Exhibit
10.1

    


    ThermoEnergy
Corporation

    


    Securities
Purchase Agreement

    


    This Securities Purchase Agreement
(this “Agreement”) is
dated as of September 15, 2008, by and between ThermoEnergy Corporation, a
Delaware corporation (the
“Company”), and The Quercus Trust (the “Investor”).

    


    WHEREAS, subject to the terms and
conditions set forth in this Agreement and pursuant to Section 4(2) of the
Securities Act (as defined below) and Rule 506 promulgated thereunder, the
Company desires to issue and sell to the Investor, and the Investor desires to
purchase from the Company certain securities of the Company, as more fully
described in this Agreement.

    


    NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Company and the Investor agree as follows:

    


    ARTICLE
1

    


    Definitions

    


    Section 1.1.  Definitions.  In
addition to the terms defined elsewhere in this Agreement, for all purposes of
this Agreement, the following terms have the meanings indicated in this Section
1.1:

    


    “Action” means any action,
suit, inquiry, notice of violation, proceeding (including any partial proceeding
such as a deposition) or investigation pending or threatened in writing against
or affecting the Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative agency,
regulatory authority (federal, state, county, local or foreign), stock market,
stock exchange or trading facility.

    


    “Adjusted Purchase Price” has
the meaning set forth in Section 2.2.

    


    “Affiliate” means any Person
that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with a Person, as such terms are used
in and construed under Rule 144.

    


    “Arkansas Courts” has the
meaning set forth in Section 7.9.

    


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

    


    “Business Day” means any day
except Saturday, Sunday and any day which is a federal legal holiday or a day on
which banking institutions in the City of New York are authorized or required by
law or other governmental action to close.

    


    “Cash Flow Trigger Date” means
the date on which the Company first reports results of operations reflecting a
positive cash flow in each of two successive fiscal quarters.

    


    “Claim” has the meaning set
forth in Section 4.6(c).


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    “Closing” means each closing
of the purchase and sale of a Note and a Warrant pursuant to Article 2.

    


    “Closing Date” means the
Initial Closing Date and the date on which the Second Closing, if any, occurs
pursuant to Section 2.2 hereof.

    


    “Commission” means the
Securities and Exchange Commission.

    


    “Common Stock” means the
common stock of the Company, par value $0.001 per share, and any securities into
which such common stock may hereafter be reclassified.

    


    “Common Stock Equivalents”
means any securities of the Company or any Subsidiary which entitle the holder
thereof to acquire Common Stock at any time, including without limitation, any
debt, preferred stock, rights, options, warrants or other instrument that is at
any time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder to
receive, directly or indirectly, Common Stock.

    


    “Company Counsel” means Nixon
Peabody, LLP.

    


    “Company Deliverables” has the
meaning set forth in Section 2.2(a).

    


    “Company Stock Options” has the
meaning set forth in Section 3.1(g).

    


    “Contingent Obligations” has
the meaning set forth in Section 3.1(r).

    


    “Conversion Shares” means the
shares of Common Stock issuable upon conversion of the Notes.

    


    “Convertible Securities” has
the meaning set forth in Section 3.1(g).

    


    “Development Contract” means
either a Letter to Proceed or a fully executed contract between the Company and
the City of New York, New York (or any agency thereof) or for the development of
the 26th Ward
wastewater treatment plant substantially as set forth in the business plan
previously provided by the Company to the Investor.

    


    “Effective Date” means the
date that any Registration Statement filed pursuant to Article 4 is first
declared effective by the Commission.

    


    “Effectiveness Period” has the
meaning set forth in Section 4.1(b).

    


    “Environmental Law” has the
meaning set forth in Section 3.1(aa).

    


    “ERISA” means the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations promulgated thereunder.

     

    “ERISA Affiliate” means any
trade or business, whether or not incorporated, that together with the Company
would be deemed to be a single employer for purposes of Section 4001 of ERISA or
Sections 414(b), (c), (m), (n) or (o) of the Internal Revenue Code of 1986, as
amended.

     

    “Evaluation Period” has the
meaning set forth in Section 3.1(r).


    
      
         


      

      
        2

        
          

        

      

      
         


      

    


    “Event” has the meaning set
forth in Section 4.1(d).

    


    “Event Date” has the meaning
set forth in Section 4.1(d).

    


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

    


    “Exempt Issuance” means the
issuance by the Company (a) to employees, officers, directors of, and
consultants to, the Company of shares of Common Stock or options for the
purchase of shares of Common Stock pursuant to stock option or long-term
incentive plans approved by the Board, (b) of shares of Common Stock upon the
exercise of Warrants issued hereunder, (c) of shares of Common Stock upon
conversion of shares of Series A Preferred Stock, (d) of shares of Common Stock
upon exercise of Prior Warrants or conversion of Prior Convertible Securities,
(e) of securities issued pursuant to acquisitions, licensing agreements, or
other strategic transactions, (f) of securities issued in connection with
equipment leases, real property leases, loans, credit lines, guaranties or
similar transactions approved by the Board, (g) of securities issued in
connection with join ventures or similar strategic relationships approved by the
Board, (h) of securities in a merger, or (i) of securities in a public offering
registered under the Securities Act.

     

    “Filing Date” means the date
that is 60 days after the Initial Closing Date.

    


    “Financing Notice” has the
meaning set forth in Section 5.5(b).

    


    “GAAP” means generally
accepted accounting principles as in effect from time to time in the United
States of America.

    


    “Governmental Authority” has
the meaning set forth in Section 3.1(e).

    


    “Hazardous Substance” has the
meaning set forth in Section 3.1(aa).

    


    “Indebtedness” has the meaning
set forth in Section 3.1(r).

    


    “Indemnified Party” has the
meaning set forth in Section 4.6(c).

    


    “Indemnified Person” has the
meaning set forth in Section 4.6(a).

    


    “Indemnifying Party” has the
meaning set forth in Section 4.6(c).

    


    “Initial Closing Date” means
the Business Day immediately following the date on which all of the conditions
set forth in Sections 6.1 and 6.2 hereof are satisfied, or such other date as
the parties may agree.

    


    “Intellectual Property Rights”
has the meaning set forth in Section 3.1(o).

    


    “Interest Shares” means the
shares of Common Stock issuable interest due and payable under the
Notes.

    


    “Investor Deliverables” has
the meaning set forth in Section 2.2(b).

    


    “Lien” means any lien, charge,
encumbrance, security interest, right of first refusal or other restrictions of
any kind.


    
      
         


      

      
        3

        
          

        

      

      
         


      

    


    “Losses” has the meaning set
forth in Section 5.7.

    


    “Material Adverse Effect”
means any of (i) a material and adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material and adverse effect
on the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
or (iii) a material impairment of the Company’s ability to perform on a timely
basis its obligations under any Transaction Document.

    


    “NASD Rules” has the meaning
set forth in Section 4.3(o).

    


    “Note” means any of the Senior
Convertible Promissory Notes of the Company, in the form of Exhibit A, which
are issuable to the Investor at the Closings.

    


    “OFAC” has the meaning set
forth in Section 3.1(ee).

    


               “Penalty Base” has the meaning
set forth in Section 4.1(d).

    


    “Person” means an individual
or corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.

    


    “Placement Agent” has the
meaning set forth in Section 3.1(s).

    


    “Post-Effective Amendment”
means a post-effective amendment to the Registration
Statement.

     

    “Post-Effective Amendment Filing
Deadline”  means the seventh Business Day after the
Registration Statement ceases to be effective pursuant to applicable securities
laws due to the passage of time or the occurrence of an event requiring the
Company to file a Post-Effective Amendment.

     

    “Prior Warrants” has the
meaning set forth in Section 3.1(g).

    


    “Proceeding” means an action,
claim, suit, investigation or proceeding (including, without limitation, an
investigation or partial proceeding, such as a deposition), whether commenced or
threatened.

    


    “Prospectus” has the meaning
set forth in Section 4.3.

    


    “Proposed Financing” has the
meaning set forth in Section 5.5(a).

    


    “Purchase Price” means the
price payable by the Investor for the Notes and Warrants pursuant to Sections
2.1 and 2.2.

    


    “Registrable Securities” means
the Interest Shares, the Conversion Shares and the Warrant Shares; provided,
however, that the Investor shall not be required to Convert the Notes or
exercise the Warrants in order to have the Conversion Shares or the Warrant
Shares included in any Registration Statement.

    


    “Registration Period” means
the period commencing on the date hereof and ending on the date on which all of
the Registrable Securities may be sold to the public without registration under
the Securities Act in reliance on Rule 144.


    
      
         


      

      
        4

        
          

        

      

      
         


      

    


    “Registration Statement” means
a registration statement filed on the appropriate Form with, and declared
effective by, the Commission under the Securities Act and covering the resale by
the Investor of the Registrable Securities.

    


    “Requested Information” has
the meaning set forth in Section 4.3(a).

    


    “Required Effectiveness Date”
means the earlier of (i) the date that is 150 days after the Initial Closing
Date or (ii) five Business Days after receipt by the Company from the Commission
of notice of “no review” of the Registration Statement.

    


    “Rule 144” means Rule 144
promulgated by the Commission pursuant to the Securities Act, as such Rule may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

    


    “SEC Reports” has the meaning
set forth in Section 3.1(h).

    


    “Securities” means the Notes,
the Warrants, and the Shares.

    


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

    


    “Series A Preferred Stock”
means the shares of the preferred stock of the Company, par value $0.01 per
share, that have been designated as “Series A Convertible Preferred
Stock.”

