Unassociated Document


    SECURITIES
      PURCHASE AGREEMENT 

     

    SECURITIES
      PURCHASE AGREEMENT
      (the
      "Agreement"),
      dated
      as of November 20, 2007, by and among TXCO Resources Inc., a Delaware
      corporation, with headquarters located at 777
      E.
      Sonterra Blvd., Suite 350, San Antonio, Texas 78258 (the "Company"),
      and
      the investors listed on the Schedule of Buyers attached hereto (individually,
      a
      "Buyer"
      and
      collectively, the "Buyers").

     

    WHEREAS:

     

    A. The
      Company and each Buyer is executing and delivering this Agreement in reliance
      upon the exemption from securities registration afforded by Section 4(2) of
      the
      Securities Act of 1933, as amended (the "1933
      Act"),
      and
      Rule 506 of Regulation D ("Regulation D")
      as
      promulgated by the United States Securities and Exchange Commission (the
      "SEC")
      under
      the 1933 Act.

     

    B. The
      Company has authorized a new series of convertible preferred stock of the
      Company designated as Series
      C
      Convertible Preferred Stock,
      the
      terms of which are set forth in the certificate of designation for such series
      of preferred stock (the "Certificate
      of Designations")
      in the
      form attached hereto as Exhibit
      A,
      which
      Series C Preferred Stock shall be convertible into the Company's common stock,
      par value $0.01 per share (the "Common
      Stock"),
      in
      accordance with the terms of the Certificate of Designations. 

     

    C. Each
      Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
      conditions stated in this Agreement, at the Initial Closing (as defined below)
      that aggregate number of shares of Series C Convertible Preferred Stock set
      forth opposite such Buyer's name in column (3) on the Schedule of Buyers (which
      aggregate number for all Buyers shall be 55,000) (the "Initial
      Preferred Shares")
      (as
      converted, collectively, the "Initial
      Conversion Shares").

     

    D. Subject
      to the terms and conditions set forth in this Agreement, the Buyers shall have
      the right to participate in Additional Closings (as defined below) in order
      to
      purchase, and require the Company to sell up to that aggregate number of shares
      of Series C Preferred Stock set forth opposite such Buyer's name in column
      (4)
      on the Schedule of Buyers (which aggregate number for all Buyers shall not
      exceed 25,000) (the "Additional
      Preferred Shares",
      together with the Initial Preferred Shares, the "Preferred
      Shares")
      (as
      converted, collectively, the "Additional
      Conversion Shares",
      together with the Initial Conversion Shares, the "Conversion
      Shares").

     

    E. Contemporaneously
      with the execution and delivery of this Agreement, the parties hereto are
      executing and delivering a Registration Rights Agreement, substantially in
      the
      form attached hereto as Exhibit
      B
      (the
      "Registration
      Rights Agreement"),
      pursuant to which the Company has agreed to provide certain registration rights
      with respect to the Registrable Securities (as defined in the Registration
      Rights Agreement), under the 1933 Act and the rules and regulations promulgated
      thereunder, and applicable state securities laws. 


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    F. The
      Preferred Shares may be entitled to dividends, which at the option of the
      Company, subject to certain conditions, may be paid in shares of Common Stock
      (the "Dividend
      Shares").

     

    G. The
      Preferred Shares, the Conversion Shares and the Dividend Shares are collectively
      referred to herein as the "Securities".

     

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

     

    1. PURCHASE
      AND SALE OF PREFERRED SHARES.

     

    (a) Purchase
      of Preferred Shares.

     

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

     

    (ii) Additional
      Preferred Shares.
      Subject
      to the satisfaction (or waiver) of the conditions set forth in Sections 1(c),
      6(b) and 7(b) below, the Company shall issue and sell to each Buyer electing
      to
      participate in such Additional Closing pursuant to Section 1(c) below, and
      each
      such Buyer severally, but not jointly, agrees to purchase from the Company
      on
      such Additional Closing Date (as defined below), up to the number of Additional
      Preferred Shares as is set forth opposite such Buyer's name in column (4) on
      the
      Schedule of Buyers (each, an "Additional
      Closing").

     

    (iii) Closing.
      The
      Initial Closing and the Additional Closings are each referred to in this
      Agreement as a "Closing".
      Each
      Closing shall occur on the applicable Closing Date at the offices of Schulte
      Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

     

    (iv) Purchase
      Price.
      The
      purchase price for each Buyer of the Initial Preferred Shares to be purchased
      by
      each such Buyer at the Initial Closing shall be the amount set forth opposite
      such Buyer's name in column (5) of the Schedule of Buyers (the "Initial
      Purchase Price").
      Each
      Buyer shall pay $1,000 for each Preferred Share to be purchased by such Buyer
      at
      each Additional Closing (the "Additional
      Purchase Price",
      and
      together with the Initial Purchase Price, the "Purchase
      Price").

     

    (b) Initial
      Closing Date.
      The
      date and time of the Initial Closing (the "Initial
      Closing Date")
      shall
      be 10:00 a.m., New York City Time, on the date hereof after notification of
      satisfaction (or waiver) of the conditions to the Initial Closing set forth
      in
      Sections 6(a) and 7(a) below (or such later date as is mutually agreed to by
      the
      Company and each Buyer).


    
      
        
        

      

      
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    (c) Additional
      Closing Date.
      The
      date and time of the Additional Closings (each an "Additional
      Closing Date,"
      and
      together with the Initial Closing Date, each a "Closing
      Date"
      and
      collectively, the "Closing
      Dates")
      shall
      be 10:00 a.m., New York City time, on the date specified in the applicable
      Additional Closing Notice (as defined below), subject to satisfaction (or
      waiver) of the conditions to Additional Closing set forth in Sections 6(b)
      and
      7(b) and the conditions contained in this Section 1(c) (or such later date
      as is
      mutually agreed to by the Company and the applicable Buyer). Subject to the
      requirements of Sections 6(b) and 7(b) and the conditions contained in this
      Section 1(c), each Buyer may purchase (provided that such Buyer was a Buyer
      under this Agreement on the date hereof and such Buyer holds all of the
      Preferred Shares purchased hereunder at the time of such Additional Closing),
      at
      such Buyer's option, Additional Preferred Shares by delivering written notice
      to
      the Company (an "Additional
      Closing Notice")
      at any
      time during the period beginning after the date hereof and ending on the date
      one hundred and twenty (120) days after the Initial Closing Date
      (the
      "Additional
      Closing Expiration Date"),
      which
      Additional Closing Expiration Date may be extended at the option of the Company
      to a date not later than one hundred and eighty (180) days after the Initial
      Closing Date.
      The
      Additional Closing Notice shall be delivered at least ten (10) Business Days
      prior to the applicable Additional Closing Date set forth in such Additional
      Closing Notice. An Additional Closing Notice shall set forth (i) the number
      of
      Additional Preferred Shares to be purchased by such Buyer at the Additional
      Closing, which number of shares shall not exceed the number of Additional
      Preferred Shares as is set forth opposite such Buyer's name in column (4) on
      the
      Schedule of Buyers, (ii) the aggregate Additional Purchase Price for the
      Additional Preferred Shares to be purchased and (iii) the proposed Additional
      Closing Date. As used herein, "Business
      Day"
      means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      The City of New York are authorized or required by law to remain
      closed.

     

    (d) Form
      of Payment.
      On the
      Initial Closing Date, each Buyer shall pay the Initial Purchase Price to the
      Company for the Initial Preferred Shares to be issued and sold to such Buyer
      at
      the Initial Closing by wire transfer of immediately available funds for such
      Initial Purchase Price in accordance with the Company's written wire
      instructions (less, in the case of Capital Ventures International ("Capital
      Ventures"),
      a
      Buyer, the amounts withheld pursuant to Section 4(g)). On each Additional
      Closing Date, each Buyer shall pay the Additional Purchase Price to the Company
      for the Additional Preferred Shares to be issued and sold to such Buyer at
      such
      Additional Closing by wire transfer of immediately available funds for such
      Additional Purchase Price in accordance with the Company's written wire
      instructions. At each Closing, the Company shall deliver to each Buyer the
      Preferred Shares (in such numbers as such Buyer shall request) which such Buyer
      is then purchasing duly executed on behalf of the Company and registered in
      the
      name of such Buyer or its designee.

     

    2. BUYER'S
      REPRESENTATIONS AND WARRANTIES.

     

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

     

    (a) Organization;
      Authority.
      Such
      Buyer is an entity duly organized, validly existing and in good standing under
      the laws of the jurisdiction of its organization with the requisite power and
      authority to enter into and to consummate the transactions contemplated by
      the
      Transaction Documents (as defined below) to which it is a party and otherwise
      to
      carry out its obligations hereunder and thereunder.


    
      
        
        

      

      
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    (b) No
      Public Sale or Distribution.
      Such
      Buyer is (i) acquiring the Preferred Shares, (ii) upon conversion of the
      Preferred Shares will acquire the Conversion Shares and (iii) will acquire
      the
      Dividend Shares in each case, in the ordinary course of business for its own
      account and not with a view towards, or for resale in connection with, the
      public sale or distribution thereof, except pursuant to sales registered or
      exempted under the 1933 Act and such Buyer does not have a present arrangement
      to effect any distribution of the Securities to or through any person or entity;
      provided,
      however,
      that by
      making the representations herein, such Buyer does not agree to hold any of
      the
      Securities for any minimum or other specific term and reserves the right to
      dispose of the Securities at any time in accordance with or pursuant to a
      registration statement or an exemption under the 1933 Act. Such Buyer is
      acquiring the Securities hereunder in the ordinary course of its business.
      Such
      Buyer does not presently have any agreement or understanding, directly or
      indirectly, with any Person to distribute any of the Securities.

     

    (c) Accredited
      Investor Status.
      Such
      Buyer is an "accredited investor" as that term is defined in Rule 501(a) of
      Regulation D.

     

    (d) Reliance
      on Exemptions.
      Such
      Buyer understands that the Securities are being offered and sold to it in
      reliance on specific exemptions from the registration requirements of United
      States federal and state securities laws and that the Company is relying in
      part
      upon the truth and accuracy of, and such Buyer's compliance with, the
      representations, warranties, agreements, acknowledgments and understandings
      of
      such Buyer set forth herein in order to determine the availability of such
      exemptions and the eligibility of such Buyer to acquire the
      Securities.

     

    (e) Information.
      Such
      Buyer and its advisors, if any, have been furnished with all materials relating
      to the business, finances and operations of the Company and materials relating
      to the offer and sale of the Securities which have been requested by such Buyer.
      Such Buyer and its advisors, if any, have been afforded the opportunity to
      ask
      questions of the Company. Neither such inquiries nor any other due diligence
      investigations conducted by such Buyer or its advisors, if any, or its
      representatives shall modify, amend or affect such Buyer's right to rely on
      the
      Company's representations and warranties contained herein. Such Buyer
      understands that its investment in the Securities involves a high degree of
      risk. Such Buyer has sought such accounting, legal and tax advice from Persons
      other than the Company as it has considered necessary to make an informed
      investment decision with respect to its acquisition of the Securities. In
      addition, such Buyer acknowledges that, in connection with the Closing, the
      Company is entering into the transactions set forth in Schedule
      2(e)
      and that
      the Buyer has been afforded the opportunity to ask questions of the Company
      regarding the same.

     

    (f) No
      Governmental Review.
      Such
      Buyer understands that no United States federal or state agency or any other
      government or governmental agency has passed on or made any recommendation
      or
      endorsement of the Securities or the fairness or suitability of the investment
      in the Securities nor have such authorities passed upon or endorsed the merits
      of the offering of the Securities.


