the Company nor any
other Buyer’s business and/or legal counsel in making such decision.


 


(l)            Certain
Trading Activities. Other than the acquisition of the Bridge Notes, such
Buyer has not directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with such Buyer, engaged in any transactions in
the securities of the Company (including, without limitations, any Short Sales
involving the Company’s securities) since the time that such Buyer was first
contacted by the Company or Cowen and Company regarding the transactions
contemplated hereby. Such Buyer covenants that neither it nor any Person acting
on its behalf or pursuant to any understanding with it will engage in any
transactions in the securities of the Company (including Short Sales) prior to
the time that the transactions contemplated by this Agreement are publicly
disclosed. For the purpose of this Agreement, “Short Sales” include, without limitation,
all “short sales” as defined in Rule 200
promulgated under Regulation SHO under the 1934 Act and all types of
direct and indirect stock pledges, forward sale contracts, options, puts,
calls, swaps and similar arrangements (including on a total return basis), and
sales and other transactions through non-US broker dealers or foreign regulated
brokers.


 


(m)          General
Solicitation. Such Buyer is not purchasing the Securities as a result of
any advertisement, article, notice or other communication regarding the
Securities published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar.


 


(n)           Organization.
Such Buyer is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with the requisite
corporate or partnership power and authority to enter into and to consummate
the transactions contemplated by the applicable Transaction Documents (as
defined below) and otherwise to carry out its obligations thereunder.


 


3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


 


The Company
represents and warrants to each of the Buyers that:


 


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(a)           Organization
and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any joint venture or any entity (i)
in which the Company, directly or indirectly, owns 50% or more of the
outstanding capital stock or holds an equity or similar interest representing
50% or more of the outstanding equity or similar interest of such entity, (ii)
that is a significant subsidiary of the Company as defined under Regulation S-X
of the 1934 Act or (iii) in which the Company controls or operates all or part
of the business, operations or administration of such entity) are entities duly
organized and validly existing 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, taken as a whole, or on the transactions contemplated hereby
and 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 power and authority to
enter into and perform its obligations under this Agreement, the Notes, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as
defined in Section 5(b)), the Warrants, the Lock-Up Agreements and each of the
other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the 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 other than (i) the filing of a Form D under Regulation D of
the 1933 Act, (ii) the filing with the SEC of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement, (iii) such filings as are required by the Principal Market (as
defined below) and (iv) such filings required under applicable securities or “Blue
Sky” laws of the states of the United States, 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 when delivered by the Company will
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.


 


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(c)           Issuance
of Securities. The issuance of 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, a number of shares of Common Stock shall have
been duly authorized and reserved for issuance which equals 130% of the maximum
number of shares Common Stock issuable upon conversion of the Notes (assuming
such conversion occurred at Closing) and upon exercise of the Warrants
(assuming such exercise occurred at Closing). Upon conversion in accordance
with the Notes or exercise in accordance with the Warrants, as the case may be,
the Conversion Shares and the Warrant Shares, respectively, when issued, 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. Based in part upon the accuracy of the representations and warranties of
the Buyers’ set forth in Article 2, issuance by the Company of the Securities
is, or will be upon issuance, exempt from registration under the 1933 Act.


 


(d)           No
Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Notes and the Warrants, and reservation for issuance and
issuance of the Conversion Shares and the Warrant Shares) will not (i) result
in a violation of any certificate of incorporation, certificate of formation,
any certificate 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 as reported on Bloomberg Financial Markets LP (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; except in the case of
each of clauses (ii) and (iii), such as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.


 


(e)           Consents.
Other than as contemplated in Section 3(b), and otherwise as set forth on Schedule
3(e), the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the Closing Date (other
than those which the Company is not required to obtain in accordance with the
Transaction Documents until after the Closing Date) and the Company and its
Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. The Company is not in violation of
the listing requirements of the Principal Market and has no knowledge of any
facts which 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) to the Company’s knowledge, an “affiliate” of the Company
(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 affiliates, nor any Person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or brokers’ commissions (other than for persons
engaged by any Buyer or its investment advisor) relating to or arising out of
the transactions contemplated hereby. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim. The Company acknowledges that it has engaged Cowen and
Company as placement agent (the “Placement Agent”) in connection with the
sale of the Securities. Other than the Placement Agent, the Company has not
engaged any placement agent or other 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, in each case,


 


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is absolute
and unconditional 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. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the jurisdiction of its formation 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 has not adopted a stockholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.


 


(k)           SEC
Documents; Financial Statements. Except as disclosed in Schedule 3(k),
since October 7, 2005, 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 dates, the
SEC Documents complied in all material respects with the requirements of the
1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. As of their respective dates, the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto. 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, 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 and not misleading.