    


    “Shares” means the Conversion
Shares, the Interest Shares and the Warrant Shares.

    


    “Subsidiary” means any
“significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X
promulgated by the Commission under the Exchange Act.

    


    “Trading Day” means (i) a day
on which the Common Stock is traded on a Trading Market, or (ii) if the Common
Stock is not listed on a Trading Market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, or
(iii) if the Common Stock is not then listed or quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding to its functions of reporting prices);
provided, that in the event that the Common Stock is not listed or quoted as set
forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business
Day.

    


    “Trading Market” means
whichever of the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market, or the Nasdaq Over-the-Counter Market on which the
Common Stock is listed or traded on the date in question.

    


    “Transaction Documents” means
this Agreement, the Notes, the Warrants and any other documents or agreements
executed in connection with the transactions contemplated
hereunder.

    


    “2007 Agreement” means that
certain Securities Purchase Agreement dated as of December 18, 2007 between the
Company and the Investor, as amended.

    


    “Warrant” means any of the
Common Stock Purchase Warrants, in the form of Exhibit B, which
are issuable to the Investor at the Closings.


    
      
         


      

      
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    “Warrant Shares” means the
shares of Common Stock issuable upon exercise of the Warrants.

    


    ARTICLE
2

    


    Purchase and
Sale

    


    Section
2.1.  Issuance
of Securities at the Initial Closing.  Upon the terms and
subject to the conditions set forth in this Agreement, and in accordance with
applicable law, the Company agrees to sell to the Investor, and the Investor
agrees to purchase from the Company, for the Purchase Price of $2,000,000, on
the Initial Closing Date, (i) a Note in the original principal amount of
$2,000,000 and (ii) a Warrant to purchase 4,000,000 shares of Common
Stock.

    


    Section
2.2.  Issuance
of Securities at the Second Closing.  On the fifth Business Day
following the filing by the Company with the Commission of a Current Report on
Form 8-K reporting the execution and delivery of the Development Contract, the
Company will sell to the Investor, and the Investor will purchase from the
Company, at the Purchase Price of $5,000,000, (i) a Note in the original
principal amount of $5,000,000 and (ii) a Warrant to purchase 10,000,000 shares
of Common Stock.

     

    Section
2.3.  Payment
of Purchase Price.  As consideration for the issuance of the
Securities being purchased at each Closing, the Investor shall on the respective
Closing Date pay to the Company, by wire transfer or other form of immediately
available funds, an amount equal to the applicable aggregate Purchase Price for
the Securities being purchased at such Closing.

     

    Section
2.4.  Delivery
of Securities.  At each Closing, the Company shall, against
payment by the Investor of the applicable Purchase Price, issue to the Investor
the Note and the Warrant being purchased at such Closing.

     

               Section
2.5. Additional
Closing Deliveries.  At each Closing,
the Company shall deliver or cause to be delivered to the Investor the following
(the “Company
Deliverables”):

    


    
      	
               
      

            	
              (i)

            	
              The
      legal opinion of Company Counsel, in substantially the form of Exhibit C
      hereto, addressed to the Investor;

            


    

    


    
      	
               
      

            	
              (ii)

            	
              The
      Certificate of Incorporation of the Company, together with all amendments
      thereto, certified by the Secretary of State of the State of Delaware as
      of a date not more than five Business Days prior to the Closing
      Date;

            


    

    


    
      	
               
      

            	
              (iii)

            	
              Copies
      of each of the following documents, in each case certified by the
      Secretary of the Company to be in full force and effect on the Closing
      Date:

            


    

    


    
      	
               
      

            	
              (A)

            	
              resolutions
      of the board of directors of the Company approving the execution, delivery
      and performance of the Transaction Documents and the transactions
      contemplated thereby;

            


    

    


    
      	
               
      

            	
              (B)

            	
              the
      By-laws of the Company; and

            


    

    


    
      	
               
      

            	
              (C)

            	
              irrevocable
      instructions to the Company’s transfer agent as to the reservation and
      issuance of the Conversion Shares and the Warrant Shares;
    and

            


    

    


    
      	
               
      

            	
              (iv)

            	
              A
      good standing certificate of the Company issued by the Secretary of State
      of the State of Delaware dated as of a date no earlier than five Business
      Days prior to the Closing Date.

            


    


    
      
         


      

      
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    ARTICLE
3

    


    Representations and
Warranties

    


    Section 3.1.  Representations
and Warranties of the Company. The Company hereby makes the
following representations and warranties to the Investor:

    


    
      	
               
      

            	
              (a)

            	
              Subsidiaries. The Company has no
      direct or indirect Subsidiaries other than as specified in the SEC
      Reports. Except as disclosed in the SEC Reports, the Company owns,
      directly or indirectly, all of the capital stock of each Subsidiary free
      and clear of any and all Liens other than Liens disclosed in the SEC
      Reports, and all the issued and outstanding shares of capital stock of
      each Subsidiary are validly issued and are fully paid, non-assessable and
      free of preemptive and similar
rights.

            


    

    


    
      	
               
      

            	
              (b)

            	
              Organization
      and Qualification. Each of the Company
      and each Subsidiary is duly incorporated or otherwise organized, validly
      existing and in good standing under the laws of the jurisdiction of its
      incorporation or organization (as applicable), with the requisite power
      and authority to own and use its properties and assets and to carry on its
      business as currently conducted. Neither the Company nor any Subsidiary is
      in violation of any of the provisions of its respective certificate or
      articles of incorporation, bylaws or other organizational or charter
      documents. Each of the Company and each Subsidiary is duly qualified to
      conduct its respective business and is in good standing as a foreign
      corporation or other entity in each jurisdiction in which the nature of
      the business conducted or property owned by it makes such qualification
      necessary, except where the failure to be so qualified or in good
      standing, as the case may be, could not, individually or in the aggregate,
      have or reasonably be expected to result in a Material Adverse Effect, and
      no proceedings have been instituted in any such jurisdiction revoking,
      limiting or curtailing, or seeking to revoke, such power and authority or
      qualification.

            


    

    


    
      	
               
      

            	
              (c)

            	
              Authorization;
      Enforcement. The Company has the
      requisite corporate power and authority to enter into and to consummate
      the transactions contemplated by each of the Transaction Documents and
      otherwise to carry out its obligations thereunder. The execution and
      delivery of each of the Transaction Documents by the Company and the
      consummation by it of the transactions contemplated thereby have been duly
      authorized by all necessary action on the part of the Company and no
      further action is required by the Company in connection therewith. Each
      Transaction Document has been (or upon delivery will have been) duly
      executed by the Company and, when delivered in accordance with the terms
      hereof, will constitute the valid and binding obligation of the Company
      enforceable against the Company in accordance with its terms, except as
      such enforceability may be limited by applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation or similar laws relating to, or
      affecting generally the enforcement of, creditors’ rights and remedies or
      by other equitable principles of general
  application.

            


    


    
      
         


      

      
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              (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 thereby do not and will not (i) conflict with or violate any
      provision of the Company’s or any Subsidiary’s certificate or articles of
      incorporation, bylaws or other organizational or charter documents, or
      (ii) conflict with, or constitute a default (or an event that with notice
      or lapse of time or both would become a default) under, or give to others
      any rights of termination, amendment, acceleration or cancellation (with
      or without notice, lapse of time or both) of, or result in the imposition
      of any Lien upon any of the material properties or assets of the Company
      or of any Subsidiary pursuant to, any agreement, credit facility, debt or
      other instrument (evidencing a Company or Subsidiary debt or otherwise) or
      other understanding to which the Company or any Subsidiary is a party or
      by which any property or asset of the Company or any Subsidiary is bound
      or affected, or (iii) result in a violation of any law, rule, regulation,
      order, judgment, injunction, decree or other restriction of any court or
      governmental authority to which the Company or a Subsidiary is subject
      (including federal and state securities laws and regulations), or by which
      any property or asset of the Company or a Subsidiary 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)

            	
              Filings,
      Consents and Approvals. The Company is not
      required to obtain any consent, waiver, authorization or order of, give
      any notice to, or make any filing or registration with, any court or other
      federal, state, local or other governmental authority (a “Governmental
      Authority”) or other Person in connection with the execution,
      delivery and performance by the Company of the Transaction Documents and
      the consummation of the transactions contemplated thereby, other than (i)
      the filing of a Notice of Sale of Securities on Form D with the Commission
      (ii) filings required under applicable state securities laws, (iii) the
      filing of a Current Notice on Form 8-K with the Commission and (iv) the
      filing with the Commission of one or more Registration Statements in
      accordance with the requirements of Article 4 of this
      Agreement,.

            


    

    


    
      	
               
      

            	
              (f)

            	
              Issuance
      of the Securities. The Securities have
      been duly authorized.  Each Note and Warrant, when issued and
      paid for in accordance with this Agreement, will be duly and validly
      issued. The Company has reserved and set aside from its duly authorized
      capital stock a sufficient number of shares of Common Stock to satisfy in
      full the Company’s obligations to issue (i) the Conversion Shares upon
      conversion of the Notes, (ii) the Interest Shares in payment of interest
      that shall become due and payable under the Notes, and (iii) the Warrant
      Shares upon exercise of the Warrants.  The Shares, when issued
      and paid for in payment of interest under the Notes or upon conversion of
      the Notes or exercise of the Warrants in accordance with their respective
      terms, will be duly and validly issued, fully paid and nonassessable, free
      and clear of all Liens.