    
      
        
        

      

      
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    (g) Transfer
      or Resale.
      Such
      Buyer understands that except as provided in the Registration Rights Agreement:
      (i) the Securities have not been and are not being registered under the 1933
      Act
      or any state securities laws, and may not be offered for sale, sold, assigned
      or
      transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
      have delivered to the Company an opinion of counsel, in a generally acceptable
      form, to the effect that such Securities to be sold, assigned or transferred
      may
      be sold, assigned or transferred pursuant to an exemption from such
      registration, or (C) such Buyer provides the Company with reasonable assurance
      that such Securities can be sold, assigned or transferred pursuant to Rule
      144
      or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule
      thereto) (collectively, "Rule
      144");
      (ii)
      any sale of the Securities made in reliance on Rule 144 may be made only in
      accordance with the terms of Rule 144 and further, if Rule 144 is not
      applicable, any resale of the Securities under circumstances in which the seller
      (or the Person (as defined in Section 3(s)) through whom the sale is made)
      may
      be deemed to be an underwriter (as that term is defined in the 1933 Act) may
      require compliance with some other exemption under the 1933 Act or the rules
      and
      regulations of the SEC thereunder; and (iii) neither the Company nor any other
      Person is under any obligation to register the Securities under the 1933 Act
      or
      any state securities laws or to comply with the terms and conditions of any
      exemption thereunder. Notwithstanding the foregoing, the Securities may be
      pledged in connection with a bona fide margin account or other loan or financing
      arrangement secured by the Securities and such pledge of Securities shall not
      be
      deemed to be a transfer, sale or assignment of the Securities hereunder, and
      no
      Buyer effecting a pledge of Securities shall be required to provide the Company
      with any notice thereof or otherwise make any delivery to the Company pursuant
      to this Agreement or any other Transaction Document (as defined in Section
      3(b)), including, without limitation, this Section 2(g).

     

    (h) Legends.
      Such
      Buyer understands that the certificates or other instruments representing the
      Preferred Shares and, until such time as the resale of the Conversion Shares
      have been registered under the 1933 Act as contemplated by the Registration
      Rights Agreement, the stock certificates representing the Conversion Shares,
      except as set forth below, shall bear any legend as required by the "blue sky"
      laws of any state and a restrictive legend in substantially the following form
      (and a stop-transfer order may be placed against transfer of such stock
      certificates):

     

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


    
      
        
        

      

      
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    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of the Securities upon which
      it is
      stamped or issue to such holder by electronic delivery at the applicable balance
      account at The Depository Trust Company ("DTC"),
      if,
      unless otherwise required by state securities laws, (i) such Securities are
      registered for resale under the 1933 Act, (ii) in connection with a sale,
      assignment or other transfer, such holder provides the Company with an opinion
      of counsel, in a generally acceptable form, to the effect that such sale,
      assignment or transfer of the Securities may be made without registration under
      the applicable requirements of the 1933 Act, or (iii) such holder provides
      the
      Company with reasonable assurance that the Securities can be sold, assigned
      or
      transferred pursuant to Rule 144 or Rule 144A. The Company shall be responsible
      for the fees of its transfer agent and all DTC fees associated with such
      issuance.

     

    (i) Validity;
      Enforcement.
      This
      Agreement and the Registration Rights Agreement have been duly and validly
      authorized, executed and delivered on behalf of such Buyer and shall constitute
      the legal, valid and binding obligations of such Buyer enforceable against
      such
      Buyer in accordance with their respective terms, except as such enforceability
      may be limited by general principles of equity or to applicable bankruptcy,
      insolvency, reorganization, moratorium, liquidation and other similar laws
      relating to, or affecting generally, the enforcement of applicable creditors'
      rights and remedies.

     

    (j) No
      Conflicts.
      The
      execution, delivery and performance by such Buyer of this Agreement and the
      Registration Rights Agreement and the consummation by such Buyer of the
      transactions contemplated hereby and thereby will not (i) result in a violation
      of the organizational documents of such Buyer or (ii) conflict with, or
      constitute a default (or an event which with notice or lapse of time or both
      would become a default) under, or give to others any rights of termination,
      amendment, acceleration or cancellation of, any agreement, indenture or
      instrument to which such Buyer is a party, or (iii) result in a violation of
      any
      law, rule, regulation, order, judgment or decree (including federal and state
      securities laws) applicable to such Buyer, except in the case of clauses (ii)
      and (iii) above, for such conflicts, defaults, rights or violations which would
      not, individually or in the aggregate, reasonably be expected to have a material
      adverse effect on the ability of such Buyer to perform its obligations
      hereunder.

     

    (k) Residency.
      Such
      Buyer is a resident of that jurisdiction specified below its address on the
      Schedule of Buyers.

     

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


    
      
        
        

      

      
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    3. REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

     

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

     

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

     

    (b) Authorization;
      Enforcement; Validity.
      The
      Company has the requisite power and authority to enter into and perform its
      obligations under this Agreement, the Certificate of Designations, the
      Registration Rights Agreement, the Irrevocable Transfer Agent Instructions
      (as
      defined in Section 5(b)), each of the Lock-Up Agreements and each of the other
      agreements entered into by the parties hereto in connection with the
      transactions contemplated by this Agreement (collectively, the "Transaction
      Documents")
      and to
      issue the Securities in accordance with the terms hereof and thereof. The
      execution and delivery of the Transaction Documents by the Company and the
      consummation by the Company of the transactions contemplated hereby and thereby,
      including, without limitation, the issuance of the Preferred Shares and the
      reservation for issuance and the issuance of the Conversion Shares issuable
      upon
      conversion of the Preferred Shares and the reservation for issuance and the
      issuance of the Dividend Shares issuable with respect to the Preferred Shares,
      have been duly authorized by the Company's board of directors and (other than
      the filing with the SEC of a Form D and one or more Registration Statements
      in
      accordance with the requirements of the Registration Rights Agreement and any
      other filings as may be required by any state securities agencies or by the
      Principal Market (as defined below)), no further filing, consent, or
      authorization is required by the Company, its board of directors or its
      stockholders. This Agreement and the other Transaction Documents of even date
      herewith have been duly executed and delivered by the Company, and constitute
      the legal, valid and binding obligations of the Company, enforceable against
      the
      Company in accordance with their respective terms, except as such enforceability
      may be limited by general principles of equity or applicable bankruptcy,
      insolvency, reorganization, moratorium, liquidation or similar laws relating
      to,
      or affecting generally, the enforcement of applicable creditors' rights and
      remedies. The Certificate of Designations in the form attached hereto as
Exhibit
      A
      has been
      filed with the Secretary of State of the State of Delaware and is in full force
      and effect, enforceable against the Company in accordance with its terms and
      has
      not been amended.


    
      
        
        

      

      
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    (c) Issuance
      of Securities.
      The
      Preferred Shares are duly authorized and upon issuance in accordance with the
      terms of the Transaction Documents shall be free from all taxes, liens and
      charges with respect to the issue thereof, and the Preferred Shares shall be
      entitled to the rights and preferences set forth in the Certificate of
      Designations. As of the applicable Closing, a number of shares of Common Stock
      shall have been duly authorized and reserved for issuance which equals 110%
      of
      the sum of (i) the maximum number of shares of Common Stock issuable upon
      conversion of the Preferred Shares and (ii) the maximum number of Dividend
      Shares issuable pursuant to the terms of the Certificate of Designations,
      issuable at such Closing and issued at any prior Closing (assuming for purposes
      hereof, that the Preferred Shares are convertible at the Conversion Price and
      without taking into account any limitations on the conversion of the Preferred
      Shares set forth in the Certificate of Designations and that all dividends
      will
      be issued in the form of Dividend Shares for a period of three (3) years at
      an
      assumed value of the Weighted Average Price as of the Initial Closing Date).
      Upon issuance or conversion in accordance with the Certificate of Designations,
      the Conversion Shares and the Dividend Shares will be validly issued, fully
      paid
      and nonassessable and free from all preemptive or similar rights, taxes, liens
      and charges with respect to the issue thereof, with the holders being entitled
      to all rights accorded to a holder of Common Stock. Subject to the accuracy
      of
      the representations and warranties of the Buyers in this Agreement, the offer
      and issuance by the Company of the Securities is exempt from registration under
      the 1933 Act.

     

    (d) No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated hereby
      and
      thereby (including, without limitation, the issuance of the Preferred Shares
      and
      the Dividend Shares and reservation for issuance of the Conversion Shares and
      the Dividend Shares) will not (i) result in a violation of the Certificate
      of
      Incorporation (as defined in Section 3(r)) of the Company or any certificate
      of
      incorporation, certificate of formation, any certificate of designations or
      other constituent document of any of its Subsidiaries, any capital stock of
      the
      Company or Bylaws (as defined in Section 3(r)) or any of its Subsidiaries bylaws
      or (ii) conflict with, or constitute a default (or an event which with notice
      or
      lapse of time or both would become a default) under, or give to others any
      rights of termination, amendment, acceleration or cancellation of, any
      agreement, indenture or instrument to which the Company or any of its
      Subsidiaries is a party, or (iii) result in a violation of any law, rule,
      regulation, order, judgment or decree (including federal and state securities
      laws and regulations and the rules and regulations of The NASDAQ Global Select
      Market (the "Principal
      Market"))
      applicable to the Company or any of its Subsidiaries or by which any property
      or
      asset of the Company or any of its Subsidiaries is bound or affected, which
      with
      regard to subsections (ii) and (iii) would reasonably be expected to cause
      a
      Material Adverse Effect.


    
      
        
        

      

      
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    (e) Consents.
      Subject
      to the receipt of Stockholder Approval, the Company is not required to obtain
      any consent, authorization or order of, or make any filing or registration
      with,
      any court, governmental agency or any regulatory or self-regulatory agency
      or
      any other Person in order for it to execute, deliver or perform any of its
      obligations under or contemplated by the Transaction Documents, in each case
      in
      accordance with the terms hereof or thereof. All consents, authorizations,
      orders, filings and registrations which the Company is required to obtain
      pursuant to the preceding sentence have been obtained or effected on or prior
      to
      the Closing Date, and the Company and its Subsidiaries are unaware of any facts
      or circumstances which might prevent the Company from obtaining or effecting
      any
      of the registration, application or filings pursuant to the preceding sentence.
      The Company is not in violation of the requirements of the Principal Market
      and
      has no knowledge of any facts that would reasonably lead to delisting or
      suspension of the Common Stock in the foreseeable future. 

     

    (f) Acknowledgment
      Regarding Buyer's Purchase of Securities.
      The
      Company acknowledges and agrees that each Buyer is acting solely in the capacity
      of arm's length purchaser with respect to the Transaction Documents and the
      transactions contemplated hereby and thereby and that no Buyer is (i) an officer
      or director of the Company, (ii) to the knowledge of the Company, an "affiliate"
      of the Company or any of its Subsidiaries (as defined in Rule 144) or (iii)
      to
      the knowledge of the Company, a "beneficial owner" of more than 10% of the
      shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities
      Exchange Act of 1934, as amended (the "1934
      Act")).
      The
      Company further acknowledges that no Buyer is acting as a financial advisor
      or
      fiduciary of the Company or any of its Subsidiaries (or in any similar capacity)
      with respect to the Transaction Documents and the transactions contemplated
      hereby and thereby, and any advice given by a Buyer or any of its
      representatives or agents in connection with the Transaction Documents and
      the
      transactions contemplated hereby and thereby is merely incidental to such
      Buyer's purchase of the Securities. The Company further represents to each
      Buyer
      that the Company's decision to enter into the Transaction Documents has been
      based solely on the independent evaluation by the Company and its
      representatives.

