Document:

exv10w1

 

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of April 4, 2006, by and among
Touchstone Resources USA Inc., a Delaware corporation, with headquarters located at 1600 Smith
Street, Suite 5100, Houston, Texas 77002 (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 senior convertible notes of the Company, which
Notes shall be convertible into the Company’s common stock, $0.001 par value per share (the “Common
Stock”), in accordance with the terms of the Notes.

     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) the aggregate principal amount of $22,000,000 in Notes, in
substantially the form attached hereto as Exhibit A (the “Notes”), in individual amounts as
set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers (which aggregate
amount for all Buyers shall be $22,000,000) (as converted, collectively, the “Conversion Shares”),
(ii) warrants, in substantially the form attached hereto as Exhibit B-1 (the “Series A
Warrants”), to acquire that number of shares of Common Stock set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers and (iii) warrants in substantially the form attached
hereto as Exhibit B-2 (the “Series B Warrants”) to acquire that number of shares of Common Stock
set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers (collectively with the
Series A Warrants, the “Warrants”) (as exercised, collectively, the “Warrant Shares”).

     D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company has
agreed to provide certain registration rights with respect to the Conversion Shares and Warrant
Shares under the 1933 Act and the rules and regulations promulgated thereunder, and applicable
state securities laws.

     E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares, are collectively are
referred to herein as the “Securities”.

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

     1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

 

          (a) Amount. Subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, agrees to purchase from the Company on the Closing Date (as defined below), a
principal amount of Notes, as is set forth opposite such Buyer’s name in column (3) on the Schedule
of Buyers, along with Series A Warrants to acquire that number of Warrant Shares as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers and Series B Warrants to acquire
that number of Warrant Shares as is set forth opposite such Buyer’s name in column (5) on the
Schedule of Buyers.

          (b) Closing. The closing (the “Closing”) of the purchase of the Notes and the
Warrants by the Buyers shall occur at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue,
New York, New York 10022. The date and time of the Closing (the “Closing Date”) shall be 10:00
a.m., New York City Time, on the date hereof, subject to notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and each Buyer).

          (c) Purchase Price. The purchase price for each Buyer (the “Purchase Price”) of the
Notes and related Warrants to be purchased by each Buyer at the Closing shall be equal to $1.00 for
each $1.00 of principal amount of Notes being purchased by such Buyer at the Closing.

          (d) Form of Payment. On the Closing Date, (A) each Buyer shall pay its aggregate
Purchase Price to the Company for the Notes and the Warrants to be issued and sold to such Buyer at
the Closing, by wire transfer of immediately available funds in accordance with the Company’s
written wire instructions, and (B) the Company shall deliver to each Buyer the Notes (in the
principal amounts as such Buyer shall have requested prior to the Closing) which such Buyer is then
purchasing along with the Warrants (in the amounts as such Buyer shall have requested prior to the
Closing) such Buyer is 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) No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and the
Warrants, (ii) upon conversion of the Notes will acquire the Conversion Shares, and (iii) upon
exercise of the Warrants will acquire the Warrant Shares, in each case, for its own account and not
with a view towards, or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the 1933 Act; provided,
however, that by making the representations herein, such Buyer does not agree to hold any
of the Securities for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary course of its
business. Such Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.

          (b) Accredited Investor Status. Such Buyer is an “accredited investor” as

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that term is defined in Rule 501(a) of Regulation D.

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

          (d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.

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

          (f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, or (B) such Buyer provides the Company
with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person (as defined in
Section 3(s)) through whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is
under any obligation to register the Securities under the 1933 Act or any state securities laws or
to comply with the terms and conditions of any exemption thereunder. The Securities may be pledged
(as long as such pledge is in compliance with the 1933 Act) 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

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Transaction Document (as defined in Section 3(b)), including, without limitation, this Section
2(f).

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

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

The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by
state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the Company reasonable
assurance that the 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(k).

          (h) Validity; Enforcement. This Agreement and the Registration Rights Agreement to
which such Buyer is a party have been duly and validly authorized, executed and delivered 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.

          (i) No Conflicts. The execution, delivery and performance by such Buyer

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of this Agreement and the Registration Rights Agreement to which such Buyer is a party and the
consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result
in a violation of the organizational documents of such Buyer or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation
of any law, rule, regulation, order, judgment or decree (including federal and state securities
laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the ability of such Buyer to perform
its obligations hereunder.