            


    


    
      
         


      

      
        8

        
          

        

      

      
         


      

    


    
      	
               
      

            	
              (g)

            	
              Capitalization. The authorized capital
      stock of the Company consists of 150,000,000 shares of Common Stock and
      20,000,000 shares of Preferred Stock, par value $0.01, of which 10,000,000
      shares have been designed Series A Preferred Stock and 10,000,000 shares
      are undesignated.  As of the close of business on the Business
      Day immediately prior to the date hereof, (i) 208,334 shares of Series A
      Preferred Stock were issued and outstanding, all of which are validly
      issued, fully-paid and non-assessable, (ii) 49,448,044 shares of Common
      Stock were issued and outstanding, all of which are validly issued,
      fully-paid and non-assessable, (iii) 83,797 shares of Common Stock were
      held by the Company in Treasury, (iv) 9,688,200 shares of Common Stock
      were reserved for issuance upon exercise of outstanding options granted to
      employees, directors, and consultants of the Company (the “Company Stock Options”);
      (v) 26,109,323 shares of Common Stock were reserved for issuance upon
      exercise of outstanding warrants to purchase Common Stock (the “Prior Warrants”); (vi)
      208,334 shares of Common Stock were reserved for issuance upon conversion
      of outstanding shares of Series A Preferred Stock, and (vii) 10,159,351
      shares of Common Stock were reserved for issuance upon conversion of other
      convertible notes, debentures or securities (“Prior Convertible
      Securities”).  No Person has any right of first refusal,
      preemptive right, right of participation, or any similar right to
      participate in the transactions contemplated by the Transaction
      Documents.  Except pursuant to (i) the outstanding shares of Series A
      Preferred Stock, (ii) the Company Stock Options, (iii) the Prior Warrants
      or (iv) the Prior Convertible Securities, or as a result of the purchase
      and sale of the Securities as contemplated by this Agreement, there are no
      outstanding options, warrants, script rights to subscribe to, calls or
      commitments of any character whatsoever relating to, or securities, rights
      or obligations convertible into or exchangeable for, or giving any Person
      any right to subscribe for or acquire, any shares of Common Stock, or
      contracts, commitments, understandings or arrangements by which the
      Company or any Subsidiary is or may become bound to issue additional
      shares of Common Stock or Common Stock Equivalents.  The issue and
      sale of the Securities will not obligate the Company to issue shares of
      Common Stock or other securities to any Person (other than the Investor)
      and will not result in a right of any holder of Company securities to
      adjust the exercise or conversion price under such securities. No further
      approval or authorization of any stockholder, the Board of Directors of
      the Company or any other Person  is required for the issuance
      and sale of the Securities.  There are no stockholders agreements,
      voting agreements or other similar agreements with respect to the
      Company’s capital stock to which the Company is a party or, to the
      knowledge of the Company, between or among any of the Company’s
      stockholders.

            


    

    


    
      	
               
      

            	
              (h)

            	
              SEC
      Reports; Financial Statements.  The Company
      has filed all reports required to be filed by it under the Securities Act
      and the Exchange Act, including pursuant to Section 13(a) or 15(d)
      thereof, for the twelve months preceding the date hereof (the foregoing
      materials, being collectively referred to herein as the “SEC
      Reports”).  As of their respective dates, the SEC Reports
      complied in all material respects with the requirements of the Securities
      Act and the Exchange Act and the rules and regulations of the Commission
      promulgated thereunder, and none of the SEC Reports, when filed, 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 light of the circumstances under which they were
      made, not misleading.  The financial statements of the Company
      included in the SEC Reports comply in all material respects with
      applicable accounting requirements and the rules and regulations of the
      Commission with respect thereto as in effect at the time of
      filing.  Such financial statements have been prepared in
      accordance with GAAP applied on a consistent basis during the periods
      involved, except as may be otherwise specified in such financial
      statements or the notes thereto, and fairly present in all material
      respects the financial position of the Company and its consolidated
      Subsidiaries as of and for the dates thereof and the results of operations
      and cash flows for the periods then ended, subject, in the case of
      unaudited statements, to normal, immaterial, year-end audit
      adjustments.

            


    

    


    
      	
               
      

            	
              (i)

            	
              Material
      Changes.
      Since the date of the latest audited financial statements included within
      the SEC Reports, except as specifically disclosed in the SEC Reports, (i)
      there has been no event, occurrence or development that has had or that
      could reasonably be expected to result in a Material Adverse Effect, (ii)
      the Company has not incurred any liabilities (contingent or otherwise)
      other than (A) trade payables, accrued expenses and other liabilities
      incurred in the ordinary course of business consistent with past practice
      and (B) liabilities not required to be reflected in the Company’s
      financial statements pursuant to GAAP or required to be disclosed in
      filings made with the Commission, (iii) the Company has not altered its
      method of accounting or the identity of its auditors, (iv) the Company has
      not declared or made any dividend or distribution of cash or other
      property to its stockholders or purchased, redeemed or made any agreements
      to purchase or redeem any shares of its capital stock, and (v) the Company
      has not issued any equity securities to any officer, director or
      Affiliate, except pursuant to existing Company stock option plans. The
      Company does not have pending before the Commission any request for
      confidential treatment of
information.

            


    


    
      
         


      

      
        9

        
          

        

      

      
         


      

    


    
      	
               
      

            	
              (j)

            	
              Litigation
      and Investigations. There is no Action
      which (i) adversely affects or challenges the legality, validity or
      enforceability of any of the Transaction Documents or the Securities or
      (ii) except as specifically disclosed in the SEC Reports, could, if there
      were an unfavorable decision, individually or in the aggregate, have or
      reasonably be expected to result in a Material Adverse Effect. Neither the
      Company nor any Subsidiary, nor any director or officer thereof (in his
      capacity as such), is or has been the subject of any Action involving a
      claim of violation of or liability under federal or state securities laws
      or a claim of breach of fiduciary duty, except as specifically disclosed
      in the SEC Reports. There has not been, and to the knowledge of the
      Company, there is not pending any investigation by the Commission
      involving the Company or any current or former director or officer of the
      Company (in his or her capacity as such). The Commission has not issued
      any stop order or other order suspending the effectiveness of any
      registration statement filed by the Company or any Subsidiary under the
      Exchange Act or the Securities Act.  There are no outstanding
      comments by the Staff of the Commission on any filing by the Company or
      any Subsidiary under the Exchange Act or the Securities
    Act.

            


    

    


    
      	
               
      

            	
              (k)

            	
              Labor
      Relations.
      No material labor dispute exists or, to the knowledge of the Company, is
      imminent with respect to any of the employees of the
    Company.

            


    

    


    
      	
               
      

            	
              (l)

            	
              Compliance. Neither the Company
      nor any Subsidiary (i) is in default under or in violation of (and no
      event has occurred that has not been waived that, with notice or lapse of
      time or both, would result in a default by the Company or any Subsidiary
      under), nor has the Company or any Subsidiary received notice of a claim
      that it is in default under or that it is in violation of, any indenture,
      loan or credit agreement or any other agreement or instrument to which it
      is a party or by which it or any of its properties is bound (whether or
      not such default or violation has been waived), (ii) is in violation of
      any order of any court, arbitrator or governmental body, or (iii) is or
      has been in violation of any statute, rule or regulation of any
      governmental authority, including without limitation all foreign, federal,
      state and local laws relating to taxes, environmental protection,
      occupational health and safety, product quality and safety and employment
      and labor matters, except in each case as could not, individually or in
      the aggregate, have or reasonably be expected to result in a Material
      Adverse Effect.

            


    

    


    
      	
               
      

            	
              (m)

            	
              Regulatory
      Permits.
      The Company and the Subsidiaries possess all certificates, authorizations
      and permits issued by the appropriate federal, state, local or foreign
      regulatory authorities necessary to conduct their respective businesses as
      described in the SEC Reports, except where the failure to possess such
      permits could not, individually or in the aggregate, have or reasonably be
      expected to result in a Material Adverse Effect, and neither the Company
      nor any Subsidiary has received any notice of proceedings relating to the
      revocation or modification of any such
permits.

            


    


    
      
         


      

      
        10

        
          

        

      

      
         


      

    


    
      	
               
      

            	
              (n)

            	
              Title
      to Assets.
      The Company and the Subsidiaries have good and marketable title in fee
      simple to all real property owned by them that is material to their
      respective businesses and good and marketable title in all personal
      property owned by them that is material to their respective businesses, in
      each case free and clear of all Liens, except for Liens that do not
      materially affect the value of such property and do not materially
      interfere with the use made and proposed to be made of such property by
      the Company and the Subsidiaries. All real property and facilities held
      under lease by the Company and the Subsidiaries are held by them under
      valid, subsisting and enforceable leases of which the Company and the
      Subsidiaries are in material compliance, except as could not, individually
      or in the aggregate, have or reasonably be expected to result in a
      Material Adverse Effect.

            


    

    


    
      	
               
      

            	
              (o)

            	
              Patents
      and Trademarks. The Company and the
      Subsidiaries have, or have rights to use, all patents, patent
      applications, trademarks, trademark applications, service marks, trade
      names, copyrights, licenses and other similar rights that are necessary or
      material for use in connection with their respective businesses as
      described in the SEC Reports and which the failure to so have could,
      individually or in the aggregate, have or reasonably be expected to result
      in a Material Adverse Effect (collectively, the “Intellectual Property
      Rights”). No claims or Actions have been made or filed by any
      Person against the Company to the effect that Intellectual Property Rights
      used by the Company or any Subsidiary violate or infringe upon the rights
      of such claimant. To the knowledge of the Company, all of the Intellectual
      Property Rights are enforceable and there is no existing infringement by
      another Person of any of the Intellectual Property
  Rights.