     

    (g) No
      General Solicitation; Placement Agents' Fees.
      Neither
      the Company, nor any of its Subsidiaries or affiliates, nor any Person acting
      on
      its or their behalf, has engaged in any form of general solicitation or general
      advertising (within the meaning of Regulation D) in connection with the offer
      or
      sale of the Securities. The Company shall be responsible for the payment of
      any
      placement agent's fees, financial advisory fees, or brokers' commissions (other
      than for persons engaged by any Buyer or its investment advisor) relating to
      or
      arising out of the transactions contemplated hereby. The Company shall pay,
      and
      hold each Buyer harmless against, any liability, loss or expense (including,
      without limitation, attorney's fees and out-of-pocket expenses) arising in
      connection with any such claim. The Company acknowledges that it has engaged
      Lazard Freres & Co. LLC, BMO Capital Markets and Scotia Capital Inc. as
      placement agents (the "Agents")
      in
      connection with the sale of the Securities. Other than the Agents, the Company
      has not engaged any placement agent or other agent in connection with the sale
      of the Securities.


    
      
        
        

      

      
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    (h) No
      Integrated Offering.
      Except
      as set forth on Schedule 3(h), none of the Company, its Subsidiaries, any of
      their affiliates, and any Person acting on their behalf has, directly or
      indirectly, made any offers or sales of any security or solicited any offers
      to
      buy any security, under circumstances that would require registration of any
      of
      the Securities under the 1933 Act or cause this offering of the Securities
      to be
      integrated with prior offerings by the Company for purposes of the 1933 Act
      or
      any applicable stockholder approval provisions, including, without limitation,
      under the rules and regulations of any exchange or automated quotation system
      on
      which any of the securities of the Company are listed or designated. None of
      the
      Company, its Subsidiaries, their affiliates and any Person acting on their
      behalf will take any action or steps referred to in the preceding sentence
      that
      would require registration of any of the Securities under the 1933 Act or cause
      the offering of the Securities to be integrated with other
      offerings.

     

    (i) Dilutive
      Effect.
      The
      Company understands and acknowledges that the number of Conversion Shares
      issuable upon conversion of the Preferred Shares will increase in certain
      circumstances. The Company further acknowledges that its obligation to issue
      Conversion Shares upon conversion of the Preferred Shares and the Dividend
      Shares in accordance with this Agreement and the Certificate of Designations
      is
      absolute and unconditional regardless of the dilutive effect that such issuance
      may have on the ownership interests of other stockholders of the
      Company.

     

    (j) Application
      of Takeover Protections; Rights Agreement.
      The
      Company and its board of directors have taken all necessary action, if any,
      in
      order to render inapplicable any control share acquisition, business
      combination, poison pill (including any distribution under a rights agreement)
      or other similar anti-takeover provision under the Certificate of Incorporation
      or any certificates of designations or the laws of the jurisdiction of its
      formation or incorporation which is or could become applicable to any Buyer
      as a
      result of the transactions contemplated by this Agreement, including, without
      limitation, the Company's issuance of the Securities and any Buyer's ownership
      of the Securities. Except as disclosed in the SEC Documents and Schedule 3(j),
      the Company has not adopted a stockholder rights plan or similar arrangement
      relating to accumulations of beneficial ownership of Common Stock or a change
      in
      control of the Company.

     

    (k) SEC
      Documents; Financial Statements.
      Except
      as disclosed on Schedule 3(k), during the two (2) years prior to the date
      hereof, the Company has timely filed all reports, schedules, forms, statements
      and other documents required to be filed by it with the SEC pursuant to the
      reporting requirements of the 1934 Act (all of the foregoing filed prior to
      the
      date hereof and all exhibits included therein and financial statements, notes
      and schedules thereto and documents incorporated by reference therein being
      hereinafter referred to as the "SEC
      Documents").
      The
      Company has delivered to the Buyers or their respective representatives true,
      correct and complete copies of each of the SEC Documents not available on the
      EDGAR system that have been requested by each Buyer. As of their respective
      dates, the SEC Documents complied in all material respects with the requirements
      of the 1934 Act and the rules and regulations of the SEC promulgated thereunder
      applicable to the SEC Documents, and none of the SEC Documents, at the time
      they
      were filed with the SEC, contained any untrue statement of a material fact
      or
      omitted to state a material fact required to be stated therein or necessary
      in
      order to make the statements therein, in the light of the circumstances under
      which they were made, not misleading. As of their respective dates, the
      financial statements of the Company included in the SEC Documents complied
      as to
      form in all material respects with applicable accounting requirements and the
      published rules and regulations of the SEC with respect thereto as in effect
      as
      of the time of filing. Such financial statements have been prepared in
      accordance with generally accepted accounting principles, consistently applied,
      during the periods involved (except (i) as may be otherwise indicated in such
      financial statements or the notes thereto, or (ii) in the case of unaudited
      interim statements, to the extent they may exclude footnotes or may be condensed
      or summary statements) and fairly present in all material respects the financial
      position of the Company as of the dates thereof and the results of its
      operations and cash flows for the periods then ended (subject, in the case
      of
      unaudited statements, to normal year-end audit adjustments). 


    
      
        
        

      

      
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    (l) Absence
      of Certain Changes.
      Except
      as disclosed in the SEC Documents, since December 31, 2006 there has been no
      Material Adverse Effect. Neither the Company nor any of its Subsidiaries has
      taken any steps to seek protection pursuant to any bankruptcy law nor does
      the
      Company have any knowledge or reason to believe that its creditors intend to
      initiate involuntary bankruptcy proceedings or any actual knowledge of any
      fact
      which would reasonably lead a creditor to do so. The Company and its
      Subsidiaries, individually and on a consolidated basis, are not as of the date
      hereof, and after giving effect to the transactions contemplated hereby to
      occur
      at the Closing will not, be Insolvent (as defined below). For purposes of this
      Section 3(l), "Insolvent"
      means,
      with respect to any Person (as defined in Section 3(s)) (i) the present fair
      saleable value of such Person's assets is less than the amount required to
      pay
      such Person's total Indebtedness (as defined in Section 3(s)), (ii) such Person
      is unable to pay its debts and liabilities, subordinated, contingent or
      otherwise, as such debts and liabilities become absolute and matured, (iii)
      such
      Person intends to incur or believes that it will incur debts that would be
      beyond its ability to pay as such debts mature or (iv) such Person has
      unreasonably small capital with which to conduct the business in which it is
      engaged as such business is now conducted and is proposed to be
      conducted.

     

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

     

    (n) Conduct
      of Business; Regulatory Permits.
      Neither
      the Company nor its Subsidiaries is in violation of any term of or in default
      under its Certificate of Incorporation, the Certificate of Designations, the
      Existing Certificate of Designations (as defined below), any other certificate
      of designation, preferences or rights of any other outstanding series of
      preferred stock of the Company or Bylaws or their organizational charter or
      certificate of incorporation or bylaws, respectively. Neither the Company nor
      any of its Subsidiaries is in violation of any judgment, decree or order or
      any
      statute, ordinance, rule or regulation applicable to the Company or its
      Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
      its business in violation of any of the foregoing, except in all cases for
      possible violations which would not, individually or in the aggregate,
      reasonably be expected to have a Material Adverse Effect. Without limiting
      the
      generality of the foregoing, the Company is not in violation of any of the
      rules, regulations or requirements of the Principal Market and has no knowledge
      of any facts or circumstances that would reasonably lead to delisting or
      suspension of the Common Stock by the Principal Market in the foreseeable
      future. During the two (2) years prior to the date hereof, (i) the Common Stock
      has been designated for quotation on the Principal Market or its predecessor,
      (ii) trading in the Common Stock has not been suspended by the SEC or the
      Principal Market and (iii) the Company has received no communication, written
      or
      oral, from the SEC or the Principal Market regarding the suspension or delisting
      of the Common Stock from the Principal Market. The Company and its Subsidiaries
      possess all certificates, authorizations and permits issued by the appropriate
      regulatory authorities necessary to conduct their respective businesses, except
      where the failure to possess such certificates, authorizations or permits would
      not have, individually or in the aggregate, a Material Adverse Effect, and
      neither the Company nor any such Subsidiary has received any notice of
      proceedings relating to the revocation or modification of any such certificate,
      authorization or permit.


    
      
        
        

      

      
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    (o) Foreign
      Corrupt Practices.
      Neither
      the Company nor any of its Subsidiaries nor any director, officer, agent,
      employee or other Person acting on behalf of the Company or any of its
      Subsidiaries has, in the course of its actions for, or on behalf of, the Company
      or any of its Subsidiaries (i) used any corporate funds for any unlawful
      contribution, gift, entertainment or other unlawful expenses relating to
      political activity; (ii) made any direct or indirect unlawful payment to any
      foreign or domestic government official or employee from corporate funds; (iii)
      violated or is in violation of any provision of the U.S. Foreign Corrupt
      Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
      payoff, influence payment, kickback or other unlawful payment to any foreign
      or
      domestic government official or employee.

     

    (p) Sarbanes-Oxley
      Act.
      The
      Company is in material compliance with any and all applicable requirements
      of
      the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and
      any
      and all applicable rules and regulations promulgated by the SEC thereunder
      that
      are effective as of the date hereof.

     

    (q) Transactions
      With Affiliates.
      Except
      as disclosed in the SEC Documents, none of the officers or directors of the
      Company or any of its Subsidiaries is presently a party to any transaction
      with
      the Company or any of its Subsidiaries (other than for ordinary course services
      as employees, officers or directors), including any contract, agreement or
      other
      arrangement providing for the furnishing of services to or by, providing for
      rental of real or personal property to or from, or otherwise requiring payments
      to or from any such officer or director or, to the actual knowledge of the
      Company or any of its Subsidiaries, any corporation, partnership, trust or
      other
      entity in which any such officer, director, or employee has a substantial
      interest or is an officer, director, trustee or partner.


    
      
        
        

      

      
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    (r) Equity
      Capitalization.
      As of
      the date hereof, the authorized capital stock of the Company consists of (i)
      100,000,000 shares of Common Stock, of which as of the date hereof, 34,162,119
      are issued and outstanding and 2,235,462 shares are reserved for issuance
      pursuant to securities granted or that may be granted that are (other than
      the
      Preferred Shares) exercisable or exchangeable for, or convertible into, shares
      of Common Stock and (ii) 10,000,000 shares of Preferred Stock none of which,
      as
      of the date hereof, are issued and outstanding. All of such outstanding shares
      have been, or upon issuance will be, validly issued and are fully paid and
      nonassessable. Except as set forth on Schedule
      3(r):
      (i)
      none of the Company's capital stock is subject to preemptive rights or any
      other
      similar rights or any liens or encumbrances suffered or permitted by the
      Company; (ii) except as disclosed in the SEC Documents, there are no outstanding
      options, warrants, scrip, rights to subscribe to, calls or commitments of any
      character whatsoever relating to, or securities or rights convertible into,
      or
      exercisable or exchangeable for, any capital stock of the Company or any of
      its
      Subsidiaries, or contracts, commitments, understandings or arrangements by
      which
      the Company or any of its Subsidiaries is or may become bound to issue
      additional capital stock of the Company or any of its Subsidiaries or options,
      warrants, scrip, rights to subscribe to, calls or commitments of any character
      whatsoever relating to, or securities or rights convertible into, or exercisable
      or exchangeable for, any capital stock of the Company or any of its
      Subsidiaries; (iii) there are no agreements or arrangements under which the
      Company or any of its Subsidiaries is obligated to register the sale of any
      of
      their securities under the 1933 Act (except pursuant to the Registration Rights
      Agreement); (iv) there are no outstanding securities or instruments of the
      Company or any of its Subsidiaries which contain any redemption or similar
      provisions, and there are no contracts, commitments, understandings or
      arrangements by which the Company or any of its Subsidiaries is or may become
      bound to redeem a security of the Company or any of its Subsidiaries; (v) there
      are no securities or instruments containing anti-dilution or similar provisions
      that will be triggered by the issuance of the Securities; (vi) except as
      disclosed in the SEC Documents, the Company does not have any stock appreciation
      rights or "phantom stock" plans or agreements or any similar plan or agreement;
      and (vii) the Company and its Subsidiaries have no liabilities or obligations
      required to be disclosed in the SEC Documents but not so disclosed in the SEC
      Documents, other than those incurred in the ordinary course of the Company's
      or
      its Subsidiaries' respective businesses and which, individually or in the
      aggregate, do not or would not have a Material Adverse Effect. Included in
      the
      SEC Documents are true, correct and complete copies of the Company's Certificate
      of Incorporation, as amended and as in effect on the date hereof (the
      "Certificate
      of Incorporation"),
      and
      the Company's Bylaws, as amended and as in effect on the date hereof (the
      "Bylaws"),
      and
      the terms of all securities convertible into, or exercisable or exchangeable
      for, shares of Common Stock and the material rights of the holders thereof
      in
      respect thereto. 