          (j) Residency. Such Buyer is incorporated or formed in the jurisdiction specified
below its address on the Schedule of Buyers and is resident for state securities laws purposes at
the address indicated on the Schedule of Buyers.

     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

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

          (a) Organization and Qualification. The Company and its “Subsidiaries” (which for
purposes of this Agreement means any entity in which the Company, directly or indirectly, owns
capital stock or holds an equity or similar interest) are entities duly organized and validly
existing in good standing under the laws of the jurisdiction in which they are formed, and have the
requisite power and authorization to own their properties and to carry on their business as now
being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign entity to
do business and is in good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary, except to the extent
that the failure to be so qualified or be in good standing would not have a Material Adverse
Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on
the business, properties, assets, operations, results of operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries, taken as whole, or on the transactions
contemplated hereby and the other Transaction Documents or by the agreements and instruments to be
entered into in connection herewith or therewith, or on the authority or ability of the Company to
perform its obligations under the Transaction Documents (as defined below). The Company has no
Subsidiaries, except as set forth on Schedule 3(a).

          (b)  Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the Warrants,
the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in
Section 5(b)), and each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation, the issuance of the
Notes, the reservation for issuance and the issuance of

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the Conversion Shares issuable upon conversion of the Notes, the issuance of the Warrants and
the reservation for issuance and issuance of the Warrant Shares issuable upon exercise of the
Warrants, have been duly authorized by the Company’s Board of Directors and (other than the filing
with the SEC of one or more Registration Statements in accordance with the requirements of the
Registration Rights Agreement) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.

          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the Closing, the Company shall have reserved from its duly authorized capital stock all of the
available shares of Common Stock for issuance upon conversion of the Notes and exercise of the
Warrants, which amount shall be sufficient to convert no less than 100% of the Notes at the initial
Conversion Price and 100% of the Warrants at the initial Exercise Price, other than the Warrant
Shares underlying the Series B Warrants. From and after the Capital Increase, the Company shall
have reserved from its duly authorized capital stock not less than the sum of (i) 130% of the
maximum number of shares of Common Stock issuable upon conversion of the Notes (assuming for
purposes hereof, that the Notes are convertible at the Conversion Price and without taking into
account any limitations on the conversion of the Notes set forth in the Notes) and (ii) 130% of the
maximum number of shares of Common Stock issuable upon exercise of the Warrants (without taking
into account any limitations on the exercise of the Warrants set forth in the Warrants). Upon
issuance or conversion in accordance with the Notes or exercise in accordance with the Warrants, as
the case may be, the Conversion Shares and the Warrant Shares, respectively, 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. 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 Notes and the Warrants and
the reservation for issuance and of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the Certificate of Incorporation (as defined in Section 3(r)) of the
Company or any of its Subsidiaries, any capital stock of the Company or Bylaws (as defined in
Section 3(r)) of the Company or any of its Subsidiaries or (ii) except as set forth on Schedule
3(d), 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 NASD’s OTC Bulletin Board (the “Principal Market”)) applicable to the Company or
any of its Subsidiaries or by

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which any property or asset of the Company or any of its Subsidiaries is bound or affected.

          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for it
to execute, deliver or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. 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 listing requirements of the Principal
Market and has no knowledge of any facts which would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.

          (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. The Company
further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company or
any of its Subsidiaries (or in any similar capacity) with respect to the Transaction Documents and
the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Securities.
The Company further represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the Company and its
representatives.

          (g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its Subsidiaries or affiliates, nor, to the Company’s knowledge, 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.

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

          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes, and, the Warrant Shares

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issuable upon exercise of the Warrants, will increase in certain circumstances. The Company
further acknowledges that its obligation to issue Conversion Shares upon conversion of the Notes in
accordance with this Agreement and the Notes and its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrants is, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance may have on the
ownership interests of other stockholders of the Company.

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

          (k) SEC Documents; Financial Statements. Except as set forth on Schedule
3(k), during the two (2) years prior to the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”)
(all of the foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or
their respective representatives true, correct and complete copies of the SEC Documents not
available on the EDGAR system if such SEC Documents have been requested in writing by Buyers. As
of their respective dates and subject to the Company’s current status as being non-compliant with
Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal controls and procedures as set
forth on the Company’s quarterly report on Form 10-QSB for the period ended September 30, 2005
filed on November 14, 2005 (the “Section 404 Deficiency”), 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 and subject to the Section 404 Deficiency, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with respect thereto.
Such financial statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit adjustments).