            


    

    


    
      	
               
      

            	
              (p)

            	
              Insurance. The Company and the
      Subsidiaries are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are
      prudent and customary in the businesses in which the Company and the
      Subsidiaries are engaged. The Company has no reason to believe that it
      will not be able to renew its and the Subsidiaries’ 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 on
      terms consistent with the market for the Company’s and such Subsidiaries’
      respective lines of business.

            


    

    


    
      	
               
      

            	
              (q)

            	
              Transactions
      With Affiliates and Employees. Except as set forth in
      the SEC Reports, none of the officers or directors of the Company and, to
      the knowledge of the Company, none of the employees of the Company is a
      party to any transaction with the Company or any Subsidiary (other than
      for services as employees, officers and 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 officer, director or
      such employee or, to the knowledge of the Company, any entity in which any
      officer, director, or any such employee has a substantial interest or is
      an officer, director, trustee or
partner.

            


    

    


    
      	
               
      

            	
              (r)

            	
              Sarbanes-Oxley;
      Internal Accounting Controls.  The Company is
      in material compliance with all provisions of the Sarbanes-Oxley Act of
      2002 (including the rules and regulations of the Commission adopted
      thereunder) which are applicable to it as of the Closing Date.  The
      Company’s certifying officers have evaluated the effectiveness of the
      Company’s controls and procedures as of the filing date of the most
      recently filed periodic report under the Exchange Act (such date, the
      “Evaluation
      Date”).  The Company presented in its most recently filed
      periodic report under the Exchange Act the conclusions of the certifying
      officers about the effectiveness of the disclosure controls and procedures
      based on their evaluations as of the Evaluation Date.  Since the
      Evaluation Date, there have been no significant changes in the Company’s
      internal controls (as such term is defined in Item 307(b) of Regulation
      S-K under the Exchange Act) or, to the Company’s knowledge, in other
      factors that could significantly affect the Company’s internal
      controls.

            


    


    
      
         


      

      
        11

        
          

        

      

      
         


      

    


    
      	
               
      

            	
              (s)

            	
              Certain
      Fees. No
      brokerage or finder’s fees or commissions are or will be payable by the
      Company to any broker, financial advisor or consultant, finder, placement
      agent, investment banker, bank or other Person with respect to the
      transactions contemplated by this Agreement except to Merriman Curhan Ford
      & Co. (the “Placement
      Agent”). The Investor shall have no obligation with respect to any
      fees or with respect to any claims (other than such fees or commissions
      owed by the Investor pursuant to written agreements executed by the
      Investor which fees or commissions shall be the sole responsibility of the
      Investor) made by or on behalf of the Placement Agent or any other Persons
      for fees of a type contemplated in this Section that may be due in
      connection with the transactions contemplated by this
      Agreement.

            


    

    


    
      	
               
      

            	
              (t)

            	
              Investment
      Company.
      The Company is not, and is not an Affiliate of, and immediately following
      the Closing will not have become, an “investment company” within the
      meaning of the Investment Company Act of 1940, as
  amended.

            


    

    


    
      	
               
      

            	
              (u)

            	
              No
      Additional Agreements. The Company does not
      have any agreement or understanding with the Investor with respect to the
      transactions contemplated by the Transaction Documents other than as
      specified in the Transaction
Documents.

            


    

    


    
      	
               
      

            	
              (v)

            	
              Full
      Disclosure.  All
      disclosures provided to the Investor regarding the Company, its business
      and the transactions contemplated hereby, furnished by or on behalf of the
      Company (including the Company’s representations and warranties set forth
      in this Agreement) are true and correct in all material respects and do
      not contain any untrue statement of a material fact or omit to state any
      material fact necessary in order to make the statements made therein, in
      light of the circumstances under which they were made, not
      misleading.

            


    

    


    
      	
               
      

            	
              (w)

            	
              Environmental
      Matters.  To the
      Company’s knowledge: (i) the Company and its Subsidiaries have complied
      with all applicable Environmental Laws; (ii) the properties currently
      owned or operated by Company (including soils, groundwater, surface water,
      buildings or other structures) are not contaminated with any Hazardous
      Substances; (iii) the properties formerly owned or operated by Company or
      its Subsidiaries were not contaminated with Hazardous Substances during
      the period of ownership or operation by Company and its Subsidiaries; (iv)
      Company and its Subsidiaries are not subject to liability for any
      Hazardous Substance disposal or contamination on any third party property;
      (v) Company and its Subsidiaries have not been associated with any release
      or threat of release of any Hazardous Substance; (vi) Company and its
      Subsidiaries have not received any notice, demand, letter, claim or
      request for information alleging that Company and its Subsidiaries may be
      in violation of or liable under any Environmental Law; and (vii) Company
      and its Subsidiaries are not subject to any orders, decrees, injunctions
      or other arrangements with any Governmental Authority or subject to any
      indemnity or other agreement with any third party relating to liability
      under any Environmental Law or relating to Hazardous
      Substances.

            


    


    
      
         


      

      
        12

        
          

        

      

      
         


      

    


    As used
in this Agreement, the term “Environmental Law” means any
federal, state, local or foreign law, regulation, order, decree, permit,
authorization, opinion, common law or agency requirement relating to: (A) the
protection, investigation or restoration of the environment, health and safety,
or natural resources; (B) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (C) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.

     

    As used
in this Agreement, the term “Hazardous Substance” means any
substance that is: (i) listed, classified or regulated pursuant to any
Environmental Law; (ii) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (iii) any other substance which is the
subject of regulatory action by any Governmental Authority pursuant to any
Environmental Law.

     

    
      	
               
      

            	
              (x)

            	
              Taxes.  The Company
      and its Subsidiaries have filed all necessary federal, state and foreign
      income and franchise tax returns when due (or obtained appropriate
      extensions for filing) and have paid or accrued all taxes shown as due
      thereon, and the Company has no knowledge of a tax deficiency which has
      been or might be asserted or threatened against it or any Subsidiary which
      would have a Material Adverse
Effect.

            


    

     

    
      	
               
      

            	
              (y)

            	
              Private
      Offering.  Assuming
      the correctness of the representations and warranties of the Investor set
      forth in this Agreement, the offer and sale of the Notes and the Warrants
      hereunder are, and upon (i) exercise of the Warrants, the issuance of the
      Warrant Shares, (ii) upon conversion of the Notes, the issuance of the
      Conversion Shares and (iii) upon issuance of the Interest Shares in
      payment of interest due and payable under the Notes, such issuance will
      be, exempt from registration under the Securities Act.  The
      Company has offered the Notes and the Warrants for sale only to the
      Investor.

            


    

     

    
      	
               
      

            	
              (z)

            	
              ERISA.  Neither the
      Company nor any ERISA Affiliate maintains, contributes to or has any
      liability or contingent liability with respect to any employee benefit
      plan subject to ERISA.

            


    

     

    
      	
               
      

            	
              (aa)

            	
              Foreign
      Assets Control Regulations and Anti-Money Laundering.

            


    

     

                    (i)OFAC.  Neither
the issuance of the Convertible Note and Warrant to the Investor, nor the use of
the respective proceeds thereof, shall cause the Investor to violate the U.S.
Bank Secrecy Act, as amended, and any applicable regulations thereunder or any
of the sanctions programs administered by the U.S. Department of the Treasury’s
Office of Foreign Assets Control (“OFAC”) of the United States
Department of Treasury, any regulations promulgated thereunder by OFAC or under
any affiliated or successor governmental or quasi-governmental office, bureau or
agency and any enabling legislation or executive order relating
thereto.  Without limiting the foregoing, neither the Company nor any
Subsidiary (i) is a person whose property or interests in property are blocked
or subject to blocking pursuant to Section 1 of Executive Order 13224 of
September 23, 200l Blocking Property and Prohibiting Transactions With Persons
Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079
(2001)), (ii) engages in any dealings or transactions prohibited by
Section 2 of such executive order, or is otherwise associated with any such
person in any manner violative of Section 2, or (iii) is a person on the
list of Specially Designated Nationals and Blocked Persons or subject to the
limitations or prohibitions under any other OFAC regulation or executive
order.


    
      
         


      

      
        13

        
          

        

      

      
         


      

    


                     (ii)Patriot
Act.  The Company and each of its Subsidiaries are in
compliance, in all material respects, with the USA PATRIOT Act.  No
part of the proceeds of the sale of the Shares and the Warrants hereunder will
be used, directly or indirectly, for any payments to any governmental official
or employee, political party, official of a political party, candidate for
political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in violation
of the United States Foreign Corrupt Practices Act of 1977, as
amended.

    


    Section
3.2.  Representations
and Warranties of the Investor.  The Investor
hereby represents and warrants to the Company as follows:

    


    
      	
               
      

            	
              (a)

            	
              Authority. This Agreement has
      been duly executed by the Investor, and when delivered by the Investor in
      accordance with terms hereof, will constitute the valid and legally
      binding obligation of the Investor, enforceable against it in accordance
      with its terms, except as such enforceability may be limited by applicable
      bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
      laws relating to, or affecting generally the enforcement of, creditors’
      rights and remedies or by other equitable principles of general
      application.