     

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


    
      
        
        

      

      
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    (t) Absence
      of Litigation.
      Except
      as disclosed in the SEC Documents, there is no action, suit, proceeding, inquiry
      or investigation before or by the Principal Market, any court, public board,
      government agency, self-regulatory organization or body pending or, to the
      knowledge of the Company, threatened against or affecting the Company or any
      of
      its Subsidiaries, which if determined adversely to the Company or any of its
      Subsidiaries would, or would reasonably be expected to, have a Material Adverse
      Effect.

     

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


    
      
        
        

      

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

     

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

     

    (w) Title.
      Except
      as would not, or would not reasonably be expected to, have a Material Adverse
      Effect or is otherwise disclosed in the SEC Documents, the Company and its
      Subsidiaries have defensible title to all real property and good and marketable
      title to all personal property owned by them, in each case free and clear of
      all
      liens, encumbrances and defects. Except as would not, or would not reasonable
      be
      expected to, have a Material Adverse Effect or is otherwise disclosed in the
      SEC
      Documents, any real property and facilities held under lease by the Company
      or
      any of its Subsidiaries are held by them under valid, subsisting and enforceable
      leases.

     

    (x) Intellectual
      Property Rights.
      The
      Company and its Subsidiaries own or possess adequate rights or licenses to
      use
      all trademarks, trade names, service marks, service mark registrations, service
      names, patents, patent rights, copyrights, inventions, licenses, approvals,
      governmental authorizations, original works of authorship, trade secrets and
      other intellectual property rights and all applications related thereto
      ("Intellectual
      Property Rights")
      necessary to conduct their respective businesses as now conducted. None of
      the
      Company's or its Subsidiaries' Intellectual Property Rights have expired,
      terminated or been abandoned, or are expected to expire, terminate or be
      abandoned, within one year from the date of this Agreement. The Company does
      not
      have any knowledge of any infringement by the Company or any of its Subsidiaries
      of Intellectual Property Rights of others. There is no claim, action or
      proceeding being made or brought, or to the knowledge of the Company, being
      threatened, against the Company or any of its Subsidiaries regarding its
      Intellectual Property Rights. The Company is unaware of any facts or
      circumstances which might give rise to any of the foregoing infringements or
      claims, actions or proceedings. The Company and its Subsidiaries have taken
      reasonable security measures to protect the secrecy, confidentiality and value
      of all of their Intellectual Property Rights.


    
      
        
        

      

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

     

    (z) Subsidiary
      Rights.
      Except
      as disclosed in Schedule 3(z), the Company or one of its Subsidiaries has the
      unrestricted right to vote, and (subject to limitations imposed by applicable
      law) to receive dividends and distributions on, all capital securities of its
      Subsidiaries as owned by the Company or such Subsidiary.

     

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

     

    (bb) Internal
      Accounting and Disclosure Controls.
      The
      Company and each of its Subsidiaries maintain a system of internal accounting
      controls sufficient to provide reasonable assurance that (i) transactions are
      executed in accordance with management's general or specific authorizations,
      (ii) transactions are recorded as necessary to permit preparation of financial
      statements in conformity with generally accepted accounting principles and
      to
      maintain asset and liability accountability, (iii) access to assets or
      incurrence of liabilities is permitted only in accordance with management's
      general or specific authorization and (iv) the recorded accountability for
      assets and liabilities is compared with the existing assets and liabilities
      at
      reasonable intervals and appropriate action is taken with respect to any
      difference. The Company maintains disclosure controls and procedures (as such
      term is defined in Rule 13a-14 under the 1934 Act) that are effective in
      ensuring that information required to be disclosed by the Company in the reports
      that it files or submits under the 1934 Act is recorded, processed, summarized
      and reported, within the time periods specified in the rules and forms of the
      SEC, including, without limitation, controls and procedures designed to ensure
      that information required to be disclosed by the Company in the reports that
      it
      files or submits under the 1934 Act is accumulated and communicated to the
      Company's management, including its principal executive officer or officers
      and
      its principal financial officer or officers, as appropriate, to allow timely
      decisions regarding required disclosure. During the twelve months prior to
      the
      date hereof, neither the Company nor any of its Subsidiaries has received any
      notice or correspondence from any accountant relating to any potential material
      weakness in any part of the system of internal accounting controls of the
      Company or any of its Subsidiaries.


    
      
        
        

      

      
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    (cc) Off
      Balance Sheet Arrangements.
      There
      is no transaction, arrangement, or other relationship between the Company and
      an
      unconsolidated or other off balance sheet entity that is required to be
      disclosed by the Company in its 1934 Act filings and is not so disclosed or
      that
      otherwise would be reasonably likely to have a Material Adverse
      Effect.

     

    (dd) Investment
      Company Status.
      The
      Company is not, and upon consummation of the sale of the Securities will not
      be,
      an "investment company," a company controlled by an "investment company" or
      an
      "affiliated person" of, or "promoter" or "principal underwriter" for, an
      "investment company" as such terms are defined in the Investment Company Act
      of
      1940, as amended.

     

    (ee) Transfer
      Taxes.
      On the
      Closing Date, all stock transfer or other taxes (other than income or similar
      taxes) which are required to be paid in connection with the sale and transfer
      of
      the Securities to be sold to each Buyer hereunder will be, or will have been,
      fully paid or provided for by the Company, and all laws imposing such taxes
      will
      be or will have been complied with.

     

    (ff) Acknowledgement
      Regarding Buyers' Trading Activity.
      It is
      understood and acknowledged by the Company (i) that none of the Buyers have
      been
      asked by the Company or its Subsidiaries to agree, nor has any Buyer agreed
      with
      the Company or its Subsidiaries, to desist from purchasing or selling, long
      and/or short, securities of the Company, or "derivative" securities based on
      securities issued by the Company or to hold the Securities for any specified
      term; (ii) that any Buyer, and counterparties in "derivative" transactions
      to
      which any such Buyer is a party, directly or indirectly, presently may have
      a
      "short" position in the Common Stock, and (iii) that each Buyer shall not be
      deemed to have any affiliation with or control over any arm's length
      counterparty in any "derivative" transaction. The Company further understands
      and acknowledges that one or more Buyers may engage in hedging and/or trading
      activities at various times during the period that the Securities are
      outstanding, including, without limitation, during the periods that the value
      of
      the Conversion Shares and the Dividend Shares deliverable with respect to
      Securities are being determined and (b) such hedging and/or trading activities,
      if any, can reduce the value of the existing stockholders' equity interest
      in
      the Company both at and after the time the hedging and/or trading activities
      are
      being conducted. The Company acknowledges that such aforementioned hedging
      and/or trading activities do not constitute a breach of this Agreement, the
      Certificate of Designations or any of the documents executed in connection
      herewith.

     

    (gg) Manipulation
      of Price.
      The
      Company has not, and to its knowledge no one acting on its behalf has, (i)
      taken, directly or indirectly, any action designed to cause or to result in
      the
      stabilization or manipulation of the price of any security of the Company to
      facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
      purchased, or paid any compensation for soliciting purchases of, any of the
      Securities, or (iii) paid or agreed to pay to any person any compensation for
      soliciting another to purchase any other securities of the
      Company.


    
      
        
        

      

      
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    (hh) U.S.
      Real Property Holding Corporation.
      The
      Company is not, has never been, and so long as any Preferred Shares remain
      outstanding, shall not become, a U.S. real property holding corporation within
      the meaning of Section 897 of the Internal Revenue Code of 1986, as amended,
      and
      the Company shall so certify upon any Buyer's request.

     

    (ii)Bank
      Holding Company Act.
      Neither
      the Company nor any of its Subsidiaries is subject to the Bank Holding Company
      Act of 1956, as amended (the "BHCA")
      and to
      regulation by the Board of Governors of the Federal Reserve System (the
      "Federal
      Reserve").
      Neither the Company nor any of its Subsidiaries or affiliates owns or controls,
      directly or indirectly, five percent (5%) or more of the outstanding shares
      of
      any class of voting securities or twenty-five percent (25%) or more of the
      total
      equity of a bank or any equity that is subject to the BHCA and to regulation
      by
      the Federal Reserve. Neither the Company nor any of its Subsidiaries or
      affiliates exercises a controlling influence over the management or policies
      of
      a bank or any entity that is subject to the BHCA and to regulation by the
      Federal Reserve.

     

    (jj)Form
      S-3 Eligibility.
      The
      Company is eligible to register the Conversion Shares for resale by the Buyers
      using Form S-3 promulgated under the 1933 Act. 

     

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

     

    4. COVENANTS.

     

    (a) Reasonable
      Best Efforts.
      Each
      party shall use its reasonable best efforts timely to satisfy each of the
      covenants and conditions to be satisfied by it as provided in Sections 4, 6
      and
7 of this Agreement.


    
      
        
        

      

      
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    (b) Form
      D
      and Blue Sky.
      The
      Company agrees to file a Form D with respect to the Securities as required
      under
      Regulation D and to provide a copy thereof to each Buyer promptly after such
      filing. The Company shall, on or before the Closing Date, take such action
      as
      the Company shall reasonably determine is necessary in order to obtain an
      exemption for or to qualify the Securities for sale to the Buyers at the Closing
      pursuant to this Agreement under applicable securities or "Blue Sky" laws of
      the
      states of the United States (or to obtain an exemption from such qualification),
      and shall provide evidence of any such action so taken to the Buyers on or
      prior
      to the Closing Date. The Company shall make all filings and reports relating
      to
      the offer and sale of the Securities required under applicable securities or
      "Blue Sky" laws of the states of the United States following the Closing Date.
      

     

    (c) Reporting
      Status.
      Until
      the date on which the Buyers shall have sold all the Conversion Shares and
      the
      Dividend Shares and none of the Preferred Shares is outstanding (the
      "Reporting
      Period"),
      the
      Company shall timely file all reports required to be filed with the SEC pursuant
      to the 1934 Act, and the Company shall not terminate its status as an issuer
      required to file reports under the 1934 Act (except to the extent that the
      Company has complied with its obligations under the Certificate of Designations
      in connection with (i) a reorganization of the Company or a merger or
      consolidation of the Company with or into another entity or (ii) an event that
      is deemed a "liquidation event" pursuant to the Certificate of Designations)
      even if the 1934 Act or the rules and regulations thereunder would no longer
      require or otherwise permit such termination.