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          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
the date of the Company’s most recent audited financial statements contained in a Form 10-K, there
has been no material adverse change and no material adverse development in the business, assets,
properties, operations, condition (financial or otherwise), results of operations or prospects of
the Company. Except as disclosed in Schedule 3(l), since the date of the Company’s most
recent audited financial statements contained in a Form 10-K, neither the Company nor any of its
Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) except as set
forth in Schedule 3(l) (which shall list capital expenditures for each oil field by
category), had capital expenditures, individually or in the aggregate, in excess of $100,000.
Neither 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 (i) the present fair saleable value of the
Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as
defined in Section 3(s)), (ii) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured,
(iii) the Company intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature or (iv) the Company 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 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 for possible violations which would not, individually or in the aggregate, 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, other than
the pending investigation by the SEC relating to the Common Stock and certain affiliates of the
Company and the related subpoena received by the Company from the SEC in connection therewith as
set forth on the Company’s quarterly report on Form 10-QSB for the period ended September 30, 2005
filed on November 14, 2005 (the “SEC Investigation”), has no knowledge of any facts or
circumstances that would reasonably lead to delisting or

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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, (ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or oral, from the SEC
or the Principal Market regarding the suspension or delisting of the Common Stock from the
Principal Market. The Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor
any such Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.

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

          (p) Sarbanes-Oxley Act. Except as disclosed in Schedule 3(p), the Company is
in compliance with any and all requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof and applicable to the Company, and any and all applicable rules and regulations
promulgated by the SEC thereunder that are effective as of the date hereof.

          (q)  Transactions With Affiliates. Except as set forth in the SEC Documents filed at
least ten days prior to the date hereof and other than the grant of stock options disclosed on
Schedule 3(q), none of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors), including any
contract, agreement or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise requiring payments to or
from any such officer, director or employee or, to the knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director, trustee or partner.

          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock, of which as of the date hereof, 79,188,709
are issued and outstanding, 5,367,540 shares are reserved for issuance pursuant to the Company’s
stock option and purchase plans and 30,297,188 shares are reserved for issuance pursuant to
securities (other than the Warrants and the Notes) exercisable or exchangeable for, or convertible
into, shares of Common Stock and 5,000,000 shares of preferred stock, par value $.001 per share, of
which as of the date hereof, 710,063 are issued and outstanding. All of such outstanding
shares have been, or upon issuance will be, validly

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issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(r):
(i) none of the Company’s share capital is subject to preemptive rights or any other similar rights
or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or exchangeable for, any
share capital 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 share capital 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 share capital of the Company or
any of its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements,
credit facilities or other agreements, documents or instruments evidencing Indebtedness (as defined
in Section 3(s)) of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements securing obligations in
any material amounts, either singly or in the aggregate, filed in connection with the Company or
any of its Subsidiaries, except for standard memoranda of Joint Operating Agreements and Financing
Statements in counties in which the Company is operating; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (vi) there are no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or
may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar provisions that will be triggered by
the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or
“phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect. The Company has furnished to the Buyer 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 Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv)
is a party to any contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of

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any such outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition of property, assets
or businesses, (E) all indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to any property or
assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied for the periods
covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including accounts and contract rights) owned
by any Person, even though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above,
except that ordinary course trade payables will not be considered Indebtedness for purposes of this
Section 3(s); (y) “Contingent Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of
such liability that such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be protected (in whole or
in part) against loss with respect thereto; and (z) “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

          (t) Absence of Litigation. Except for the SEC Investigation and as set forth in
Schedule 3(t), there is no action, suit, proceeding, inquiry or investigation before or by
the Principal Market, any court, public board, government agency, self-regulatory organization or
body pending or, to the knowledge of the Company, threatened against or affecting the Company or
any of its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of the
Company’s or its Subsidiaries’ officers or directors that would 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

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existing insurance coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

          (v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or any such
Subsidiary. No executive officer of the Company or any of its Subsidiaries, to the knowledge of
the Company or any such Subsidiary, 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 such
Subsidiary 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 set forth on Schedule 3(w), the Company and its
Subsidiaries have good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects
where failure to have such title would cause a Material Adverse Effect and, except that this is
limited to the Company’s knowledge with respect to title in fee simple for oil and gas leasehold
interests. 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 with such exceptions
as are not material and do not interfere with the use made and proposed to be made of such property
and buildings by the Company and its Subsidiaries.