            


    

    


    
      	
               
      

            	
              (b)

            	
              Investment
      Intent. The
      Investor is acquiring the Securities as principal for its own account for
      investment purposes only and not with a view to or for distributing or
      reselling such Securities or any part thereof, without prejudice, however,
      to the Investor’s right at all times to sell or otherwise dispose of all
      or any part of such Securities in compliance with applicable federal and
      state securities laws. The Investor does not have any agreement or
      understanding, directly or indirectly, with any Person to distribute any
      of the Securities.

            


    

    


    
      	
               
      

            	
              (c)

            	
              Investor
      Status. The
      Investor is an “accredited investor” as defined in Rule 501(a) under the
      Securities Act and a
      “qualified institutional buyer” as defined in Rule 144A under the
      Securities Act.   The Investor is not a registered
      broker-dealer under Section 15 of the Exchange
  Act.

            


    

    


    
      	
               
      

            	
              (d)

            	
              Access
      to Information. The Investor
      acknowledges that it has reviewed the SEC Reports and has been afforded
      (i) the opportunity to ask such questions as he has deemed necessary of,
      and to receive answers from, representatives of the Company concerning the
      terms and conditions of the offering of the Securities and the merits and
      risks of investing in the Securities; (ii) access to information about the
      Company and the Subsidiaries and their respective financial condition,
      results of operations, business, properties, management and prospects
      sufficient to enable him to evaluate his investment; and (iii) the
      opportunity to obtain such additional information that the Company
      possesses or can acquire without unreasonable effort or expense that is
      necessary to make an informed investment decision with respect to the
      investment.

            


    

    


    
      	
               
      

            	
              (e)

            	
              General
      Solicitation.  The
      Investor 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 or any
      other general solicitation or general
  advertisement.

            


    


    
      
         


      

      
        14

        
          

        

      

      
         


      

    


    
      	
               
      

            	
              (f)

            	
              Disclosure.  The
      Investor acknowledges and agrees that the Company neither makes nor has
      made any representations or warranties with respect to the transactions
      contemplated hereby other than those specifically set forth in Section
      3.1.

            


    

    


    ARTICLE
4

    


    Registration
Rights

    


    Section
4.1.     Shelf
Registration.

     

    (a)  As
promptly as possible, and in any event on or prior to the Filing Date, the
Company shall prepare and file with the Commission a “shelf” Registration
Statement covering the resale of all Registrable Securities for an offering to
be made on a continuous basis pursuant to Rule 415.  If for any reason
(including, without limitation, the Commission’s interpretation of Rule 415) the
Commission does not permit all of the Registrable Securities to be included in
such Registration Statement, then the Company shall prepare and file with the
Commission a separate Registration Statement with respect to any such
Registrable Securities not included with the initial Registration Statements, as
expeditiously as possible, but in no event later than the date which is 30 days
after the date on which the Commission shall indicate as being the first date
such filing may be made.  The Registration Statement shall be on a
Form S-3; in the event Form S-3 is not available for the registration of the
resale of Registrable Securities hereunder, the Company shall (i) register the
resale of the Registrable Securities on another appropriate form in accordance
herewith and (ii) attempt to register the Registrable Securities on Form S-3 as
soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statements then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the Commission.

     

    (b)  The
Company shall use its best efforts to cause the Registration Statement to be
declared effective by the Commission as promptly as possible after the filing
thereof, but in any event prior to the Required Effectiveness Date, and shall
use its best efforts to keep the Registration Statement continuously effective
under the Securities Act until the earlier of (i) the fifth anniversary of the
Effective Date, (ii) the date when all Registrable Securities covered by such
Registration Statement have been sold publicly, or (iii) the date on which the
Registrable Securities are eligible for sale without registration pursuant to
subparagraph (k) of Rule 144 (the “Effectiveness Period”). The
Company shall notify the Investor in writing promptly (and in any event within
one Business Day) after receiving notification from the Commission that the
Registration Statement has been declared effective.

     

    (c)  As
promptly as possible, and in any event no later than the Post-Effective
Amendment Filing Deadline, the Company shall prepare and file with the
Commission a Post-Effective Amendment.  The Company shall use its best
efforts to cause the Post-Effective Amendment to be declared effective by the
Commission as promptly as possible after the filing thereof.  The
Company shall notify the investor in writing promptly (and in any event within
one Business Day) after receiving notification from the Commission that the
Post-Effective Amendment has been declared effective.


    
      
         


      

      
        15

        
          

        

      

      
         


      

    


    (d)  If:
(i) any Registration Statement is not filed on or prior to the Filing Date or a
Post-Effective Amendment is not filed on or prior to the Post-Effective
Amendment Filing Deadline, or (ii) the Company fails to file with the Commission
a request for acceleration of effectiveness in accordance with Rule 461
promulgated under the Securities Act, within five Business Days after the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be “reviewed,” or will not be
subject to further review, or (iii) the Company fails to respond to any comments
made by the Commission within 15 Business Days after the receipt of such
comments, or (iv) a Registration Statement filed hereunder is not declared
effective by the Commission by the Required Effectiveness Date (which date shall
be extended by 30 days in the case of a comment regarding Rule 415), or a
Post-Effective Amendment is not declared effective on or prior to the fifteenth
Business Day following the Post-Effective Amendment Filing Deadline, or (v)
after a Registration Statement is filed with and declared effective by the
Commission, such Registration Statement ceases to be effective as to all
Registrable Securities to which it is required to relate at any time prior to
the expiration of the Effectiveness Period for a period of more than 60 days
without being succeeded by an amendment to such Registration Statement or by a
subsequent Registration Statement filed with and declared effective by the
Commission, or (vi) an amendment to a Registration Statement is not filed by the
Company with the Commission within 15 Business Days after the Commission’s
having notified the Company that such amendment is required in order for such
Registration Statement to be declared effective (any such failure or breach
being referred to as an “Event” and the date on which
such Event occurs being referred to as “Event Date”), then: (x) on
each such Event Date the Company shall pay to the Investor an amount in cash, as
liquidated damages and not as a penalty, equal to 1% of the aggregate Purchase
Price paid by the Investor pursuant to this Agreement for the Registrable
Securities covered by such Registration Statement (the “Penalty Base”); and (y) on
the same day of each successive month following such Event Date (so long as the
applicable Event shall not have been cured by such date) until the applicable
Event is cured, the Company shall pay to the Investor an amount in cash, as
liquidated damages and not as a penalty, equal to 1% of the Penalty
Base.  Such payments shall be the Investor’s sole and exclusive remedy
for such Events.  If the Company fails to pay any liquidated damages
pursuant to this Section in full within seven Business Days after the date
payable, the Company will pay interest thereon at a rate of 18% per annum (or
such lesser maximum amount that is permitted to be paid by applicable law) to
the Investor, accruing daily from the date such liquidated damages are due until
such amounts, plus all such interest thereon, are paid in full.

     

    (e)  The
Company shall not, prior to the Effective Date of the Registration Statement,
prepare and file with the Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its equity securities.

     

    (f)  If
the Company issues to the Investor any Common Stock pursuant to the Transaction
Documents that is not included in the initial Registration Statement, then the
Company shall file an additional Registration Statement covering such number of
shares of Common Stock on or prior to the Filing Date and shall use it best
efforts, but in no event later than the Required Effectiveness Date, to cause
such additional Registration Statement to be declared effective by the
Commission.

     

    Section 4.2.  Registration
Process.  In connection with the registration of the
Registrable Securities pursuant to Section 4.1, the Company shall:

     

     

                     (a)Prepare and file with the Commission
the Registration Statement and such amendments (including post-effective
amendments) to the Registration Statement and supplements to the prospectus
included therein (a “Prospectus”) as the Company may deem
necessary or appropriate and take all lawful action such that the Registration
Statement and any amendment thereto does not, when it becomes effective, contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, not misleading
and that the Prospectus forming part of the Registration Statement, and any
amendment or supplement thereto, does not at any time during the Registration
Period include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.;


    
      
         


      

      
        16

        
          

        

      

      
         


      

    


                     (b)Comply with the provisions of the
Securities Act with respect to the Registrable Securities covered by the
Registration Statement until the earlier of (i) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the Investor as set forth in the Prospectus forming
part of the Registration Statement or (ii) the date on which the Registration
Statement is withdrawn;

     

                     (c)Prior to the filing with the Commission
of the Registration Statement (including any amendments thereto) and the
distribution or delivery of any Prospectus (including any supplements thereto),
provide draft copies thereof to the Investor and reflect in such documents all
such comments as the Investor (and its counsel) reasonably may propose and
furnish to the Investor and its legal counsel identified to the Company
(i) promptly after the same is prepared and publicly distributed, filed
with the Commission, or received by the Company, one copy of the Registration
Statement, each Prospectus, and each amendment or supplement thereto, and
(ii) such number of copies of the Prospectus and all amendments and
supplements thereto and such other documents, as the Investor may reasonably
request in order to facilitate the disposition of the Registrable
Securities;

     

                     (d)(i) register or qualify the
Registrable Securities covered by the Registration Statement under such
securities or “blue sky” laws of such jurisdictions as the Investors reasonably
request, (ii) prepare and file in such jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times during the Registration Period, (iii) take all such other lawful
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all such
other lawful actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to (A) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify, (B) subject itself to general taxation in
any such jurisdiction or (C) file a general consent to service of process
in any such jurisdiction;

     

                     (e)As promptly as practicable after
becoming aware of such event, notify the Investor of the occurrence of any
event, as a result of which the Prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and promptly prepare an amendment to the Registration
Statement and supplement to the Prospectus to correct such untrue statement or
omission, and deliver a number of copies of such supplement and amendment to
each Investor as such Investor may reasonably request;

     