     

    (d) Use
      of
      Proceeds.
      The
      Company shall use the proceeds from the sale of the Securities for general
      corporate and for working capital purposes, but not for (A) except as set forth
      in Schedule 4(d), repayment of any outstanding Indebtedness of the Company
      or
      any of its Subsidiaries or (B) redemption or repurchase of any of its or its
      Subsidiaries' equity securities.

     

    (e) Financial
      Information.
      The
      Company agrees to send the following to each Investor (as defined in the
      Registration Rights Agreement) during the Reporting Period (i) unless the
      following are filed with the SEC through EDGAR and are available to the public
      through the EDGAR system, within one (1) Business Day after the filing thereof
      with the SEC, a copy of its Annual Reports and Quarterly Reports on Form 10-K,
      10-KSB, 10-Q or 10-QSB, any interim reports or any consolidated balance sheets,
      income statements, stockholders' equity statements and/or cash flow statements
      for any period other than annual, any Current Reports on Form 8-K and any
      registration statements (other than on Form S-8) or amendments filed pursuant
      to
      the 1933 Act, (ii) within four (4) Business Days of the release thereof,
      facsimile or e-mail copies of all press releases issued by the Company or any
      of
      its Subsidiaries, unless the same are filed with the SEC through EDGAR and
      available to the public through EDGAR within such time, and (iii) copies of
      any
      notices and other information made available or given to the stockholders of
      the
      Company generally, within four (4) Business Days of the making available or
      giving thereof to the stockholders, unless such notice and other information
      is
      filed with the SEC through EDGAR and available to the public through EDGAR
      within such time. 


    
      
        
        

      

      
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    (f) Listing.
      The
      Company shall promptly secure the listing of all of the Registrable Securities
      (as defined in the Registration Rights Agreement) upon each national securities
      exchange and automated quotation system, if any, upon which the Common Stock
      is
      then listed (subject to official notice of issuance) and shall use its
      reasonable best efforts to maintain such listing of all Registrable Securities
      from time to time issuable under the terms of the Transaction Documents. The
      Company shall use its reasonable best efforts to maintain the Common Stock's
      authorization for quotation on an Eligible Market. Neither the Company nor
      any
      of its Subsidiaries shall take any action which would be reasonably expected
      to
      result in the delisting or suspension of the Common Stock on an Eligible Market.
      The Company shall pay all fees and expenses in connection with satisfying its
      obligations under this Section 4(f).

     

    (g) Fees.
      The
      Company shall reimburse Capital Ventures, or its designee(s) (in addition to
      any
      other expense amounts paid to any Buyer prior to the date of this Agreement)
      for
      all reasonable costs and expenses incurred in connection with the transactions
      contemplated by the Transaction Documents (including all reasonable legal fees
      and disbursements in connection therewith, documentation and implementation
      of
      the transactions contemplated by the Transaction Documents and due diligence
      expenses in connection therewith), in an amount not to exceed $50,000, which
      amount may be withheld by such Buyer from its Initial Purchase Price at the
      Initial Closing or paid by the Company upon termination of this Agreement.
      The
      Company shall be responsible for the payment of any placement agent's fees
      or
      commissions, financial advisory fees, or broker's commissions (other than for
      Persons engaged by any Buyer) relating to or arising out of the transactions
      contemplated hereby, including, without limitation, any fees or commissions
      payable to the Agents. The Company shall pay, and hold each Buyer harmless
      against, any liability, loss or expense (including, without limitation,
      reasonable attorney's fees and out-of-pocket expenses) arising in connection
      with any claim relating to any such payment. Except as otherwise set forth
      in
      the Transaction Documents, each party to this Agreement shall bear its own
      expenses in connection with the sale of the Securities to the
      Buyers.

     

    (h) Pledge
      of Securities.
      The
      Company acknowledges and agrees that the Securities may be pledged by an
      Investor (as defined in the Registration Rights Agreement) in connection with
      a
      bona fide margin agreement or other loan or financing arrangement that is
      secured by the Securities. The pledge of Securities shall not be deemed to
      be a
      transfer, sale or assignment of the Securities hereunder, and no Investor
      effecting a pledge of Securities shall be required to provide the Company with
      any notice thereof or otherwise make any delivery to the Company pursuant to
      this Agreement or any other Transaction Document. The Company hereby agrees
      to
      execute and deliver such documentation as a pledgee of the Securities may
      reasonably request in connection with a pledge of the Securities to such pledgee
      by an Investor.


    
      
        
        

      

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

     

    (j) Additional
      Preferred Shares; Variable Securities; Dilutive Issuances.
       So long as any Buyer or Buyers beneficially owns in the aggregate more
      than 10% of the Preferred Shares purchased pursuant to this Agreement, the
      Company will not, without the prior written consent of Buyers holding at least
      two-thirds of the Preferred Shares, issue any shares of Preferred Shares (other
      than to the Buyers as contemplated hereby) and the Company shall not issue
      any
      other securities that would cause a breach or default under the Certificate
      of
      Designations. For so long as any Preferred Shares remain outstanding, the
      Company shall not, in any manner, issue or sell any rights, warrants or options
      to subscribe for or purchase Common Stock or directly or indirectly convertible
      into or exchangeable or exercisable for Common Stock at a conversion, exchange
      or exercise price which varies or may vary after issuance with the market price
      of the Common Stock, including by way of one or more reset(s) to any fixed
      price
      unless the conversion, exchange or exercise price of any such security cannot
      be
      less than the then applicable Conversion Price (as defined in the Certificate
      of
      Designations) with respect to the Common Stock into which any Preferred Shares
      are convertible. For so long as any Preferred Shares remain outstanding, the
      Company shall not, in any manner, enter into or affect any Dilutive Issuance
      (as
      such term is defined in the Certificate of Designations) if the effect of such
      Dilutive Issuance is to cause the Company to be required to issue upon
      conversion of any Preferred Shares any shares of Common Stock in excess of
      that
      number of shares of Common Stock which the Company may issue upon conversion
      of
      the Preferred Shares without breaching the Company's obligations under the
      rules
      or regulations of the Principal Market (without giving effect to the Exchange
      Cap provisions set forth in the Certificate of Designations). Notwithstanding
      anything to the contrary in this section, the Company shall be permitted to
      enter into the transactions described in Schedule
      2(e).


    
      
        
        

      

      
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    (k) Corporate
      Existence.
      So long
      as any Buyer beneficially owns any Securities, the Company shall maintain its
      corporate existence and shall not sell all or substantially all of the Company's
      assets and shall not be party to any Fundamental Transaction (as defined in
      the
      Certificate of Designations) unless the Company is in compliance with the
      applicable provisions governing Fundamental Transactions set forth in the
      Certificate of Designations.

     

    (l) Reservation
      of Shares.
      The
      Company shall take all action necessary to at all times have authorized, and
      reserved for the purpose of issuance, no less than 110% of the sum of (i) the
      maximum number of shares of Common Stock issuable upon conversion of the
      Preferred Shares (assuming for purposes hereof, that the Preferred Shares are
      convertible at the Conversion Price and without taking into account any
      limitations on the conversion of the Preferred Shares set forth in the
      Certificate of Designations) and (ii) the maximum number of Dividend Shares
      issuable pursuant to the terms of the Certificate of Designations.

     

    (m) Conduct
      of Business.
      The
      business of the Company and its Subsidiaries shall not be conducted in violation
      of any law, ordinance or regulation of any governmental entity, except where
      such violations would not result, either individually or in the aggregate,
      in a
      Material Adverse Effect.

     

    (n) Additional
      Registration Statements.
      Except
      as set forth on Schedule
      4(n),
      until
      the date that is forty-five (45) calendar days after the earlier of (i) the
      Effective Date and (ii) the last day of the Registration Period (each as defined
      in the Registration Rights Agreement) (the "Trigger
      Date"),
      the
      Company shall not file a registration statement under the 1933 Act relating
      to
      securities that are not the Securities.

     

    (o) Additional
      Issuances of Securities.

     

    (i) For
      purposes of this Section 4(o), the following definitions shall
      apply.

     

    (1) "Convertible
      Securities"
      means
      any stock or securities (other than Options) convertible into or exercisable
      or
      exchangeable for shares of Common
      Stock.

     

    (2) "Options"
      means
      any rights, warrants or options to subscribe for or purchase shares of
Common
      Stock or
      Convertible Securities.


    
      
        
        

      

      
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    (3) "Common
      Stock Equivalents"
      means,
      collectively, Options and Convertible Securities.

     

    (ii) From
      the
      date hereof until the Trigger Date, the Company will not, directly or
      indirectly, offer, sell, grant any option to purchase, or otherwise dispose
      of
      (or announce any offer, sale, grant or any option to purchase or other
      disposition of) any of its or its Subsidiaries' equity or equity equivalent
      securities, including without limitation any debt, preferred stock or other
      instrument or security that is, at any time during its life and under any
      circumstances, convertible into or exchangeable or exercisable for shares of
      Common Stock or Common Stock Equivalents (any such offer, sale, grant,
      disposition or announcement being referred to as a "Subsequent
      Placement");
      provided that the foregoing shall not apply to any Subsequent Placement which
      does not have the right to have any of its securities registered for resale.
      

     

    (iii) From
      the
      date hereof until the earlier of (i) the second anniversary of the Initial
      Closing and (ii) the time that no Preferred Shares are outstanding, the Company
      will not, directly or indirectly, effect any Subsequent Placement unless the
      Company shall have first complied with this Section 4(o)(iii).

     

    (1) The
      Company shall deliver to each Buyer an irrevocable written notice
      (the "Offer
      Notice")
      of any
      proposed or intended issuance or sale or exchange (the "Offer")
      of the
      securities being offered (the "Offered
      Securities")
      in a
      Subsequent Placement (subject to the Buyer's prior agreement to maintain
      confidentiality of such Offer Notice), which Offer Notice shall (w) identify
      and
      describe the Offered Securities, (x) describe the price (which price may be
      expressed as a formula) and other terms upon which they are to be issued, sold
      or exchanged, and the number or amount of the Offered Securities to be issued,
      sold or exchanged (except with respect to an underwritten offering of Offered
      Securities or a similar offering in which the price of such Offered Securities
      is determined on or about the Closing Date of such offering, in which case
      the
      Company may provide the underwriter's proposed range of prices in satisfaction
      of this clause (x) in the Offer Notice) (y) identify the persons or
      entities (if known) to which or with which the Offered Securities are to be
      offered, issued, sold or exchanged and (z) offer to issue and sell to or
      exchange with such Buyers 50% of the Offered Securities, allocated among such
      Buyers (a) based on such Buyer's pro rata portion of the aggregate number of
      Preferred Shares purchased hereunder (the "Basic
      Amount"),
      and
      (b) with respect to each Buyer that elects to purchase its Basic Amount, any
      additional portion of the Offered Securities attributable to the Basic Amounts
      of other Buyers as such Buyer shall indicate it will purchase or acquire should
      the other Buyers subscribe for less than their Basic Amounts (the "Undersubscription
      Amount"),
      which
      process shall be repeated until the Buyers shall have an opportunity to
      subscribe for any remaining Undersubscription Amount.


    
      
        
        

      

      
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    (2)
       To
      accept
      an Offer, in whole or in part, such Buyer must deliver a written notice to
      the
      Company prior to the end of the tenth (10th)
      Business Day after such Buyer's receipt of the Offer Notice (the "Offer
      Period"),
      setting forth the portion of such Buyer's Basic Amount that such Buyer elects
      to
      purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
      the
      Undersubscription Amount, if any, that such Buyer elects to purchase (in either
      case, the "Notice
      of Acceptance").
      If
      the Basic Amounts subscribed for by all Buyers are less than the total of all
      of
      the Basic Amounts, then each Buyer who has set forth an Undersubscription Amount
      in its Notice of Acceptance shall be entitled to purchase, in addition to the
      Basic Amounts subscribed for, the Undersubscription Amount it has subscribed
      for; provided,
      however,
      that if
      the Undersubscription Amounts subscribed for exceed the difference between
      the
      total of all the Basic Amounts and the Basic Amounts subscribed for (the
      "Available
      Undersubscription Amount"),
      each
      Buyer who has subscribed for any Undersubscription Amount shall be entitled
      to
      purchase only that portion of the Available Undersubscription Amount as the
      Basic Amount of such Buyer bears to the total Basic Amounts of all Buyers that
      have subscribed for Undersubscription Amounts, subject to rounding by the
      Company to the extent it deems reasonably necessary.