          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company’s Intellectual Property Rights have expired or
terminated, or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, being threatened, against the Company or
any of its Subsidiaries regarding its Intellectual Property Rights. Neither the Company nor any of
its Subsidiaries is unaware of

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any facts or circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their Intellectual Property
Rights.

          (y) Environmental Laws. To the Company’s knowledge, 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 set forth 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. Except for the Section 404
Deficiency, 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

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with respect to any difference. The Company maintains disclosure controls and procedures (as
such term is defined in Rule 13a-14 under the 1934 Act) that are effective in ensuring that
information required to be disclosed by the Company in the reports that it files or submits under
the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in
the rules and forms of the SEC, including, without limitation, controls and procedures designed in
to ensure that information required to be disclosed by the Company in the reports that it files or
submits under the 1934 Act is accumulated and communicated to the Company’s management, including
its principal executive officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions regarding required disclosure.

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

          (dd) Ranking of Notes. No Indebtedness of the Company is senior to or ranks pari
passu with the Notes in right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.

          (ee) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked to agree, nor has any Buyer
agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or
“derivative” securities based on securities issued by the Company or to hold the Securities for any
specified term; (ii) that any Buyer, and counter parties in “derivative” transactions to which any
such Buyer is a party, directly or indirectly, presently may have a “short” position in the Common
Stock, and (iii) that each Buyer shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative” transaction. The Company and the Company
further understand and acknowledge 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 Warrant
Shares deliverable with respect to Securities are being determined and (b) such hedging and/or
trading activities, if any, can reduce the value of the existing stockholders’ equity interest in
the Company both at and after the time the hedging and/or trading activities are being conducted.
The Company acknowledges that such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.

          (ff) Form S-1 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.

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

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

          (ii) 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.

          (jj) 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 the Securities. All disclosure provided to the Buyers regarding the
Company, its business and the transactions contemplated hereby, including the Schedules to this
Agreement, furnished by or on behalf of the Company is true and correct and does not contain any
untrue statement of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they were made, not
misleading. Each press release issued by the Company or its Subsidiaries during the twelve (12)
months preceding the date of this Agreement did not at the time of release contain any untrue
statement of a material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the circumstances under which
they were made, not misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so publicly announced or
disclosed.

     4. COVENANTS.

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

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

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the Buyers on or prior to the Closing Date. The Company shall make all filings and reports
relating to the offer and sale of the Securities required under applicable securities or “Blue Sky”
laws of the states of the United States following the Closing Date.

          (c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold more than eighty percent (80%) of the Conversion
Shares and Warrant Shares and none of the Notes or Warrants is outstanding (the “Reporting
Period”), the Company shall file all reports required to be filed with the SEC pursuant to the 1934
Act, and the Company shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such
termination.

          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities (i) to repay its 12% secured convertible promissory note, dated March 23, 2004, by and
between the Company and Trident Growth Fund, L.P. in the principal amount of $2,100,000 (the
“Trident Note”) plus accrued interest not in excess of $20,000, (ii) to repay its 12% convertible
promissory note, dated November 18, 2004, by and between the Company and DDH Resources II Limited
(“DDH II”) in the principal amount of $1,000,000 (the “DDH II Note”) and (iii) for general
corporate purposes, and not for (A) 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 on Form 10-K or 10-KSB, its Quarterly Reports on Form 10-Q or Form 10-QSB, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile or e-mailed copies
of all press releases issued by the Company or any of its Subsidiaries, and (iii) copies of any
notices and other information made available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the stockholders. As used herein
“Business Day” means any other day other than a Saturday, Sunday, or other day on which commercial
banks in The City of New York are authorized or required by law to remain closed.

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

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          (g) Fees. The Company shall reimburse Kings Road Holdings II LLC (a Buyer) 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 in connection therewith) in an amount not to exceed
$100,000, without the Company’s prior approval which amount shall be withheld by such Buyer from
its Purchase Price at the Closing. The Company acknowledges that it has only engaged First Albany
Capital as placement agent (the “Agent”) in connection with the sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising
out of the transactions contemplated hereby, including, without limitation, any fees payable to the
Agent. 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.

          (h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document, including, without limitation, Section 2(f)
hereof; provided that an Investor and its pledgee shall be required to comply with the provisions
of Section 2(f) hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities to such pledgee by
an Investor.