 


(l)            Absence
of Certain Changes. Except as disclosed in Schedule 3(l),
since October 7, 2005, 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(1), since
October 7, 2005, the Company has not (i) declared or paid any
dividends, (ii) sold any


 


10

















 


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 $100,000. The Company has not taken any steps to seek
protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact which
would reasonably lead a creditor to do so. The Company and its Subsidiaries,
individually and on a consolidated basis, will not, after giving effect to the
transactions contemplated hereby to occur at the Closing, 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
(excluding the Notes) (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.


 


(m)          No
Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.


 


(n)           Conduct
of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Certificate of
Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or 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 October 7, 2005, the Common Stock has been designated for
quotation on the Principal Market. Since October 7, 2005, (i) trading in the
Common Stock has not been suspended by the SEC or the Principal Market and (ii)
the Company has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate regulatory
authorities necessary to conduct their respective businesses, except where the
failure to possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.


 


11

















 


(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, any corporation, partnership, trust or
other entity in which any such officer, director, or employee has a substantial
interest or is an officer, director, trustee or partner.


 


(r)            Equity
Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 250,000,000 shares of Common Stock, of which as of the
date hereof, 215,037,018 are issued and outstanding, up to 3,000,000 shares
will be reserved for issuance pursuant to the Company’s stock option and
purchase plans and 30,627,108 shares are reserved for issuance pursuant to
securities (other than the Notes and the Warrants) exercisable or exchangeable
for, or convertible into, shares of Common Stock and (ii) 15,000,000 shares of
preferred stock, of which as of the date hereof, no shares are issued and
outstanding. All of such outstanding shares have been, or upon issuance will
be, validly issued and are fully paid and nonassessable. Except as 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


 


12

















 


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 Certificate of Incorporation, as amended and
as in effect on the date hereof (the “Certificate
of Incorporation”), and the Company’s Bylaws, as amended and as in
effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or
exchangeable for, shares of Common Stock and the material rights of the holders
thereof in respect thereto. Schedule 3(r) sets forth the shares of
Common Stock owned beneficially or of record and Common Stock Equivalents (as
defined below) held by each director and executive officer.


 


(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


 


13

















 


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.


 


(t)            Absence
of Litigation. Except as set forth on Schedule 3(s), there is no
action, suit, proceeding 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, whether of a civil or criminal nature or otherwise.


 


(u)           Insurance.
The Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.


 


(v)           Employee
Relations. (i)  Neither the Company
nor any of its Subsidiaries is a party to any collective bargaining agreement
or employs any member of a union. The Company and its Subsidiaries believe that
their relations with their employees are good. No executive officer of the
Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act)
has notified the Company or any such Subsidiary that such officer intends to
leave the Company or any such Subsidiary or otherwise terminate such officer’s
employment with the Company or any such Subsidiary. No executive officer of the
Company or any of its Subsidiaries is, or is now expected to be, in violation
of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing matters.


 


14

















 


(ii)           The
Company and its Subsidiaries are in compliance with all federal, state, local
and foreign laws and regulations respecting labor, employment and employment
practices and benefits, terms and conditions of employment and wages and hours,
except where failure to be in compliance would not, either individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.


 


(w)          Title.
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 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, licenses, approvals, governmental
authorizations, 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 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 any of its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.


 


(y)           Environmental
Laws. The Company and its Subsidiaries (i) are in compliance with any and
all Environmental Laws (as hereinafter defined), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign
laws relating to pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, groundwater, land surface or
subsurface strata), including, without limitation, laws relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters,


 


15

















 


injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.


 


(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)         Investment
Company. 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.


 


(bb)         Tax
Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.


 


(cc)         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. Since October 7, 2005, neither the Company nor
any of its Subsidiaries have received any notice or correspondence from any
accountant identifying a material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries which is
not specified in the Company’s Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2005.


 


16

















 


(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 Exchange
Act filings and is not so disclosed or that otherwise would be reasonably
likely to have a Material Adverse Effect.


 


(ee)         Ranking
of Notes. Except as set forth on Schedule (ee), 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.


 


(ff)           Form
SB-2 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form SB-2 promulgated
under the 1933 Act.


 


(gg)         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.


 


(hh)         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 Placement Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Placement Agent, paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company.