     

    (3) The
      Company shall have fifteen (15) Business Days from the expiration of the Offer
      Period above to offer, issue, sell or exchange all or any part of such Offered
      Securities as to which a Notice of Acceptance has not been given by the Buyers
      (the "Refused
      Securities"),
      but
      only to the offerees described in the Offer Notice (if so described therein)
      and
      only upon terms and conditions (including, without limitation, unit prices
      and
      interest rates) that are not more favorable to the acquiring person or persons
      or less favorable to the Company than those set forth in the Offer
      Notice.

     

    (4) In
      the
      event the Company shall propose to sell less than all the Refused Securities
      (any such sale to be in the manner and on the terms specified in Section
      4(o)(iii)(3) above), then each Buyer may, at its sole option and in its sole
      discretion, reduce the number or amount of the Offered Securities specified
      in
      its Notice of Acceptance to an amount that shall be not less than the number
      or
      amount of the Offered Securities that such Buyer elected to purchase pursuant
      to
      Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of which
      shall be the number or amount of Offered Securities the Company actually
      proposes to issue, sell or exchange (including Offered Securities to be issued
      or sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such
      reduction) and (ii) the denominator of which shall be the original amount of
      the
      Offered Securities. In the event that any Buyer so elects to reduce the number
      or amount of Offered Securities specified in its Notice of Acceptance, the
      Company may not issue, sell or exchange more than the reduced number or amount
      of the Offered Securities unless and until such securities have again been
      offered to the Buyers in accordance with Section 4(o)(iii)(1)
      above.

     

    (5) Upon
      the
      closing of the issuance, sale or exchange of all or less than all of the Refused
      Securities, the Buyers shall acquire from the Company, and the Company shall
      issue to the Buyers, the number or amount of Offered Securities specified in
      the
      Notices of Acceptance, upon the terms and conditions specified in the Offer.
      Notwithstanding anything to the contrary contained in this Agreement, if the
      Company does not consummate the closing of the issuance, sale or exchange of
      all
      or less than all of the Refused Securities, within fifteen (15) Business Days
      of
      the expiration of the Offer Period, the Company shall issue to the Buyers,
      the
      number or amount of Offered Securities specified in the Notices of Acceptance,
      upon the terms and conditions specified in the Offer. The purchase by the Buyers
      of any Offered Securities is subject in all cases to the preparation, execution
      and delivery by the Company and the Buyers of a purchase agreement relating
      to
      such Offered Securities in form and substance as agreed between the Company
      and
      the third party purchasers of the Offered Securities.


    
      
        
        

      

      
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          24 -

        
          

        

      

      
        
        

      

    


    (6) Any
      Offered Securities not acquired by the Buyers or other persons in accordance
      with Section 4(o)(iii)(2) above may not be issued, sold or exchanged until
      they
      are again offered to the Buyers under the procedures specified in this
      Agreement.

     

    (7) Notwithstanding
      anything to the contrary in this Section 4(o) and unless otherwise agreed to
      by
      the Buyers, the Company shall either confirm in writing to the Buyers that
      the
      transaction with respect to the Subsequent Placement has been abandoned or
      shall
      publicly disclose its intention to issue the Offered Securities, in either
      case
      in such a manner such that the Buyers will not be in possession of material
      non-public information, by the fifteen
      (15th)
      Business Day following delivery of the Offer Notice. If by the fifteenth
      (15th)
      Business Day following delivery of the Offer Notice no public disclosure
      regarding a transaction with respect to the Offered Securities has been made,
      and no notice regarding the abandonment of such transaction has been received
      by
      the Buyers, such transaction shall be deemed to have been abandoned and the
      Buyers shall not be deemed to be in possession of any material, non-public
      information with respect to the Company. Should the Company decide to pursue
      such transaction with respect to the Offered Securities, the Company shall
      provide each Buyer with another Offer Notice and each Buyer will again have
      the
      right of participation set forth in this Section 4(o)(iii). The Company shall
      not be permitted to deliver more than one such Offer Notice to the Buyers in
      any
      60 day period. Each Buyer expressly agrees that the Company's compliance with
      this Section 4(o)(iii) shall not be deemed a breach of Section 4(i) of this
      Agreement by the Company.

     

    (8) The
      restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall
      not apply in connection with the issuance of any Excluded Securities (as defined
      in the Certificate of Designations) or in connection with the issuance of the
      securities listed on Schedule
      4(o).

     

    (p) Restriction
      on Redemption and Cash Dividends.
      So long
      as any Preferred Shares are outstanding, the Company shall not, directly or
      indirectly, redeem, or declare or pay any cash dividend or distribution on,
      the
      Common Stock without the prior express written consent of the holders of
      Preferred Shares representing not less than two-thirds of the aggregate number
      of the then outstanding Preferred Shares. Notwithstanding the foregoing, no
      consent of the holders of Preferred Shares shall be required in connection
      with
      (i) the repurchase by the Company of its capital stock deemed to occur upon
      the
      cashless exercise of stock options or warrants if such repurchased capital
      stock
      represents a portion of the exercise price of such options or warrants, (ii)
      the
      repurchase by the Company of its capital stock necessary to enable the Company
      to pay withholding taxes incurred by an employee upon the vesting of restricted
      capital stock granted to such employee in connection with a stock incentive
      plan, or (iii) the Company for the repurchase, retirement or other acquisition
      or retirement for value of capital stock of the Company held by any future,
      present or former director, officer, member of management, employee or
      consultant of the Company or the Subsidiaries (or the estate, family members,
      spouse or former spouse of any of the foregoing); provided, however, that the
      aggregate amount of payments made under clause (iii) does not exceed in any
      calendar year $250,000 (with unused amounts in any calendar year being carried
      over to the two succeeding calendar years) and no payments shall be permitted
      pursuant to clause (iii) if a Triggering Event under the Certificate of
      Designations has occurred and the Company has not satisfied its obligations
      to
      the holders of Preferred Shares under the Certificate of Designations in
      connection therewith.


    
      
        
        

      

      
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          25 -

        
          

        

      

      
        
        

      

    

     

    (q) No
      Waiver of Lock-Up Agreements.
      The
      Company shall not amend, waive or modify any provision of any of the Lock-Up
      Agreements (as defined below). 

     

    (r) Stockholder
      Approval.
      The
      Company shall provide each stockholder entitled to vote at the next annual
      meeting of stockholders of the Company (the "Stockholder
      Meeting"),
      which
      shall be promptly called and held not later than June 1, 2007 (the "Stockholder
      Meeting Deadline"),
      a
      proxy statement, substantially in the form which has been previously reviewed
      by
      the Buyers and a counsel of their choice, soliciting each such stockholder's
      affirmative vote at the Stockholder Meeting for approval of resolutions
      ("Stockholder
      Resolutions")
      providing for the Company's issuance of all of the Securities as described
      in
      the Transaction Documents in accordance with applicable law and the rules and
      regulations of the Principal Market (such affirmative approval being referred
      to
      herein as the "Stockholder
      Approval"),
      and
      the Company shall use its reasonable best efforts to solicit its stockholders'
      approval of such resolutions and to cause the Board of Directors of the Company
      to recommend to the stockholders that they approve such resolutions. The Company
      shall be obligated to seek to obtain the Stockholder Approval by the Stockholder
      Meeting Deadline. If, despite the Company's reasonable best efforts the
      Stockholder Approval is not obtained on or prior to the Stockholder Meeting
      Deadline, the Company shall cause an additional Stockholder Meeting to be held
      each twelve month period thereafter until such Stockholder Approval is obtained,
      provided that if the Board of Directors of the Company does not recommend to
      the
      stockholders that they approve the Stockholder Resolutions at any such
      Stockholder Meeting and the Stockholder Approval is not obtained, or the
      Preferred Shares are no longer outstanding, the Company shall cause an
      additional Stockholder Meeting to be held each calendar quarter thereafter
      until
      such Stockholder Approval is obtained.

     

    (s) Consolidated
      Leverage Ratio.
      So long
      as any Preferred Shares remain outstanding, the Company shall not incur any
      Indebtedness that could cause the Consolidated Leverage Ratio (as defined in
      the
      Senior Indebtedness Agreements (as defined in the Certificate of Designations)
      as in effect as of the date hereof) to exceed 3.65 to 1.00.

     

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


    
      
        
        

      

      
        -
          26 -

        
          

        

      

      
        
        

      

    

     

    5. REGISTER;
      TRANSFER AGENT INSTRUCTIONS.

     

    (a) Register.
      The
      Company shall maintain at its principal executive offices (or such other office
      or agency of the Company as it may designate by notice to each holder of
      Securities), a register for the Preferred Shares in which the Company shall
      record the name and address of the Person in whose name the Preferred Shares
      have been issued (including the name and address of each transferee), the number
      of Preferred Shares held by such Person, the number of Conversion Shares
      issuable upon conversion of the Preferred Shares and the number of Dividend
      Shares issuable with respect to the Preferred Shares held by such Person. The
      Company shall keep the register open and available at all times during business
      hours for inspection of any Buyer or its legal representatives.

     

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

     

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

     

    (a) Initial
      Closing Date.
      The
      obligation of the Company hereunder to issue and sell the Initial Preferred
      Shares to
      each
      Buyer at the Initial Closing is subject to the satisfaction, at or before the
      Initial Closing Date, of each of the following conditions, provided that these
      conditions are for the Company's sole benefit and may be waived by the Company
      at any time in its sole discretion by providing each Buyer with prior written
      notice thereof:

     

    
      
        
        

      

      
        -
          27 -

        
          

        

      

      
        
        

      

    

     

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


    (ii) Such
      Buyer and each other Buyer shall have delivered to the Company the Initial
      Purchase Price (less, in the case of Capital Ventures, the amounts withheld
      pursuant to Section 4(g)) for the Preferred Shares being purchased by such
      Buyer
      at the Initial Closing by wire transfer of immediately available funds pursuant
      to the wire instructions provided by the Company.

     

    (iii) The
      representations and warranties of such Buyer shall be true and correct in all
      respects as of the date when made and as of the Initial Closing Date as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date, which shall be true and correct as of such specified date),
      and
      such Buyer shall have performed, satisfied and complied in all respects with
      the
      covenants, agreements and conditions required by this Agreement to be performed,
      satisfied or complied with by such Buyer at or prior to the Initial Closing
      Date.

     

    (b) Additional
      Closing Date.
      The
      obligation of the Company hereunder to issue and sell the Additional Preferred
      Shares to
      each
      Buyer at the Additional Closing is subject to the satisfaction, at or before
      the
      Additional Closing Date, of each of the following conditions, provided that
      these conditions are for the Company's sole benefit and may be waived by the
      Company at any time in its sole discretion by providing each Buyer with prior
      written notice thereof:

     

    (i) Such
      Buyer and each other Buyer shall have delivered to the Company the Additional
      Purchase Price for the Additional Preferred Shares being purchased by such
      Buyer
      at such Additional Closing by wire transfer of immediately available funds
      pursuant to the wire instructions provided by the Company.