          (i) Disclosure of Transactions and Other Material Information. On or before 9:00
a.m., New York time, on the first Business Day following the date of this Agreement, the Company
shall issue a press release reasonably acceptable to the Buyers disclosing all material terms of
the transactions contemplated hereby and 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 each of the Notes,
the forms of Warrants and the Registration Rights Agreement) as exhibits to such filing (including
all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing with the SEC, no
Buyer shall be in possession of any material, nonpublic information received from the Company or
any of its Subsidiaries, or any of their respective officers, directors, employees or agents, that
is not disclosed in the 8-K Filing. Unless otherwise required by the Transaction Documents, the
Company shall not, and shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any material, nonpublic
information regarding the Company or any of its Subsidiaries from and after the filing of the 8-K
Filing with the SEC without the express written consent of such Buyer. In the event a Buyer
becomes aware of

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material, nonpublic information, such Buyer shall inform the Company of such information. The
Company shall promptly make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information in a form mutually agreeable to
both such Buyer and the Company. Subject to the foregoing, neither the Company, its Subsidiaries
nor any Buyer shall issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and regulations (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 shall disclose the
name of any Buyer in any filing, announcement, release or otherwise.

          (j) Restriction on Redemption and Cash Dividends. So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, the Common Stock without the prior express written consent of the
holders of Notes representing not less than a majority of the aggregate principal amount of the
then outstanding Notes.

          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For so long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary 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 Notes) with respect to the Common Stock into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into
which any Warrant is exercisable. For purposes of clarification, this does not prohibit the
issuance of securities with customary “weighted average” or “full ratchet” anti-dilution
adjustments which adjust a fixed conversion or exercise price of securities sold by the Company in
the future. For so long as any Notes or Warrants remain outstanding, the Company shall not, in any
manner, enter into or affect any Dilutive Issuance (as defined in the Notes) if the effect of such
Dilutive Issuance is to cause the Company to be required to issue upon conversion of any Note or
exercise of any Warrant any shares of Common Stock in excess of that number of shares of Common
Stock which the Company has authorized and reserved for purposes of such conversions or exercises
or which the Company may issue upon conversion of the Notes and exercise of the Warrants without
breaching the Company’s obligations under the rules or regulations of the Principal Market.

          (l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the

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Notes) unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants.

          (m) Incurrence of Liens. So long as any Notes are outstanding, the Company shall not,
directly or indirectly, allow or suffer to exist any Lien, other than Permitted Liens (as defined
in the Notes), upon any property or assets (including accounts and contract rights) owned by the
Company except as may be created by memoranda of Joint Operating Agreements.

          (n) 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 the number of shares
of Common Stock issuable upon conversion of all of the Notes and shares of Common Stock issuable
upon exercise of the Warrants, as is set forth in Section 3(c).

          (o) 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.

          (p) Additional Issuances of Securities.

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

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

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

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

               (ii) From the date hereof until 30 days after the Effective Date (as defined in the
Registration Rights Agreement) the Company will not, directly or indirectly, file any registration
statement with the SEC other than the Registration Statement (as defined in the Registration Rights
Agreement). From the date hereof until 30 days after the Effective Date, the Company will not,
directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or
announce any offer, sale, grant or any option to purchase or other disposition of) any of its or
its Subsidiaries’ equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of Common Stock or Common
Stock Equivalents (any such offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”).

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               (iii) From the Effective Date until the date no Notes are outstanding, the Company will not,
directly or indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(p)(iii).

                    (1) The Company shall deliver to each Buyer a written notice (the “Offer Notice”) of
any proposed or intended issuance or sale or exchange (the “Offer”) of the securities being
offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known)
to which or with which the Offered Securities are to be offered, issued, sold or exchanged
and (z) offer to issue and sell to or exchange with such Buyers at least 80% of the first
$25 million of Offered Securities in any Subsequent Placement and at least 50% of any
additional Offered Securities in such Subsequent Placement over $25 million, allocated among
such Buyers (a) based on such Buyer’s pro rata portion of the aggregate principal amount of
Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each Buyer that
elects to purchase its Basic Amount, any additional portion of the Offered Securities
attributable to the Basic Amounts of other Buyers as such Buyer shall indicate it will
purchase or acquire should the other Buyers subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).

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

                    (3) The Company shall have five (5) 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

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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(p)(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(p)(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(p)(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(p)(iii)(1) above.