 


(ii)           Acknowledgement
Regarding Buyers’ Trading Activity. It is understood and acknowledged by
the Company (i) that following the public disclosure of the transactions
contemplated by the Transaction Documents in accordance with the terms hereof,
none of the Buyers have been asked to agree, nor has any Buyer agreed, to
desist from purchasing or selling, long and/or short, securities of the
Company, or “derivative” securities based on securities issued by the Company
or to hold the Securities for any specified term, (ii) that any Buyer, and
counter parties in “derivative” transactions to which any such Buyer is a
party, directly or indirectly, which were established prior to their learning
of the transactions contemplated by the Transaction Documents, presently may have
a “short” position in the Common Stock, and (iii) that each Buyer shall not be
deemed to have any affiliation with or control over any arm’s length
counter-party in any “derivative” transaction. The Company further understands
and acknowledges that, following the public disclosure of the transactions
contemplated by the Transaction Documents in accordance with the terms hereof,
(a) one or more Buyers may engage in hedging and/or trading activities at
various times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Conversion Shares
and the Warrant Shares deliverable with respect to Securities are being
determined and (b) such hedging and/or trading activities, if any, can reduce the
value of the existing stockholders’ equity interest in the Company both at and
after the time the hedging and/or trading activities are being conducted. The
Company acknowledges that such aforementioned hedging


 


17

















 


and/or trading
activities do not constitute a breach of this Agreement, the Notes, the
Warrants or any of the documents executed in connection herewith.


 


(jj)           U.S.
Real Property Holding Corporation. The Company is not, nor has ever been, a
U.S. real property holding corporation within the meaning of Section 897 of the
Internal Revenue Code of 1986, as amended, and the Company shall so certify
upon Buyer’s request.


 


(kk)         Disclosure.
The Company confirms that neither it nor any other Person acting on its behalf
has provided any of the Buyers or their agents or counsel with any information
that constitutes material, nonpublic information concerning the Company or its
Subsidiaries other than the existence of the transactions contemplated by this
Agreement or the other Transaction Documents. The Company understands and
confirms that each of the Buyers will rely on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Buyers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company 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.


 


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


 


18

















 


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 otherwise permit such termination.


 


(d)           Use
of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate and for working capital purposes, provided,
however, that the Company may not use the proceeds from the sale of the
Securities for (i) the repayment of any other outstanding Indebtedness of the
Company or any of its Subsidiaries or (ii) the redemption or repurchase of any
of its or its Subsidiaries’ equity securities.


 


(e)           Financial
Information. The Company agrees to send the following to each Investor (as
defined in the Registration Rights Agreement) during the Reporting Period (i)
unless the following are filed with the SEC through EDGAR and are available to
the public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K or
10-KSB, 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, if not publicly filed,
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 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 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. 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. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).


 


(g)           Fees.
The Company shall reimburse Castlerigg Master Investments Ltd. (a Buyer) (“Castlerigg”) or its designee(s) (in addition to any other
expense amounts paid to any Buyer prior to the date of this Agreement) for all
reasonable documentation costs and expenses incurred in connection with the
transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation
and implementation of the transactions contemplated by the Transaction
Documents and due diligence in connection therewith), which amount shall be
withheld by such 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 (other than for Persons engaged by any
Buyer) relating to or arising out of the transactions contemplated hereby,
including, without limitation, any fees or commissions payable to the Placement
Agent. The


 


19

















 


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 against a Buyer relating to any
such payment. Except as otherwise set forth in the Transaction Documents, each
party to this Agreement shall bear its own expenses in connection with the sale
of the Securities to the Buyers.


 


(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 8:30 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 (and all
schedules to 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”).
From and after the filing of the 8-K Filing with the SEC, no Buyer shall be in
possession of any material, nonpublic information received from the Company,
any of its Subsidiaries or any of its respective officers, directors, employees
or agents, that is not disclosed in the 8-K Filing. The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any
material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer or as may be required under the terms
of the Transaction Documents. If a Buyer has, or believes it has, received any
such material, nonpublic information regarding the Company or any of its
Subsidiaries, it shall provide the Company with written notice thereof. The
Company shall, within five (5) Trading Days (as defined in the Note) 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


 


20

















 


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 (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Without the
prior written consent of any applicable Buyer, neither the Company nor any of
its Subsidiaries or affiliates shall disclose the name of such Buyer in any
filing, announcement, release or otherwise, unless such disclosure is required
by law, regulation or the Principal Market.


 


(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 Required Holders (as defined in the Notes).


 


(k)           Additional
Notes; Variable Securities; Dilutive Issuances. So long as any Notes remain
outstanding, 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 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
(other than pursuant to antidilution provisions) 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. For long as any Notes or Warrants remain
outstanding, the Company shall not, in any manner, enter into or affect any
Dilutive Issuance (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 Eligible Market (as defined
in the Registration Rights Agreement).


 


(l)            Corporate
Existence. So long as any Notes remain outstanding, 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.


 


(m)          Reservation
of Shares. So long as any Notes or Warrants remain outstanding, the Company
shall take all action necessary to at all times have authorized, and reserved
for the purpose of issuance, no less than 130% of the number of shares of
Common Stock issuable upon conversion of all of the Notes and issuable upon
exercise of the Warrants then outstanding (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).


 


21

















 


(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 date that is 30 calendar days following the Effective
Date (as defined in the Registration Rights Agreement) (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”).