                     (f)As promptly as practicable after
becoming aware of such event, notify the Investor (or, in the event of an
underwritten offering, the managing underwriters) of the issuance by the
Commission of any stop order or other suspension of the effectiveness of the
Registration Statement and take all lawful action to effect the withdrawal,
rescission or removal of such stop order or other suspension;

     

                     (g)Take all such other lawful actions
reasonably necessary to expedite and facilitate the disposition by the Investor
of his Registrable Securities in accordance with the intended methods therefor
provided in the Prospectus which are customary under the
circumstances;


    
      
         


      

      
        17

        
          

        

      

      
         


      

    


                     (h)Make generally available to its
security holders as soon as practicable, but in any event not later than 18
months after the Effective Date of the Registration Statement, an earnings
statement of the Company and its subsidiaries complying with Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder;

     

                     (i)In the event of an underwritten
offering, promptly include or incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
underwriters reasonably agree should be included therein and to which the
Company does not reasonably object and make all required filings of such
Prospectus supplement or post-effective amendment as soon as practicable after
it is notified of the matters to be included or incorporated in such Prospectus
supplement or post-effective amendment;

     

                     (j)Make reasonably available for
inspection by the Investor, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
agent retained by such Investors or any such underwriter all relevant financial
and other records, pertinent corporate documents and properties of the Company
and its subsidiaries, and cause the Company’s officers, directors and
employees to supply all information reasonably requested by the Investor or any
such underwriter, attorney, accountant or agent in connection with the
Registration Statement, in each case, as is customary for similar due diligence
examinations; provided,
however, that all records, information and documents that are designated
in writing by the Company, in good faith, as confidential, proprietary or
containing any nonpublic information shall be kept confidential by such
Investors and any such underwriter, attorney, accountant or agent (pursuant to
an appropriate confidentiality agreement in the case of any such holder or
agent), unless such disclosure is made pursuant to judicial process in a court
proceeding (after first giving the Company an opportunity promptly to seek a
protective order or otherwise limit the scope of the information sought to be
disclosed) or is required by law, or such records, information or documents
become available to the public generally or through a third party not in
violation of an accompanying obligation of confidentiality; and provided, further, that, if
the foregoing inspection and information gathering would otherwise disrupt the
Company’s conduct of its business, such inspection and information gathering
shall, to the maximum extent possible, be coordinated on behalf of the Investors
and the other parties entitled thereto by one firm of counsel designated by and
on behalf of the majority in interest of Investors and other
parties;

     

                     (k)In connection with any offering, make
such representations and warranties to the Investor and to the underwriters if
an underwritten offering, in form, substance and scope as are customarily made
by a company to underwriters in secondary underwritten offerings;

     

                     (l)In connection with any underwritten
offering, deliver such documents and certificates as may be reasonably required
by the underwriters; 

     

                     (m)Cooperate with the Investor to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to the Registration Statement, which
certificates shall, if required under the terms of this Agreement, be free of
all restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any Investor may request and
maintain a transfer agent for the Common Stock; and

     

                     (n)Use its commercially reasonable efforts
to cause all Registrable Securities covered by the Registration Statement to be
listed or qualified for trading on the principal Trading Market, if any, on
which the Common Stock is traded or listed on the Effective Date of the
Registration Statement.


    
      
         


      

      
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    Section
4.3.  Obligations
and Acknowledgements of the Investor.  In connection with the
registration of the Registrable Securities, the Investor shall have the
following obligations and hereby make the following
acknowledgements:

     

                     (a)It shall be a condition precedent to
the obligations of the Company to include the Registrable Securities in the
Registration Statement that the Investor (i) shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and (ii) shall execute such documents in connection with such registration
as the Company may reasonably request.  At least five Business Days
prior to the first anticipated filing date of a Registration Statement, the
Company shall notify the Investor of the information the Company requires from
the Investor (the “Requested Information”) if the Investor elects to
have any of its Registrable Securities included in the Registration
Statement.  If at least two Business Days prior to the anticipated
filing date the Company has not received the Requested Information from the
Investor, then the Company may file the Registration Statement without including
any Registrable Securities of the Investor and the Company shall have no further
obligations under this Article 4 to the Investor after such Registration
Statement has been declared effective.  If the Investor notifies the
Company and provides the Company the information required hereby prior to the
time the Registration Statement is declared effective, the Company will file an
amendment to the Registration Statement that includes the Registrable Securities
of the Investor; provided,
however, that the Company shall not be required to file such amendment to
the Registration Statement at any time less than 5 Business Days prior to the
Effectiveness Date.

     

                     (b)The Investor agrees to cooperate with
the Company in connection with the preparation and filing of a Registration
Statement hereunder, unless the Investor has notified the Company in writing of
its election to exclude all of its Registrable Securities from such Registration
Statement;

     

                     (c)The Investor agrees that, upon receipt
of any notice from the Company of the occurrence of any event of the kind
described in Section 4.2(e) or 4.2(f), the Investor shall immediately
discontinue its disposition of Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities until the Investor’s
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 4.2(e) and, if so directed by the Company, the Investor shall
deliver to the Company (at the expense of the Company) or destroy (and deliver
to the Company a certificate of destruction) all copies in the Investor’s
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice; and

     

                     (d)The Investor acknowledges that it may
be deemed to be a statutory underwriter within the meaning of the Securities Act
with respect to the Registrable Securities being registered for resale by it,
and if the Investor includes Registrable Securities for offer and sale within a
Registration Statement the Investor hereby consents to the inclusion in such
Registration Statement of a disclosure to such effect.


    
      
         


      

      
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      Section
4.4.  Expenses
of Registration.  All expenses (other than underwriting
discounts and commissions and the fees an expenses of the Investor’s counsel)
incurred in connection with registrations, filings or qualifications pursuant to
this Article 4, including, without limitation, all registration, listing,
and qualifications fees, printing and engraving fees, accounting fees, and the
fees and disbursements of counsel for the Company, shall be borne by the
Company.

    

     

    Section
4.6.  Indemnification
and Contribution

     

                  (a)Indemnification
by the Company.  The Company
shall indemnify and hold harmless the Investor and each underwriter, if any,
which facilitates the disposition of Registrable Securities, and each of their
respective officers and directors and each Person who controls such underwriter
within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act (each such Person being sometimes hereinafter referred to as
an “Indemnified Person”) from and against any
losses, claims, damages or liabilities, joint or several, to which such
Indemnified Person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, not misleading, or
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Prospectus or an omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company hereby agrees to
reimburse such Indemnified Person for all reasonable legal and other expenses
incurred by them in connection with investigating or defending any such action
or claim as and when such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or
an omission or alleged omission from, such Registration Statement or Prospectus
in reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the
case of the occurrence of an event of the type specified in Section 4.3(e),
the use by the Indemnified Person of an outdated or defective Prospectus after
the Company has provided to such Indemnified Person an updated Prospectus
correcting the untrue statement or alleged untrue statement or omission or
alleged omission giving rise to such loss, claim, damage or
liability.

     

                  (b)Indemnification
by the Investor and Underwriters.  The Investor
agrees, as a consequence of the inclusion of any of its Registrable Securities
in a Registration Statement, and each underwriter, if any, which facilitates the
disposition of Registrable Securities shall agree, severally and not jointly, as
a consequence of facilitating such disposition of Registrable Securities to
(i) indemnify and hold harmless the Company, its directors (including any
person who, with his or her consent, is named in the Registration Statement as a
director nominee of the Company), its officers who sign any Registration
Statement and each Person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which the
Company or such other persons may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in such Registration Statement or
Prospectus or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in light of the circumstances under which they were
made, in the case of the Prospectus), not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by the Investor or
underwriter expressly for use therein, and (ii) reimburse the Company for
any legal or other expenses incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided,
however, that the Investor shall not be liable under this
Section 4.5(b) for any amount in excess of the net proceeds paid to the
Investor in respect of Registrable Securities sold by it.


    
      
         


      

      
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                  (c)Notice of
Claims, etc.  Promptly after receipt
by a Person seeking indemnification pursuant to this Section 4.5 (an “Indemnified Party”) of written notice of any
investigation, claim, proceeding or other action in respect of which
indemnification is being sought (each, a “Claim”), the Indemnified Party
promptly shall notify the Person against whom indemnification pursuant to this
Section 4.5 is being sought (the “Indemnifying Party”) of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such
failure.  In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party
shall be entitled to assume the defense thereof.  Notwithstanding the
assumption of the defense of any Claim by the Indemnifying Party, the
Indemnified Party shall have the right to employ separate legal counsel and to
participate in the defense of such Claim, and the Indemnifying Party shall bear
the reasonable fees, out-of-pocket costs and expenses of such separate legal
counsel to the Indemnified Party if (and only if): (i) the Indemnifying
Party shall have agreed to pay such fees, costs and expenses, (ii) the
Indemnified Party shall reasonably have concluded that representation of the
Indemnified Party by the Indemnifying Party by the same legal counsel would not
be appropriate due to actual or, as reasonably determined by legal counsel to
the Indemnified Party, potentially differing interests between such parties in
the conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (iii) the Indemnifying Party
shall have failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice of the
commencement of such Claim.  If the Indemnified Party employs separate
legal counsel in circumstances other than as described in the preceding
sentence, the fees, costs and expenses of such legal counsel shall be borne
exclusively by the Indemnified Party.  Except as provided above, the
Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of
counsel for the Indemnified Party (together with appropriate local
counsel).  The Indemnified Party shall not, without the prior written
consent of the Indemnifying Party (which consent shall not unreasonably be
withheld), settle or compromise any Claim or consent to the entry of any
judgment that does not include an unconditional release of the Indemnifying
Party from all liabilities with respect to such Claim or judgment or contain any
admission of wrongdoing.