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

                    (6) Any Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(p)(iii)(3) above may not be issued, sold or exchanged until they are again
offered to the Buyers under the procedures specified in this Agreement.

               (iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(p) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes).

          (q) Stockholder Approval. The Company shall provide each stockholder entitled to vote
at a special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which
shall be promptly called and held not later than May 23, 2006 (the “Stockholder Meeting Deadline”),
a proxy statement, substantially in the form which has been previously reviewed by the Buyers and
Schulte Roth & Zabel LLP, soliciting each such stockholder’s affirmative vote at the Stockholder
Meeting for approval of resolutions providing for the Company’s issuance of all of the Securities
as described in the Transaction Documents in accordance with applicable law and the rules and
regulations of the Principal Market and increase in the authorized capital of the Company to not
less than 300 million shares of

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Common Stock (the “Capital Increase” and such affirmative approval being referred to herein as
the “Stockholder Approval”), and the Company shall use its commercially reasonable best efforts to
solicit its stockholders’ approval of such resolutions and to cause the Board of Directors of the
Company to recommend to the stockholders that they approve such resolutions. The Company shall be
obligated to use its commercially reasonable best efforts to obtain the Stockholder Approval by the
Stockholder Meeting Deadline. If, despite the Company’s commercially reasonable best efforts the
Stockholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the Company
shall seek Stockholder Approval at all regularly scheduled annual meetings of stockholders of the
Company until such Stockholder Approval is obtained.

     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

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

          (b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by each Buyer to the Company upon conversion of the Notes or
exercise of the Warrants in the form of Exhibit D attached hereto (the “Irrevocable
Transfer Agent Instructions”). The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5(b), and stop transfer instructions to
give effect to Section 2(g) hereof, will be given by the Company to its transfer agent 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 or Warrant Shares sold, assigned or transferred pursuant to an effective
registration statement or pursuant to Rule 144, the transfer agent shall issue such Securities to
the Buyer, assignee or transferee, as the case may be, without any restrictive legend. The Company
acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a
Buyer. Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a Buyer shall be
entitled, in addition to all other available

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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.

          The obligation of the Company hereunder to issue and sell the Notes and the related Warrants
to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for the Company’s sole benefit and
may be waived by the Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:

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

               (ii) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
(less, in the case of Kings Road Holdings II LLC, the amounts withheld pursuant to Section 4(g))
for the Notes and the related Warrants being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions provided by the Company.

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

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

          The obligation of each Buyer hereunder to purchase the Notes and the related Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by
such Buyer at any time in its sole discretion by providing the Company with prior written notice
thereof:

               (i) The Company shall have executed and delivered to such Buyer (A) each of the Transaction
Documents and (B) the Notes (in such principal amounts as such Buyer shall have requested prior to
the Closing) and the related Warrants (in such amounts as such Buyer shall have requested prior to
the Closing) being purchased by such Buyer at the Closing pursuant to this Agreement.

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

               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, which

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instructions shall have been delivered to and acknowledged in writing by the Company’s
transfer agent.

               (iv) The Company shall have delivered to such Buyer a certificate evidencing the formation and
good standing of the Company and each of its Subsidiaries in such entity’s jurisdiction of
formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a
date within 10 days of the Closing Date.

               (v) The Company shall have delivered to such Buyer a certificate evidencing the Company’s
qualification as a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company is qualified, as of a date within 10
days of the Closing Date.

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

               (vii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary
of the Company and dated as of the Closing Date, as to (i) the resolutions consistent with Section
3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer,
(ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in
the form attached hereto as Exhibit F.

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

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

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

               (xi) Voting Agreement. The Company shall have entered into the Voting Agreement,
substantially in the form attached hereto as Exhibit H, executed by the Company and Roger
Abel, Stephen P. Harrington and Stephen C. Haynes (the “Voting Agreement”).

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

               (xiii) Roger Abel and Stephen C. Haynes shall have entered into Lock-Up Agreements
substantially in the form attached hereto as Exhibit I-1 (the “Lock-Up Agreement”).

               (xiv) Stephen P. Harrington shall have entered into a Lock-Up Agreement substantially in the
form attached hereto as Exhibit I-2 (the “Harrington Lock-Up Agreement”).

               (xv) On or prior to the Closing, the Company shall have delivered to the Buyer a pay-off
letter in form and substance satisfactory to the Buyer from Trident Growth Fund, L.P. and
simultaneously with the Closing, the Company shall have repaid in full, the Trident Note.