 


(iii)          For
a period of 24 months following the Effective Date (as defined in the
Registration Rights Agreement), 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 who purchased Notes hereunder with at least
a principal amount of $5 million (each, an “Eligible
Buyer”) a 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 (w)
identify and describe the Offered Securities, (x) 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,
(y) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer
to issue and sell to or exchange with such Eligible Buyers at least 50% of the
Offered Securities, allocated among such Eligible Buyers (a) based on such
Eligible Buyer’s pro rata portion of the aggregate principal amount of Notes purchased hereunder by Eligible
Buyers (the “Basic Amount”), and
(b) with respect to each Eligible Buyer that elects to


 


22

















 


purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Eligible Buyers as such Eligible Buyer shall indicate it will purchase or
acquire should the other Eligible 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 Eligible Buyer must deliver a
written notice to the Company prior to the end of the seventh (7th)
Business Day after such Eligible Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such Eligible
Buyer’s Basic Amount that such Eligible Buyer elects to purchase and, if such
Eligible Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Eligible Buyer elects to purchase
(in either case, the “Notice of Acceptance”).
If the Basic Amounts subscribed for by all Eligible Buyers are less than the
total of all of the Basic Amounts, then each Eligible 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 Eligible 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 Eligible Buyer bears to the total Basic
Amounts of all Eligible 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 ten (10) Business Days from the expiration of the Offer
Period above to (i) 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
Eligible 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 (the
“Offer 8-K”). 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


 


23

















 


its or their respective officers, directors,
employees, stockholders or agents for any such disclosure.


 


(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 Eligible 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 Eligible
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 Eligible 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
Eligible 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 Eligible 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 Eligible Buyers shall acquire from the Company, and the
Company shall issue to the Eligible Buyers, the number or amount of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 4(o)(iii)(3) above if the Eligible Buyers have so elected, upon the
terms and conditions specified in the Offer. The purchase by the Eligible
Buyers of any Offered Securities is subject in all cases to the preparation,
execution and delivery by the Company and the Eligible Buyers of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form
and substance to the Eligible Buyers and their respective counsel.


 


(6)           Any
Offered Securities not acquired by the Eligible 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 Eligible Buyers under the procedures
specified in this Agreement.


 


(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).


 


(v)           In
exchange for the Company’s willingness to agree to these procedures, each
Eligible Buyer hereby irrevocably agrees that it will hold in strict confidence
any and all Offer Notices, the information contained therein, and the fact that
the Company is contemplating a Subsequent Placement, from the date such
Eligible Buyer receives such Offer Notice until the earlier to occur of (1) the
date the Offer 8-K is filed with the SEC and (2) the date such information is
disclosed to the public by any Eligible Buyer in accordance with Section
4(o)(iii)(3) above. Notwithstanding anything in this Section 4(o) to the
contrary, at any time any Eligible Buyer may elect, by delivering written
notice to the Company, not to receive any Offer Notices hereunder and, until
such time as such Eligible


 


24

















 


Buyer or its successor elects, by delivering
written notice to the Company, to receive Offer Notices hereunder, the Company
shall not be obligated to deliver any Offer Notices to such Eligible Buyer.


 


(p)           Additional
Registration Statements. Until the Effective Date (as defined in the
Registration Rights Agreement), the Company will not file a registration
statement under the 1933 Act relating to securities that are not the
Securities.


 


(q)           Letter
of Credit. On any Disclosure Date (as defined in the Notes), including, without
limitation, any Disclosure Date following any LC Test Satisfaction Date (as
defined below), the Company shall obtain (or maintain, as applicable) an
irrevocable letter of credit (the “Letter of
Credit”), in the amount of 30% of the principal amount of the
outstanding Notes as of such Disclosure Date (the “Required
Letter of Credit Amount”) issued in favor of Castlerigg (the “LC Agent”) by a bank acceptable to such LC Agent (the “Letter of Credit Bank”) and in form and
substance acceptable to such LC Agent; provided, however, that if on any
Disclosure Date the amount available to be drawn on a Letter of Credit then
outstanding (together with any amounts previously drawn on such Letter of
Credit by the LC Agent) is less than the Required Letter of Credit Amount, the
Company shall amend or replace such Letter of Credit with a Letter of Credit
(together with any amounts previously drawn on such Letter of Credit by the LC
Agent) in the Required Letter of Credit Amount and in form and substance
acceptable to such LC Agent. If the Net Cash Balance Test (as defined in the
Note) for the Fiscal Quarter (as defined in the Note) immediately following
such Disclosure Date is met, the Company shall no longer be required to
maintain such Letter of Credit (such date, the “LC Test
Satisfaction Date”); provided, however, that the foregoing shall not
effect the Company’s obligation to obtain (or maintain, as applicable) a Letter
of Credit with respect to any Disclosure Date that occurs after such LC Test
Satisfaction Date. Subject to the last three sentences of this Section 4(q),
the Letter of Credit shall expire not earlier than the earlier to occur of (i)
the applicable LC Test Satisfaction Date and (ii) 91 days after the Maturity
Date of the Notes (the “LC Expiration Date”).
Upon the occurrence and during the continuance of an Event of Default under
(and as defined in) the Notes, the LC Agent shall be entitled to draw under the
Letter of Credit for the full Letter of Credit Amount (as defined in the Notes)
then available thereunder, it being understood that the LC Agent shall act for
the benefit of the Buyers on a pro rata basis based on the principal amount of
the Notes held by each of the Buyers and hold such amount as collateral
security for the obligations under the Notes for the benefit of the Buyers. The
Company shall obtain such renewals, extensions or replacements of the Letter of
Credit as necessary to ensure that the Letter of Credit shall not expire prior
to the LC Expiration Date (unless the Letter of Credit shall have been reduced
to zero in accordance with the terms contained in this Section 4(q) prior to
such date). If, at any time, the Company cannot obtain a renewal, extension or
replacement of the Letter of Credit such that the Letter of Credit will expire
prior to the LC Expiration Date (a “Withdrawal
Event”), the Company and the Letter of Credit Bank shall each give
the LC Agent written notice of the occurrence of a Withdrawal Event at least
forty-five (45) days prior to the then current expiration date of the Letter of
Credit. Following a Withdrawal Event, the LC Agent shall be entitled to draw
down the Letter of Credit Amount in its entirety (whether or not an Event of
Default shall have occurred or be continuing under any of the Notes) and hold
such amount as collateral security for the obligations under the Notes for the
benefit of the Buyers.