     

    (ii) The
      representations and warranties of such Buyer shall be true and correct in all
      respects as of the date when made and as of the Additional Closing Date as
      though made at that time (except for representations and warranties that speak
      as of a specific date, which shall be true and correct as of such specified
      date), and such Buyer shall have performed, satisfied and complied in all
      respects with the covenants, agreements and conditions required by this
      Agreement to be performed, satisfied or complied with by such Buyer at or prior
      to the Additional Closing Date.

     

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

     

    (a) Initial
      Closing Date.
      The
      obligation of each Buyer hereunder to purchase the Initial Preferred
      Shares at
      the
      Initial Closing is subject to the satisfaction, at or before the Initial Closing
      Date, of each of the following conditions, provided that these conditions are
      for each Buyer's sole benefit and may be waived by such Buyer at any time in
      its
      sole discretion by providing the Company with prior written notice
      thereof:

     

    (i) The
      Company shall have duly executed and delivered to such Buyer (A) each of the
      Transaction Documents and (B) the Initial Preferred Shares (in such numbers
      as
      is set forth across from such Buyer's name in column (3) of the Schedule of
      Buyers) being
      purchased by such Buyer at the Initial Closing pursuant to this
      Agreement.


    
      
        
        

      

      
        -
          28 -

        
          

        

      

      
        
        

      

    


    (ii) Such
      Buyer shall have received the opinion of Winstead PC, the Company's outside
      counsel, dated as of the Initial Closing Date, in substantially the form of
      Exhibit
      D
      attached
      hereto.

     

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

     

    (iv) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except for those representations and warranties that are
      qualified by materiality or Material Adverse Effect, which shall be true and
      correct in all respects) as of the date when made and as of the Initial Closing
      Date as though made at that time (except for representations and warranties
      that
      speak as of a specific date, which shall be true and correct as of such
      specified date) and the Company shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      the Transaction Documents to be performed, satisfied or complied with by the
      Company at or prior to the Initial Closing Date. Such Buyer shall have received
      a certificate, executed by the Chief Executive Officer of the Company, dated
      as
      of the Initial Closing Date, to the foregoing effect and as to such other
      matters as may be reasonably requested by such Buyer in the form attached hereto
      as Exhibit
      E.

     

    (v) The
      Company shall have delivered to such Buyer a letter from the Company's transfer
      agent certifying the number of shares of Common Stock outstanding as of a date
      within five days of the Initial Closing Date.

     

    (vi) The
      Common Stock (I) shall be designated for quotation or listed on the Principal
      Market and (II) shall not have been suspended, as of the Initial Closing Date,
      by the SEC or the Principal Market from trading on the Principal Market nor
      shall suspension by the SEC or the Principal Market have been threatened, as
      of
      the Initial Closing Date, either (A) in writing by the SEC or the Principal
      Market or (B) by falling below the minimum maintenance requirements of the
      Principal Market.

     

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

     

    (viii) The
      Certificate of Designations in the form attached hereto as Exhibit
      A
      shall
      have been filed with the Secretary of State of the State of Delaware and shall
      be in full force and effect, enforceable against the Company in accordance
      with
      its terms and shall not have been amended.

     

    (ix) Such
      Buyer shall have received lock-up agreements in the form attached hereto as
      Exhibit
      G
      (the
      "Lock-Up
      Agreements"),
      duly
      executed and delivered by each of James E. Sigmon, Jeff Bookout, Robert R.
      Thomae, M. Frank Russell, Gary Grinsfelder, P. Mark Stark and the
      Company.


    
      
        
        

      

      
        -
          29 -

        
          

        

      

      
        
        

      

    


    (b) Additional
      Closing Date.
      The
      obligation of each Buyer hereunder to purchase the Additional Preferred
      Shares at
      the
      Additional Closing is subject to the satisfaction, at or before the Additional
      Closing Date, of each of the following conditions, provided that these
      conditions are for each Buyer's sole benefit and may be waived by such Buyer
      at
      any time in its sole discretion by providing the Company with prior written
      notice thereof:

     

    (i) The
      Company shall have duly executed and delivered to such Buyer the Additional
      Preferred Shares (in such numbers as such Buyer shall request) being
      purchased by such Buyer at the Additional Closing pursuant to this
      Agreement.

     

    (ii) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except for those representations and warranties that are
      qualified by materiality or Material Adverse Effect, which shall be true and
      correct in all respects) as of the date when made and as of the Additional
      Closing Date as though made at that time (except for representations and
      warranties that speak as of a specific date, which shall be true and correct
      as
      of such specified date) and the Company shall have performed, satisfied and
      complied in all material respects with the covenants, agreements and conditions
      required by the Transaction Documents to be performed, satisfied or complied
      with by the Company at or prior to the Additional Closing Date. Such Buyer
      shall
      have received a certificate, executed by the Chief Executive Officer of the
      Company, dated as of the Additional Closing Date, to the foregoing effect and
      in
      the form attached hereto as Exhibit
      E.

     

    (iii) The
      Common Stock (I) shall be designated for quotation or listed on the Principal
      Market and (II) shall not have been suspended, as of the Additional Closing
      Date, by the SEC or the Principal Market from trading on the Principal Market
      nor shall suspension by the SEC or the Principal Market have been threatened,
      as
      of the Additional Closing Date, either (A) in writing by the SEC or the
      Principal Market or (B) by falling below the minimum maintenance requirements
      of
      the Principal Market.

     

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

     

    (v) The
      Certificate of Designations in the form attached hereto as Exhibit
      A
      shall
      have been filed with the Secretary of State of the State of Delaware and shall
      be in full force and effect, enforceable against the Company in accordance
      with
      its terms and shall not have been amended.

     

    8. TERMINATION.

     

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


    
      
        
        

      

      
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          30 -

        
          

        

      

      
        
        

      

    

     

    9. MISCELLANEOUS.

     

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

     

    (b) Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      shall be considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other party;
      provided that a facsimile signature shall be considered due execution and shall
      be binding upon the signatory thereto with the same force and effect as if
      the
      signature were an original, not a facsimile signature.

     

    (c) Headings.
      The
      headings of this Agreement are for convenience of reference and shall not form
      part of, or affect the interpretation of, this Agreement.

     

    (d) Severability.
      If any
      provision of this Agreement is prohibited by law or otherwise determined to
      be
      invalid or unenforceable by a court of competent jurisdiction, the provision
      that would otherwise be prohibited, invalid or unenforceable shall be deemed
      amended to apply to the broadest extent that it would be valid and enforceable,
      and the invalidity or unenforceability of such provision shall not affect the
      validity of the remaining provisions of this Agreement so long as this Agreement
      as so modified continues to express, without material change, the original
      intentions of the parties as to the subject matter hereof and the prohibited
      nature, invalidity or unenforceability of the provision(s) in question does
      not
      substantially impair the respective expectations or reciprocal obligations
      of
      the parties or the practical realization of the benefits that would otherwise
      be
      conferred upon the parties. The parties will endeavor in good faith negotiations
      to replace the prohibited, invalid or unenforceable provision(s) with a valid
      provision(s), the effect of which comes as close as possible to that of the
      prohibited, invalid or unenforceable provision(s).

     

    
      
        
        

      

      
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          31 -

        
          

        

      

      
        
        

      

    


    (e) Entire
      Agreement; Amendments.
      Except
      as set forth on Schedule
      9(e),
      this
      Agreement and the other Transaction Documents supersede all other prior oral
      or
      written agreements between the Buyers, the Company, their Affiliates and Persons
      acting on their behalf with respect to the matters discussed herein, and this
      Agreement, the other Transaction Documents and the instruments referenced herein
      and therein contain the entire understanding of the parties with respect to
      the
      matters covered herein and therein and, except as specifically set forth herein
      or therein, neither the Company nor any Buyer makes any representation,
      warranty, covenant or undertaking with respect to such matters. No provision
      of
      this Agreement may be amended other than by an instrument in writing signed
      by
      the Company and the holders of at least two-thirds of the Preferred Shares
      issued and issuable hereunder, and any amendment to this Agreement made in
      conformity with the provisions of this Section 9(e) shall be binding on all
      Buyers and holders of Securities, as applicable. No provision hereof may be
      waived other than by an instrument in writing signed by the party against whom
      enforcement is sought. No such amendment shall be effective to the extent that
      it applies to less than all of the holders of the Preferred Shares then
      outstanding, except with the express written consent of each holder so excluded.
      Except as set forth on Schedule 9(e), no consideration shall be offered or
      paid
      to any Person to amend or consent to a waiver or modification of any provision
      of any of the Transaction Documents unless the same consideration also is
      offered to all holders of Preferred Shares. Except as set forth on Schedule
      9(e), the Company has not, directly or indirectly, made any agreements with
      any
      Buyers relating to the terms or conditions of the transactions contemplated
      by
      the Transaction Documents except as set forth in the Transaction Documents.
      Without limiting the foregoing, the Company confirms that, except as set forth
      in this Agreement, no Buyer has made any commitment or promise or has any other
      obligation to provide any financing to the Company or otherwise.

     

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

     

    If
      to the
      Company:

     

    TXCO
      Resources Inc.

    777
      E.
      Sonterra Blvd., Suite 350

    San
      Antonio, Texas 78258

    Telephone:   
      (210) 679-2429

    Facsimile:     (210)
      496-3232

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

     

    
      
        
        

      

      
        -
          32 -

        
          

        

      

      
        
        

      

    

     

    With
      a
      copy (for informational purposes only) to:

     

    Winstead
      PC

    401
      Congress Avenue, Suite 2100

    Austin,
      TX 78701

    Telephone:    (512)
      370-2800

    Facsimile:     (512)
      370-2850

    Attention:     
      J.
      Rowland Cook

    


    If
      to the
      Transfer Agent:

     

    American
      Stock Transfer & Trust Co.

    59
      Maiden
      Lane

    New
      York,
      NY 10038

    Telephone:    (718)
      921-8206

    Facsimile:     (718)
      921-8336

    Attention:     
      Carlos
      Pinto, Vice President

    


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

     

    with
      a
      copy (for informational purposes only) to:

     

    Schulte
      Roth & Zabel LLP 

    919
      Third
      Avenue

    New
      York,
      New York 10022

    Telephone:    (212)
      756-2000

    Facsimile:     (212)
      593-5955

    Attention:     
      Eleazer
      N. Klein, Esq.

     

    or
      to
      such other address and/or facsimile number and/or to the attention of such
      other
      Person as the recipient party has specified by written notice given to each
      other party five (5) days prior to the effectiveness of such change. Written
      confirmation of receipt (A) given by the recipient of such notice, consent,
      waiver or other communication, (B) mechanically or electronically generated
      by
      the sender's facsimile machine containing the time, date, recipient facsimile
      number and an image of the first page of such transmission or (C) provided
      by an
      overnight courier service shall be rebuttable evidence of personal service,
      receipt by facsimile or receipt from an overnight courier service in accordance
      with clause (i), (ii) or (iii) above, respectively.

     

    (g) Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns, including the Buyers of the Preferred
      Shares. The Company shall not assign this Agreement or any rights or obligations
      hereunder without the prior written consent of the holders of at least
      two-thirds of the aggregate number of Registrable Securities issued and issuable
      hereunder, including by way of a Fundamental Transaction (unless the Company
      is
      in compliance with the applicable provisions governing Fundamental Transactions
      set forth in the Certificate of Designations). A Buyer may assign some or all
      of
      its rights hereunder in connection with transfer of any of its Securities as
      is
      otherwise permitted by this Agreement without the consent of the Company, in
      which event such assignee shall be deemed to be a Buyer hereunder with respect
      to such assigned rights.

     

    
      
        
        

      

      
        -
          33 -

        
          

        

      

      
        
        

      

    


    (h) No
      Third Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns, and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person.