     

                  (d)Contribution.  If
the indemnification provided for in this Section 4.5 is unavailable to or
insufficient to hold harmless an Indemnified Party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then each Indemnifying Party shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the Indemnifying Party and the Indemnified
Party in connection with the statements or omissions or alleged statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations.  The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.  The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 4.5(d)
were determined by pro rata allocation (even if the Investors or any
underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in this Section 4.5(d).  The amount paid or payable
by an Indemnified Party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim.  No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.


    
      
         


      

      
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                  (e)Limitation
on Investor’s and Underwriters’ Obligations.  Notwithstanding
any other provision of this Section 4.5, in no event shall (i) the
Investor have any liability under this Section 4.5 for any amounts in
excess of the dollar amount of the proceeds actually received by the Investor
from the sale of Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) pursuant to any Registration Statement under
which such Registrable Securities are registered under the Securities Act and
(ii) any underwriter be required to undertake liability to any Person
hereunder for any amounts in excess of the aggregate discount, commission or
other compensation payable to such underwriter with respect to the Registrable
Securities underwritten by it and distributed pursuant to the Registration
Statement.

     

                  (f)Other
Liabilities.  The obligations of the Company under this
Section 4.5 shall be in addition to any liability which the Company may
otherwise have to any Indemnified Person and the obligations of any Indemnified
Person under this Section 4.5 shall be in addition to any liability which
such Indemnified Person may otherwise have to the Company.  The
remedies provided in this Section 4.5 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to an indemnified party at
law or in equity.

     

    Section
4.6.  Rule
144.  With a view to making available to the Investor the
benefits of Rule 144, the Company agrees to use its best efforts
to:

     

                     (i)comply with the provisions of paragraph
(c)(1) of Rule 144; and

     

                     (ii)file with the Commission in a timely
manner all reports and other documents required to be filed by the Company
pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time
it is not required to file such reports but in the past had been required to or
did file such reports, it will, upon the request of any Investor, make available
other information as required by, and so long as necessary to permit sales of,
its Registrable Securities pursuant to Rule 144.

     

    Section 4.7.  Common
Stock Issued Upon Stock Split, etc.  The
provisions of this Article 4 shall apply to any shares of Common Stock or
any other securities issued as a dividend or distribution in respect of the
Shares or the Warrant Shares.

    


    ARTICLE
5

    


    Other Agreements of the
Parties

    


    Section 5.1.  Certificates;
Legends.

    


    (a)           The
Securities may only be transferred in compliance with state and federal
securities laws. In connection with any transfer of the Securities other than
(i) pursuant to an effective registration statement, (ii) to the Company, or
(iii) to an Affiliate of the Investor, the Company may require the transferor
thereof to provide to the Company an opinion of counsel
selected by the transferor and reasonably acceptable to the Company, the form
and substance of which opinion shall be reasonably satisfactory to the Company,
to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act.


    
      
         


      

      
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    (b)           The
certificates representing the Shares and the Warrants to be delivered at the
Closings and the certificates evidencing the Warrant Shares to be delivered upon
exercise of the Warrants will contain appropriate legends referring to
restrictions on transfer relating to the registration requirements of the
Securities Act and applicable state securities laws.

    


    Section 5.2.  Integration.  The Company has
not and shall not, and shall use its best efforts to ensure that no Affiliate of
the Company shall, sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of the sale
of the Securities to the Investor, or that would be integrated with the offer or
sale of the Securities for purposes of the rules and regulations of any Trading
Market in a manner that would require stockholder approval of the sale of the
securities to the Investor.

    


    Section 5.3.  Securities
Laws Disclosure; Publicity.  By 9:00 a.m. (New
York time) on the Trading Day following the execution of this Agreement, and by
5:00 p.m. (New York time) on the Initial Closing Date, the Company shall issue
press releases disclosing the transactions contemplated hereby and the Closing.
On the Trading Day following the execution of this Agreement the Company will
file a Current Report on Form 8-K disclosing the material terms of the
Transaction Documents (and attach the Transaction Documents as exhibits
thereto), and on each Closing Date the Company will file an additional Current
Report on Form 8-K to disclose the Closing. In addition, the Company will make
such other filings and notices in the manner and time required by the Commission
and the Trading Market on which the Common Stock is listed.

    


    Section
5.4.  Use of
Proceeds.  The Company shall
use the net proceeds from the sale of the Securities hereunder (i) for working
capital purposes, (ii) to purchase fixed assets used in the development or
production of the Company’s products or (iii) for investment in new technologies
related to the Company’s business.

    


    Section
5.5.  Right of
First Refusal

     

    (a)  Proposed
Financings.  In the event
that, during the period commencing on the Initial Closing Date and continuing to
the later of (i) the second anniversary of the First Closing Date or (ii) the
Cash Flow Trigger Date, the Company seeks to raise additional funds through a
private placement of its securities (a “Proposed Financing”), other
than Exempt Issuances, the Investor shall have the right to participate in the
Proposed Financing on a pro rata basis, based on the percentage that (a) the
number of shares of Common Stock then held by the Investor plus the number of shares of
Common Stock issuable upon conversion of the Warrants bears to (b) the total
number of shares of Common Stock outstanding plus the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock and the
Prior Convertible Securities and exercise of the Warrants and the Prior
Warrants.

     

    (b)  Investment
Terms.  The terms on
which the Investor shall purchase securities pursuant to the Proposed Financing
shall be the same as such securities are purchased by other investors in such
Proposed Financing.  The Company shall give the Investor written
notice, no later than the date of the initial closing of the Proposed Financing,
setting forth the terms of the Proposed Financing (the “Financing
Notice”).  In the event that the terms of the Proposed
Financing are changed, the Borrower shall provide the Investor with the same
notice of the revised terms that are provided to the other investors in such
Proposed Financing.


    
      
         


      

      
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    (c)  Financings.  In the event that
the Investor does not exercise, within ten Business Days after receipt of the
Financing Notice, its right to participate in the Proposed Financing, the
Company may sell the securities in the Proposed Financing at a price and on
terms which are no more favorable to the investors in such Proposed Financing
than the terms offered to the Investor.  If the Company subsequently
changes the price or terms so that the terms are at a price or more favorable to
the investors in the Proposed Financing, the Company shall re-offer the
securities to the Investor as provided in this Section 5.5.

    


    Section
5.6.  Negative
Covenants.  During the period
from the First Closing Date to the Cash Flow Trigger Date, the Company shall
not, without the prior written consent of the Investor (which consent may be
granted or withheld by the Investor in its sole discretion), take any of the
following actions:

    


    
      	
               
      

            	
              (a)

            	
              grant,
      during any fiscal year, incentive stock options, non-qualified options or
      any similar equity incentive to employees, officers, directors or
      consultants of the Company for more than an aggregate of 2,000,000 shares
      of Common Stock;

            


    

    


    
      	
               
      

            	
              (b)

            	
              grant
      to employee, officer, director or consultant of the Company an option for
      the purchase of shares of Common Stock at an exercise price less than
      $1.50 per share (other than automatic grants of non-qualified options to
      non-employee directors of the Company pursuant to the Company’s 2007
      Incentive Stock Plan); or

            


    

    


    
      	
               
      

            	
              (c)

            	
              issue
      any promissory note or evidence of debt having rights of repayment senior
      to the Notes.

            


    

    


    ARTICLE
6

    


    Conditions Precedent to
Closing

    


    Section 6.1.  Conditions
Precedent to the Obligations of the Investor to Purchase Securities.  The obligation of
the Investor to acquire Securities at any Closing is subject to the satisfaction
or waiver by the Investor, at or before the Closing, of each of the following
conditions:

    


    
      	
               
      

            	
              (a)

            	
              Representations
      and Warranties. The Company shall have
      delivered a certificate of the Company’s Chief Executive Officer
      certifying that the representations and warranties of the Company
      contained herein are true and correct in all material respects as of the
      date when made and as of the Closing Date as though made on and as of such
      Closing Date;

            


    

    


    
      	
               
      

            	
              (b)

            	
              Performance. The Company shall have
      performed, satisfied and complied in all material respects with all
      covenants, agreements and conditions required by the Transaction Documents
      to be performed, satisfied or complied with by it at or prior to the
      Closing;

            


    

    


    
      	
               
      

            	
              (c)

            	
              No
      Injunction.
      No statute, rule, regulation, executive order, decree, ruling or
      injunction shall have been enacted, entered, promulgated or endorsed by
      any court or governmental authority of competent jurisdiction that
      prohibits the consummation of any of the transactions contemplated by the
      Transaction Documents;

            


    

    


    
      	
               
      

            	
              (d)

            	
              No
      Adverse Changes. Since the date of
      execution of this Agreement, no event or series of events shall have
      occurred that reasonably could have or result in a Material Adverse
      Effect;

            


    


    
      
         


      

      
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              (e)

            	
              Board
      of Directors.  David
      Gelbaum shall have been elected a director of the Company, to serve in the
      class of directors whose term expires in 2011.  Joseph P.
      Bartlett shall have been appointed an advisory director, with full rights
      to receive notice of all meetings of the Company’s Board of Directors, to
      receive copies of all materials provided by the Company to the members of
      its Board of Directors, and to attend and participate in (but not vote at)
      all meetings of the Company’s Board of
  Directors.