 


25

















 


(r)            LC
Agent. Castlerigg is hereby appointed as the LC Agent for the Buyers
hereunder, and each Buyer hereby authorizes the LC Agent (and its officers,
directors, employees and agents) to take any and all such actions on behalf of
such Buyer with respect to the Letter of Credit in accordance with the terms of
this Agreement. The LC Agent shall not have, by reason hereof or any of the
other Transaction Documents, a fiduciary relationship in respect of the Buyers.
Neither the LC Agent nor any of its officers, directors, employees and agents
shall have any liability to the Buyers for any action taken or omitted to be
taken in connection hereof except to the extent caused by its own gross
negligence or willful misconduct, and the Buyers agree to defend, protect,
indemnify and hold harmless the LC Agent and all of its officers, directors,
employees and agents (collectively, the “Indemnitees”)
from and against any losses, damages, liabilities, obligations, penalties,
actions, judgments, suits, fees, costs and expenses (including, without
limitation, reasonable attorneys’ fees, costs and expenses) incurred by such
Indemnitee, as incurred, whether direct, indirect or consequential, arising
from or in connection with the performance by such Indemnitee of the duties and
obligations of the LC Agent pursuant hereto.


 


(s)           Stockholder
Approval. If at any time the Exchange Cap (as defined in the Notes) would
limit the aggregate number of shares of Common Stock which the Company may
issue upon conversion or exercise, as applicable, of the Notes and Warrants, at
the written request of holders of a majority of the Conversion Shares and
Warrant Shares outstanding at such time (as determined assuming full conversion
of the Notes and full exercise of the Warrants prior to such date 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) (the date of
such request, the “Stockholder Meeting
Request Date”), the Company shall provide each stockholder entitled
to vote at a special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which shall be
promptly called and held not later than ninety (90) calendar days after the
Stockholder Meeting Request Date (the “Stockholder
Meeting Deadline”), a proxy statement, substantially in the form
which has been previously reviewed by the Buyers and Schulte Roth & Zabel
LLP, soliciting each such stockholder’s affirmative vote at the Stockholder
Meeting for approval of resolutions providing for the Company’s issuance of all
of the Securities as described in the Transaction Documents in accordance with
applicable law and the rules and regulations of the Principal Market and such
affirmative approval being referred to herein as the “Stockholder Approval”), and the Company
shall use its reasonable best efforts to solicit its stockholders’ approval of
such resolutions and to cause the Board of Directors of the Company to
recommend to the stockholders that they approve such resolutions. The Company
shall be obligated to use its reasonable best efforts to obtain the Stockholder
Approval by the Stockholder Meeting Deadline. If, despite the Company’s
reasonable best efforts the Stockholder Approval is not obtained on or prior to
the Stockholder Meeting Deadline, the Company shall cause an additional
Stockholder Meeting to be held every six (6) months thereafter until such
Stockholder Approval is obtained or the Notes are no longer outstanding.


 


(t)            Lock-Up
Agreements. The Company shall not amend, waive or modify the Lock-Up
Agreements without the written consent of the Required Holders.