     

    (i) Survival.
      Unless
      this Agreement is terminated under Section 8, the representations and warranties
      of the Company and the Buyers contained in Sections 2 and 3 and the agreements
      and covenants set forth in Sections 4, 5 and 9 shall survive the Closing and
      the
      delivery and conversion of Securities, as applicable. Each Buyer shall be
      responsible only for its own representations, warranties, agreements and
      covenants hereunder.

     

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

     

    (k) Indemnification.
      In
      consideration of each Buyer's execution and delivery of the Transaction
      Documents and acquiring the Securities thereunder and in addition to all of
      the
      Company's other obligations under the Transaction Documents, the Company shall
      defend, protect, indemnify and hold harmless each Buyer and each other holder
      of
      the Securities and all of their stockholders, partners, members, officers,
      directors, employees and direct or indirect investors and any of the foregoing
      Persons' agents or other representatives (including, without limitation, those
      retained in connection with the transactions contemplated by this Agreement)
      (collectively, the "Indemnitees"),
      as
      incurred, from and against any and all actions, causes of action, suits, claims,
      losses, costs, penalties, fees, liabilities and damages, and expenses in
      connection therewith (irrespective of whether any such Indemnitee is a party
      to
      the action for which indemnification hereunder is sought), and including
      reasonable attorneys' fees and disbursements (the "Indemnified
      Liabilities"),
      incurred by any Indemnitee as a result of, or arising out of, or relating to
      (a)
      any misrepresentation or breach of any representation or warranty made by the
      Company in the Transaction Documents, (b) any breach of any covenant, agreement
      or obligation of the Company contained in the Transaction Documents or (c)
      any
      cause of action, suit or claim brought or made against such Indemnitee by a
      third party (including for these purposes a derivative action brought on behalf
      of the Company) and arising out of or resulting from (i) the execution,
      delivery, performance or enforcement of the Transaction Documents or any other
      certificate, instrument or document contemplated hereby or thereby, (ii) any
      transaction financed or to be financed in whole or in part, directly or
      indirectly, with the proceeds of the issuance of the Securities, or (iii) the
      status of such Buyer or holder of the Securities as an investor in the Company
      pursuant to the transactions contemplated by the Transaction Documents. To
      the
      extent that the foregoing undertaking by the Company may be unenforceable for
      any reason, the Company shall make the maximum contribution to the payment
      and
      satisfaction of each of the Indemnified Liabilities which is permissible under
      applicable law. Except as otherwise set forth herein, the mechanics and
      procedures with respect to the rights and obligations under this Section 9(k)
      shall be the same as those set forth in Section 6 of the Registration Rights
      Agreement.

     

    
      
        
        

      

      
        -
          34 -

        
          

        

      

      
        
        

      

    


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

     

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

     

    (n) Rescission
      and
      Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) the Transaction Documents, whenever any Buyer exercises
      a
      right, election, demand or option under a Transaction Document and the Company
      does not timely perform its related obligations within the periods therein
      provided, then such Buyer may rescind or withdraw, in its sole discretion from
      time to time upon written notice to the Company, any relevant notice, demand
      or
      election in whole or in part without prejudice to its future actions and
      rights.

     

    (o) Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to the Buyers hereunder
      or
      pursuant to any of the other Transaction Documents or the Buyers enforce or
      exercise their rights hereunder or thereunder, and such payment or payments
      or
      the proceeds of such enforcement or exercise or any part thereof are
      subsequently invalidated, declared to be fraudulent or preferential, set aside,
      recovered from, disgorged by or are required to be refunded, repaid or otherwise
      restored to the Company, a trustee, receiver or any other Person under any
      law
      (including, without limitation, any bankruptcy law, foreign, state or federal
      law, common law or equitable cause of action), then to the extent of any such
      restoration the obligation or part thereof originally intended to be satisfied
      shall be revived and continued in full force and effect as if such payment
      had
      not been made or such enforcement or setoff had not occurred.

     

    
      
        
        

      

      
        -
          35 -

        
          

        

      

      
        
        

      

    

     

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

     

    [Signature
      Page Follows]

     

    
      
        
        

      

      
        -
          36 -

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              COMPANY:

            
	 
	
              TXCO
                RESOURCES INC.

            
	 
	 
	
              By:

            	 

	
               

            	
              Name: 

            
	
               

            	
              Title:

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


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

     

    
      	
              BUYERS:

            
	 
	
              
                CAPITAL
                  VENTURES INTERNATIONAL

              

            
	 
	
              
                BY:
                  HEIGHTS CAPITAL MANAGEMENT,

              

            
	
              INC., its
                authorized agent

            
	 
	 
	
              By:

            	 

	
               

            	
              Name:

            
	
               

            	
              Title:

            


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


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

    


    
      	
              OTHER
                BUYERS: 

            
	 
	
              UBS
                O'CONNOR LLC F/B/O: O'CONNOR

              PIPES
                CORPORATE STRATEGIES MASTER LTD

            
	 
	 
	
              By:  

            	 
              
	
               

            	
              Name:

              Title: 

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              UBS
                O'CONNOR LLC F/B/O: O'CONNOR 

              GLOBAL
                CONVERTIBLE ARBITRAGE MASTER LTD

            
	 
	 	 
	
              By:

            	 
              
	
               

            	
              Name:

            
	
               

            	Title:


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              UBS
                O'CONNOR LLC F/B/O: O'CONNOR 

              GLOBAL
                CONVERTIBLE ARBITRAGE II MASTER LTD

            
	 
	 
	
              By: 

            	 

	
               

            	
              Name:
                

              Title: 

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              
                
                  RADCLIFFE
                    SPC, LTD. FOR AND ON BEHALF
                    

                  OF
                    THE CLASS A SEGREGATED PORTFOLIO

                

              

            
	 
	 
	
              By: 

            	 

	
               

            	
              Name:
                

              Title: 

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              WHITEBOX
                CONVERTIBLE ARBITRAGE PARTNERS, LP

            
	 
	 	 
	
              By:

            	  
	
               

            	
              Name: 

            
	
               

            	Title:


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

     

    
      	
              GUGGENHEIM
                PORTFOLIO COMPANY XXXI, LLC

            
	 
	 
	
              By: 

            	 

	
               

            	
              Name:
                

              Title:

            


    

    
       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

    

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

     

    
      	
              WHITEBOX
                INTERMARKET PARTNERS, LP

            
	 	 
	 	 
	
              By:

            	 

	
               

            	
              Name: 

            
	
               

            	Title:


    

    
       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    


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

     

    
      	
              WHITEBOX
                SPECIAL OPPORTUNITIES PARTNERS, SERIES B, LP

            
	 	 
	
              By:

            	 

	
               

            	
              Name: 

            
	
               

            	Title:


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    SCHEDULE
      OF BUYERS

     

    


    
      	
               

              (1)

            	 	
               

              (2)

            	 	
               

              (3)

            	 	
               

              (4)

            	 	
              (5)

            	 	
              (6)

            	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
               

              Buyer

            	 	
               

              Address
                and Facsimile Number

            	 	
              Aggregate
                Number of 

              Initial
                

              Preferred
                

              Shares

            	 	
              Aggregate
                Number of Additional Preferred 

              Shares

            	 	
              Initial Purchase
                Price

            	 	
              Legal Representative's

              Address and Facsimile Number

            	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
              Capital
                Ventures International

               

            	 	 	
               

            	 	 	
              
              

              25,500

            	 	 	
              
              

              11,591

            	 	
              
              

              $

            	
              
              

              25,500,000

            	 	 	
              
              

              Schulte
                Roth & Zabel LLP

              919
                Third Avenue

              New
                York, New York 10022

              Attention:
                Eleazer Klein, Esq.

              Facsimile:
                (212) 593-5955

              Telephone:
                (212) 756-2376

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Whitebox
                Convertible Arbitrage Partners, LP

            	 	 	
              
              

               

            	 	 	
              
              

              8,500

            	 	 	
              
              

              3,864

            	 	
              
              

              $

            	
              
              

              8,500,000

            	 	 	
              
              

              N/A

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Guggenheim
                Portfolio Company XXXI, LLC

            	 	 	
              
              

               

            	 	 	
              
              

              800

            	 	 	
              
              

              364

            	 	
              
              

              $

            	
              
              

              800,000

            	 	 	
              
              

              N/A

            	 


    

    



    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
              Whitebox
                Intermarket Partners, LP

            	 	 	
               

            	 	 	
              
              

              1,200

            	 	 	
              
              

              545

            	 	
              
              

              $

            	
              
              

              1,200,000

            	 	 	
              
              

              N/A

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Whitebox
                Special Opportunities Partners, Series B, LP

            	 	 	
               

            	 	 	
              
              

              1,500

            	 	 	
              
              

              682

            	 	
              
              

              $

            	
              
              

              1,500,000

            	 	 	
              
              

              N/A

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

            	 	 	
               

            	 	 	
              
              

              10,000

            	 	 	
              
              

              4,545

            	 	
              
              

              $

            	
              
              

              10,000,000

            	 	 	
              
              

              N/A

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              UBS
                O’Connor LLC fbo O’Connor Global Convertible Arbitrage Master
                Limited

            	 	 	
               

            	 	 	
              
              

              5,520

            	 	 	
              
              

              2,509

            	 	
              
              

              $

            	
              
              

              5,520,000

            	 	 	
              
              

              N/A

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              UBS
                O’Connor LLC fbo O’Connor Global Convertible Arbitrage II Master
                Limited

            	 	 	
               

            	 	 	
              
              

              480

            	 	 	
              
              

              218

            	 	
              
              

              $

            	
              
              

              480,000

            	 	 	
              
              

              N/A

            	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
              UBS
                O’Connor LLC fbo O’Connor Pipes Corporate Strategies Master
                Limited

            	 	 	
               

            	 	 	
              
              

              1,500

            	 	 	
              
              

              682

            	 	
              
              

              $

            	
              
              

              1,500,000

            	 	 	
              
              

              N/A

            	 
	
              TOTAL

            	 	 	 	 	 	
              
              

              55,000

            	 	 	
              
              

              25,000

            	 	
              
              

              $

            	
              
              

              55,000,000.00

            	 	 	 	 


    

    



    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBITS

     

    
      	
              Exhibit
                A

            	
              Form
                of Certificate of Designations

            
	
              Exhibit
                B

            	
              Form
                of Registration Rights Agreement

            
	
              Exhibit
                C

            	
              Form
                of Irrevocable Transfer Agent Instructions

            
	
              Exhibit
                D

            	
              Form
                of Outside Company Counsel Opinion

            
	
              Exhibit
                E

            	
              Form
                of Secretary's Certificate

            
	
              Exhibit
                F

            	
              Form
                of Officer's Certificate

            
	
              Exhibit
                G

            	
              Form
                of Lock-Up Agreement

            


    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    SCHEDULES

     

    
      	
              Schedule
                2(e) - Information

            
	
              Schedule
                3(a) - List of Subsidiaries

            
	
              Schedule
                3(h) - No Integrated Offering

            
	
              Schedule
                3(j) - Stockholder Rights Plan

            
	
              Schedule
                3(k) - SEC Documents

            
	
              Schedule
                3(r) - Equity Capitalization

            
	
              Schedule
                3(z) - Subsidiary Rights

            
	
              Schedule
                4(d) - Use of Proceeds

            
	
              Schedule
                4(j) - Additional Rights, Warrants and Options; Dilutive
                Issuances

            
	
              Schedule
                4(n) - Additional Registration Statements

            
	
              Schedule
                4(o) - Additional Issuances of Securities

            
	
              Schedule
                9(e) - Entire Agreement; Amendments