            


    

    


    
      	
               
      

            	
              (f)

            	
              Compensation
      Committee.  The number
      of directors constituting the Compensation Committee of the Company’s
      Board of Directors shall have been set at two (2) and David Gelbaum shall
      have been designated as one of the two members of such
      committee.

            


    

    


    
      	
               
      

            	
              (g)

            	
              2007
      Warrants.  The Common
      Stock Purchase Warrant issued to the Investor pursuant to the 2007
      Agreement shall have been amended to change the exercise price thereof to
      $1,25 per share and to extend the expiration thereof to December 31,
      2012.

            


    

    


    
      	
               
      

            	
              (h)

            	
              Company
      Deliverables. The Company shall have
      delivered the Company Deliverables in accordance with Section
      2.2(a).

            


    

    


    Section 6.2.  Conditions
Precedent to the Obligations of the Company to Sell Securities.  The obligation of
the Company to sell Securities at any Closing is subject to the satisfaction or
waiver by the Company, at or before the Closing, of each of the following
conditions:

    


    
      	
               
      

            	
              (a)

            	
              Representations
      and Warranties. The representations
      and warranties of the Investor contained herein shall be true and correct
      in all material respects as of the date when made and as of the Closing
      Date as though made on and as of such
date;

            


    

    


    
      	
               
      

            	
              (b)

            	
              Performance. The Investor shall
      have performed, satisfied and complied in all material respects with all
      covenants, agreements and conditions required by the Transaction Documents
      to be performed, satisfied or complied with by such Investor at or prior
      to the Closing;

            


    

    


    
      	
               
      

            	
              (c)

            	
              No
      Injunction.
      No statute, rule, regulation, executive order, decree, ruling or
      injunction shall have been enacted, entered, promulgated or endorsed by
      any court or governmental authority of competent jurisdiction that
      prohibits the consummation of any of the transactions contemplated by the
      Transaction Documents; and

            


    

    


    
      	
               
      

            	
              (d)

            	
              Purchase
      Price. The
      Investor shall have paid the Purchase Price payable at such Closing in
      accordance with Section 2.3.

            


    

    


    ARTICLE
7

    


    Miscellaneous

    


    Section 7.1.  Fees and
Expenses.  Each party shall
pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of the Transaction
Documents. The Company shall pay all stamp and other taxes and duties levied in
connection with the sale of the Shares.


    
      
         


      

      
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    Section 7.2.  Entire
Agreement.  The Transaction
Documents, together with the Exhibits thereto, contain the entire understanding
of the parties with respect to the subject matter hereof and supersede all prior
agreements, understandings, discussions and representations, oral or written,
with respect to such matters, which the parties acknowledge have been merged
into such documents and exhibits.

    


    Section 7.3.  Notices.  Any and all
notices or other communications or deliveries required or permitted to be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile (provided the sender receives a machine-generated
confirmation of successful transmission) at the facsimile number specified in
this Section prior to 6:30 p.m. (Little Rock time) on a Business Day, (b) the
next Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Business Day or later than 6:30 p.m. (Little
Rock time) on any Business Day, (c) the Business Day following the date of
transmission, if sent by a nationally recognized overnight courier service, or
(d) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as
follows:

    


    
      
        	
                If to the Company:

              	 	
                ThermoEnergy
      Corporation

              
	 
      	 	
                Attn.:  Andrew
      T. Melton

              
	 
      	 	
                124
      West Capitol Avenue, Suite 880

              
	 
      	 	
                Little
      Rock, AR  72201

              
	 
      	 	 
      
	 
      	 	
                Telephone:  (501)
      376-6477

              
	 
      	 	
                Facsimile:  (501)
      376-5249

              
	 
      	 	 
      
	
                With
      a copy to:

              	 	
                Nixon
      Peabody, LLP

              
	 
      	 	
                Attn.:  William
      E. Kelly, Esq.

              
	 
      	 	
                100
      Summer Street

              
	 
      	 	
                Boston,
      MA  02110

              
	 
      	 	 
      
	 
      	 	
                Telephone:  (617)
      345-1195

              
	 
      	 	
                Facsimile:  (866)
      743-4899

              
	 
      	 	 
      
	
                If to the Investor:

              	 	
                The
      Quercus Trust

              
	 
      	 	
                2309
      Santiago Drive

              
	 
      	 	
                Newport
      Beach, California 92660

              
	 
      	 	 
      
	
                With
      a copy to:

              	 	
                Joseph
      P. Bartlett, Esq.

              
	 
      	 	
                1900
      Avenue of the Stars, Suite 2100

              
	 
      	 	
                Los
      Angeles, CA  90067

              
	 
      	 	 
      
	 
      	 	
                Telephone:  (310)
      201-7481

              
	 
      	 	
                Facsimile:  (310)
      201-2380;

              


      

    

    


    
      or such
other address as may be designated in writing hereafter, in the same manner, by
such Person.

    

    


    Section 7.4.  Amendments;
Waivers; No Additional Consideration.  No provision of
this Agreement may be waived or amended except in a written instrument signed by
the Company and the Investor.  No waiver of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.


    
      
         


      

      
        26

        
          

        

      

      
         


      

    


    Section 7.5  Termination.  This Agreement
may be terminated prior to Initial Closing:

    


    
      	
               
      

            	
              (a)

            	
              by
      written agreement of the Investor and the Company;
  or

            


    

    


    
      	
               
      

            	
              (b)

            	
              by
      the Company or the Investor, upon written notice to the other, if the
      Closing shall not have taken place by 6:30 p.m., Little Rock time, on the
      September 30, 2008; provided, that
      the right to terminate this Agreement under this Section 7.5(b) shall not
      be available to any Person whose failure to comply with its obligations
      under this Agreement has been the cause of or resulted in the failure of
      the Closing to occur on or before such
time.

            


    

    


    Upon a termination in accordance with
this Section 7.5, the Company and the Investor shall have no further obligation
or liability (including as arising from such termination) to the
other.

    


    Section 7.6.  Construction.  The headings
herein are for convenience only, do not constitute a part of this Agreement and
shall not be deemed to limit or affect any of the provisions hereof. 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. This Agreement shall be construed as if drafted
jointly by the parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any provisions
of this Agreement or any of the Transaction Documents.

    


    Section 7.7.  Successors
and Assigns.  This Agreement
shall be binding upon and inure to the benefit of the parties and their
successors and permitted assigns. Neither party may assign this Agreement or any
rights or obligations hereunder without the prior written consent of the other
party.

    


    Section 7.8.  No
Third-Party Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person, except as otherwise set forth in
Section 4.6 (with respect to rights to indemnification and
contribution).

    


    Section 7.9.  Governing
Law.  All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of Delaware, without regard to the principles of
conflicts of law thereof. Each party agrees that all Proceedings concerning the
interpretations, enforcement and of the transactions contemplated by this
Agreement and any other Transaction Documents (whether brought against a party
hereto or its respective Affiliates, employees or agents)
shall be commenced exclusively in the state or federal courts sitting in, or
having jurisdiction over, Little Rock, Arkansas (the “Arkansas Courts”). Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the Arkansas
Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of the any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any Proceeding, any claim that
it is not personally subject to the jurisdiction of any such Arkansas Court, or
that such Proceeding has been commenced in an improper or inconvenient forum.
Each party hereto hereby irrevocably waives personal service of process and
consents to process being served in any such Proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for 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 hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby. If either party shall commence a Proceeding to enforce any provisions of
a Transaction Document, then the prevailing party in such Proceeding shall be
reimbursed by the other party for its reasonable attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such Proceeding.


    
      
         


      

      
        27

        
          

        

      

      
         


      

    


    Section
7.10.  Survival.  The
representations, warranties, agreements and covenants contained herein shall
survive the Closings and the delivery of the Securities.

    


    Section 7.11.  Execution.  This Agreement
may be executed in two or more counterparts, all of which when taken together
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, it
being understood that both parties need not sign the same counterpart. In the
event that any signature is delivered by facsimile transmission, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
facsimile signature page were an original thereof, notwithstanding any
subsequent failure or refusal of the signatory to deliver an original executed
in ink.

    


    Section 7.12.  Severability.  If any provision
of this Agreement is held to be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of this
Agreement shall not in any way be affected or impaired thereby and the parties
will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

    


    Section 7.13.  Replacement
of Securities.  If any
certificate or instrument evidencing any Securities is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Securities.
If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such
mutilated certificate or instrument as a condition precedent to any issuance of
a replacement.

    


    Section 7.14.  Remedies.  In addition to
being entitled to exercise all rights provided herein or granted by law,
including recovery of damages, each of the Investors and the Company will be
entitled to specific performance under the Transaction Documents. The parties
agree that, except as expressly set forth herein with respect to liquidated
damages, monetary damages may not be adequate compensation for any loss incurred
by reason of any breach of obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.

    


    IN WITNESS WHEREOF,
the parties hereto have caused this Securities Purchase Agreement to be duly
executed by their respective authorized signatories as of the date first
indicated above.

    


    
      
        	
                The
      Quercus Trust

              	 
      	
                ThermoEnergy
      Corporation

              
	 
      	 
      	 
      	 
      	 
      
	
                By:   

              	
                /s/  David
Gelbaum

              	 
      	
                By:   

              	
                /s/  Andrew T.
    Melton

              
	 
      	
                David
      Gelbaum

              	 
      	 
      	
                Andrew
      T. Melon

              
	 
      	
                Trustee

              	 
      	 
      	
                Executive
      Vice President and CFO

              


      

    


    
      
         


      

      
        28