 


(u)           Amendment
to Certificate of Incorporation. On July 31, 2006, the Company shall file
an amendment to its Certificate of Incorporation to increase the number of


 


26

















 


authorized
shares of Common Stock from 250,000,000 to at least 400,000,000 (the “Share Increase”). The failure of the Company to effect the
Share Increase no later than July 31, 2006 shall be deemed an immediate Event
of Default (as defined in the Notes) pursuant to the terms of the Notes without
regard to any cure periods thereunder.


 


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 upon reasonable notice.


 


(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 “Irrevocable Transfer Agent Instructions”). The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions
to give effect to Section 2(g) hereof, will be given by the Company to its
transfer agent, 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. Upon a Registration Event or if a Buyer
effects a sale, assignment or transfer of the Securities in accordance with
Section 2(f), the Company 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 and, with respect to any transfer, shall
permit the transfer. In the event that a Registration Event has occurred or
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.


 


27

















 


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


 


Closing Date.
The obligation of the Company hereunder to issue and sell 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:


 


(a)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.


 


(b)           Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, (x) in the case of any Bridge Buyer, the amount of the Obligations
(as defined in the Bridge Notes) outstanding as of the Closing Date owed to
such Bridge Buyer that such Bridge Buyer (or the Company, as applicable) has
elected to exchange in the Exchange Election (or the Exchange, as applicable)
and (y) in the case of Castlerigg, the amounts withheld pursuant to Section
4(g)) for 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.


 


(c)           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 specific
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.


 


Closing Date.
The obligation of each Buyer hereunder to purchase 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:


 


(a)           The
Company is consummating the Initial Exchange Transaction simultaneously with
the Closing hereunder.


 


(b)           The
Company shall have duly executed and delivered to such Buyer (i) each of the
Transaction Documents and (ii) the Notes (allocated in such principal amounts
as such Buyer shall request), being purchased by such Buyer at the Closing
pursuant to this Agreement, (iii) the related Series A Warrants (allocated in
such amounts as such Buyer shall request) being purchased by such Buyer at the
Closing pursuant to this Agreement and (iv) the related Series B Warrants
(allocated in such amounts as such Buyer shall request) being purchased by such
Buyer at the Closing pursuant to this Agreement.


 


28

















 


(c)           Such
Buyer shall have received the opinion of Scheef & Stone, LLP, the Company’s
outside counsel, dated as of the Closing Date, in substantially the form of Exhibit
E attached hereto.


 


(d)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.


 


(e)           The
Company shall have delivered to such Buyer a true copy of 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.


 


(f)            The
Company shall have delivered to such Buyer a true copy of 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.


 


(g)           The
Company shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of
Delaware within ten (10) days of the Closing Date.


 


(h)           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 Certificate
of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit F.


 


(i)            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 specific
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.


 


(j)            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.


 


(k)           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


 


29

















 


or the
Principal Market or (B) by falling below the minimum listing maintenance
requirements of the Principal Market.


 


(l)            The
Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.


 


(m)          Such
Buyer shall have received a lock-up agreement in the form attached hereto as
Exhibit H-1 (the “Apollo Lock-Up Agreement”),
duly executed and delivered by Apollo Resources, Inc. (“Apollo”)
and the Company, with the Buyers as a third party beneficiary thereof, which
limits the rights of Apollo and certain of its affiliates to sell or transfer
Common Stock of the Company until the second anniversary of the Closing Date.


 


(n)           Such
Buyer shall have received lock-up agreements in the form attached hereto as
Exhibit H-2 (the “Management Lock-Up
Agreements”, together with the Apollo Lock-Up Agreement, the “Lock-Up Agreements”), duly executed and delivered by the
senior officers and directors of the Company (collectively, “Management”) and the Company, with the Buyers as a third
party beneficiary thereof, which limits the rights of Management to sell or
transfer Common Stock of the Company until the first anniversary of the Closing
Date.


 


(o)           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, due to the failure of the Company to satisfy the conditions to Closing set
forth in Section 7, the Company shall remain obligated to reimburse the
non-breaching Buyers for their 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


 


30

















 


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.


 


(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
Required Holders, 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


 


31

















 


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.


 


(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:

  
	
   

  	
   

  
	
  Earth
  Biofuels, Inc.

  	
   

  
	
  3001 Knox
  Street, Suite 403,

  	
   

  
	
  Dallas,
  Texas 75205

  
	
  Telephone:

  	
  (214) 389-9800

  
	
  Facsimile:

  	
  (214) 389-9806

  
	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  
	
  Copy to (for informational purposes only):

  
	
   

  
	
  Scheef &
  Stone, LLP

  
	
  Telephone:

  	
  (214) 706-4200

  
	
  Facsimile:

  	
  (214) 706-4242

  
	
  Attention:

  	
  Roger A. Crabb, Esq.

  
	
   

  
	
  If to the Transfer Agent:

  
	
   

  
	
  Nevada Agency and Trust Company

  
	
  50 West Liberty Street

  	
   

  
	
  Suite 800

  	
   

  
	
  Reno, Nevada 89501

  
	
  Telephone:

  	
  (775) 322-0626

  
	
  Facsimile:

  	
  (775) 322-5623

  
	
  Attention:

  	
  Mary Ramsey

  
	
   

  
	
  If to a Buyer, to its address and facsimile
  number set forth on the Schedule of Buyers, with copies to such Buyer’s
  representatives as set forth on the Schedule of Buyers,

  
	
   

  
	
  with a copy (for informational purposes
  only) to:

  
	
   

  	
   

  
	
  Schulte Roth
  & Zabel LLP

  	
   

  
	
  919 Third
  Avenue

  	
   

  
	
  New York,
  New York 10022

  
	
  Telephone:

  	
  (212) 756-2000

  
	
  Facsimile:

  	
  (212) 593-5955

  
	
  Attention:

  	
  Eleazer N. Klein, Esq.

  
			



 


32

















 


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
Required Holders (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 and the delivery and exercise of Securities, as applicable. Each Buyer
shall be responsible only for its own representations, warranties, agreements
and covenants hereunder.


 


(j)            Further
Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish
the purposes of this Agreement and the consummation of the transactions
contemplated hereby.


 


(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


 


33

















 


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. To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law. Except
as otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.


 


(l)            No
Strict Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.


 


(m)          Remedies.
Each Buyer and each holder of the Securities shall have all rights and remedies
set forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law. Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under the Transaction Documents, any remedy at law may prove to
be inadequate relief to the Buyers. The Company therefore agrees that the
Buyers shall be entitled to seek temporary and permanent injunctive relief in
any such case without the necessity of proving actual damages and without
posting a bond or other security.


 


(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,


 


34

















 


declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a
trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, foreign, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.


 


(p)           Independent
Nature of Buyers’ Obligations and Rights. The obligations of each Buyer
under any Transaction Document are several and not joint with the obligations
of any other Buyer, and no Buyer shall be responsible in any way for the
performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and the Company acknowledges that the Buyers are not acting in concert
or as a group, and the Company will not assert any such claim, with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Buyer confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.


 


[Signature Page Follows]


 


35

















 


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:

  
	
   

  	
   

  
	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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:

  
	
   

  	
   

  
	
   

  	
  CASTLERIGG MASTER INVESTMENTS

  LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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


 


 


	
   

  	
  OTHER BUYERS:

  
	
   

  	
   

  
	
   

  	
  EVOLUTION MASTER FUND LTD. SPC,

  SEGREGATED PORTFOLIO M

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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


 


 


	
   

  	
  RADCLIFFE SPC, LTD. FOR AND ON

  BEHALF OF THE CLASS A

  CONVERTIBLE CROSSOVER

  SEGREGATED PORTFOLIO

  
	
   

  	
  By: RG Capital Management, L.P.

  
	
   

  	
  By: RGC Management Company, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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.


 


 


	
   

  	
  CAPITAL VENTURES INTERNATIONAL

  
	
   

  	
  By: Heights Capital Management, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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.


 


 


	
   

  	
  PORTSIDE GROWTH AND OPPORTUNITY

  FUND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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.


 


 


	
   

  	
  CORNELL CAPITAL PARTNERS, LP

  
	
   

  	
  BY:

  	
  YORKVILLE ADVISORS, LLC

  
	
   

  	
  ITS:

  	
  GENERAL PARTNER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
   

  	
  Title:

  	
  Portfolio Manager

  
						



 

















 


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


 


 


	
   

  	
  CRANSHIRE CAPITAL L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


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.


 


 


	
   

  	
  KINGS ROAD INVESTMENTS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 

















 


SCHEDULE OF BUYERS


 


	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  	
  (7)

  	
   

  
	
  Buyer

  	
   

  	
  Address and

  Facsimile Number

  	
   

  	
  Aggregate

  Principal

  Amount of

  Notes

  	
   

  	
  Number of

  Series A

  Warrant Shares

  	
   

  	
  Number of

  Series B

  Warrant Shares

  	
   

  	
  Purchase Price

  	
   

  	
  Legal Representative’s Address

  and Facsimile Number

  	
   

  
	
  Castlerigg
  Master Investments Ltd.

  	
   

  	
  c/o Sandell Asset Management

  40 West 57th St

  26th Floor

  New York, NY 10019

  Attention: Cem Hacioglu

                   Matthew
  Pliskin

  Facsimile: 212-603-5710

  Telephone: 212-603-5700

  Residence: British Virgin Islands

  	
   

  	
  $

  	
  11,500,000

  	
   

  	
  1,982,759

  	
   

  	
  1,982,759

  	
   

  	
  $

  	
  11,500,000

  	
   

  	
  Schulte Roth & Zabel LLP

  919 Third Avenue

  New York, New York 10022

  Attention: Eleazer Klein, Esq.

  Facsimile: (212) 593-5955

  Telephone: (212) 756-2376

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Evolution
  Master Fund Ltd. SPC, Segregated Portfolio M

  	
   

  	
  c/o Evolution Capital Management LLC

  Walker House, Mary Street

  P.O. Box 908 GT

  George Town, Cayman Island

  Attn: Richard Chisholm

  Facsimile: 808-441-4946

  Telephone: 808-441-4917

  Residence: Cayman Islands

   

  Additional Copy to:

   

  Evolution Capital Management, LLC

  1132 Bishop Street,

  Suite 1880

  Honolulu, Hawaii 96813

  Attention: Richard Chisholm

  Facsimile: 808-441-4946

  Telephone: 808-441-4917

  	
   

  	
  $

  	
  11,500,000

  	
   

  	
  1,982,759

  	
   

  	
  1,982,759

  	
   

  	
  $

  	
  11,500,000

  	
   

  	
  N/A

  	
   

  



 

















 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Radcliffe
  SPC, Ltd. For and on behalf of the Class A Convertible Crossover Segregated
  Portfolio

  	
   

  	
  c/o RG Capital Management, LP

  3 Bala Plaza-East, Suite 501

  Bala Cynwyd, PA 19004

  Attention: Gerald F. Stahlecker

  Facsimile: (610) 617-0570

  Telephone: (610) 617-5911

  Residence: Cayman Islands

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  862,069

  	
   

  	
  862,069

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital
  Ventures International

  	
   

  	
  c/o Heights Capital Management

  101 California Street, Suite 3250

  San Francisco, CA 94111

  Attention: Martin Kobinger,

  Investment Manager

  Facsimile: 415-403-6525

  Telephone: 415-403-6500

  Residence: Cayman Islands

  	
   

  	
  $

  	
  8,000,000

  	
   

  	
  1,379,310

  	
   

  	
  1,379,310

  	
   

  	
  $

  	
  8,000,000

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Portside
  Growth and Opportunity Fund

  	
   

  	
  c/o Ramius Capital Group, L.L.C.

  666 Third Avenue,

  26th Floor

  New York, New York 10017

  Attention: Jeffrey Smith

                  Michael
  Neidell

  Facsimile: (212) 845-7999

  Telephone: (212) 845-7955

  Residence: Cayman Islands

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  344,828

  	
   

  	
  344,828

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell
  Capital Partners, LP

  	
   

  	
  101 Hudson Street

  Suite 3700

  Jersey City, NJ 07303

  Attention: Mark Angelo

  Facsimile: (201) 985-8266

  Telephone: (201) 985-8300

  Residence: Delaware

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  517,241

  	
   

  	
  517,241

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  Troy Rillo, Esq.

  101 Hudson Street - Suite 3700

  Jersey City, NJ 07302

  Facsimile: (201) 985-8266

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cranshire
  Capital L.P.

  	
   

  	
  c/o Downsview Capital, Inc.

  The General Partner

  666 Dundee Road,

  Suite 1901

  Northbrook, IL 60062

  Attention: Mitchell D. Kopin

  Facsimile: (847) 562-9031

  Telephone: (847) 562-9030

  Residence: Illinois

  	
   

  	
  $

  	
  1,500,000

  	
   

  	
  258,621

  	
   

  	
  258,621

  	
   

  	
  $

  	
  1,500,000

  	
   

  	
  N/A

  	
   

  



 

















 


	
  Kings
  Road Investments Ltd.

  	
   

  	
  c/o Polygon Investment Partners LP

  598 Madison Avenue

  14th Floor

  New York, NY 10022

  Attention: Erik M.W. Caspersen

                  Brandon
  L. Jones

  Facsimile: (212) 359-7303

  Telephone: (212) 359-7300

  Residence: Cayman Islands

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  1,724,138

  	
   

  	
  1,724,138

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  TOTAL

  	
   

  	
  $

  	
  52,500,000

  	
   

  	
  9,051,725

  	
   

  	
  9,051,725

  	
   

  	
  $

  	
  52,500,000

  	
   

  	
   

  	
   

  



 

















 


EXHIBITS


 


	
  Exhibit A

  	
  Form of Notes

  
	
  Exhibit B-1

  	
  Form of Series A Warrants

  
	
  Exhibit B-2

  	
  Form of Series B Warrants

  
	
  Exhibit C

  	
  Registration Rights Agreement

  
	
  Exhibit D

  	
  Irrevocable Transfer Agent Instructions

  
	
  Exhibit E

  	
  Form of Outside Company Counsel Opinion

  
	
  Exhibit F

  	
  Form of Secretary’s Certificate

  
	
  Exhibit G

  	
  Form of Officer’s Certificate

  
	
  Exhibit H-1

  	
  Apollo Lock-Up Agreement

  
	
  Exhibit H-2

  	
  Management Lock-Up Agreement