               (xvi) On or prior to the Closing, the Company shall have delivered to the Buyer a pay-off
letter in form and substance satisfactory to the Buyer from DDH II and simultaneously with the
Closing, the Company shall have repaid in full, the DDH II Note.

               (xvii) The Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.

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

9. MISCELLANEOUS.

          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal

-26-

 

service of process and consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address for such notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

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

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

          (d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.

          (e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the Company, their
Affiliates and Persons acting on their behalf with respect to the matters discussed herein, and
this Agreement, the other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate number of Registrable Securities
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 applicable Securities then outstanding. No
consideration shall be offered or paid to any Person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any

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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:

Touchstone Resources USA, Inc.

1600 Smith Street,

Houston, TX 77002

Telephone: (713) 784-1113

Facsimile: (713) 785-8530

Attention: Roger Abel

               With a copy (for informational purposes only) to:

Winstead

600 Town One Center

1450 Lake Robbins Drive

The Woodlands, TX 77380

Telephone: (281) 681-5900

Facsimile: (281) 681-5901

Attention: Paul Aubert

               If to the Transfer Agent:

StockTrans, Inc

44 West Lancaster Avenue

Ardmore, PA 19003

Telephone: 610-649-7300

Facsimile: 610-649-7302

Attention: Bob Winterle

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

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Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.

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

          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least a majority of the aggregate
number of Registrable Securities issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all
of its rights hereunder (other than the rights set forth in Section 4(p)(iii)) in connection with
transfer of any of its Securities without the consent of the Company, in which event such assignee
shall be deemed to be a Buyer hereunder with respect to such assigned rights.

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

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

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

          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement)

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(collectively, the “Indemnitees”) from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document contemplated hereby
or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. 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.
Notwithstanding anything to the contrary contained herein, the indemnification agreement contained
in this Section 9(k) shall not apply to a claim by any Indemnitee arising out of or based upon an
Indemnified Liability which occurs in reliance upon and in conformity with information furnished in
writing to the Company by such Indemnitee in connection with this Agreement.

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

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

          (n) Rescission and Withdrawal Right. Notwithstanding anything to the

-30-

 

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

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

          (p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each
Buyer under any Transaction Document are several and not joint with the obligations of any other
Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any
other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction Documents and the
Company acknowledges that the Buyers are not acting in concert or as a group 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]

-31-

 

     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:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	TOUCHSTONE RESOURCES USA, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Roger Abel	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name: Roger Abel
	 

	 	 	 	Title:   Chairman and Chief Executive Officer

 

 

     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:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	KINGS ROAD HOLDINGS II LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Erik M. W. Caspersen	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name: Erik M. W. Caspersen
	 

	 	 	 	Title:   Authorized
Signatory

 

 

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

	 	 	 	 	 	 	 
	 	 	CAPITAL VENTURES
	 	 	INTERNATIONAL
	 
	 	 	 	 	 	 
	 

	 	By: Heights Capital Management Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Martin Kobinger	 	 
	 

	 	 	 	 

	 	 
	 

	 	 	 	Name: Martin Kobinger	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 

 

 

     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.

	 	 	 	 	 	 	 
	 	 	SF CAPITAL PARTNERS LTD.
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Brian H. Davidson	 	 
	 

	 	 	 	 

	 	 
	 

	 	 	 	Name: Brian H. Davidson	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 

 

 

     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.

	 	 	 	 	 	 	 
	 	 	RHP MASTER FUND, LTD
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Rock Hill Investment Management, L.P.	 	 
	 

	 	By:
	 	RHP General Partner, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Keith Marlowe	 	 
	 	 	 	 	   
	 

	 	 	 	Name: Keith Marlowe	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 

 

 

SCHEDULE OF BUYERS

	 	 	 	 	 	 	 	 	 	 	 
	(1)	 	(2)	 	(3)	 	(4)	 	(5)	 	(5)
	 	 	 	 	Aggregate Principal	 	Aggregate Number of	 	Aggregate Number of	 	Legal Representative’s
	Buyer	 	Address and Facsimile Number	 	Amount of Notes	 	Series A Warrants	 	Series B Warrants	 	Address and Facsimile Number
	 
	Kings Road
	 	c/o Polygon Investment Partners	 	11,000,000	 	7,783,019	 	4,150,944	 	Schulte Roth & Zabel LLP
	Holdings II LLC
	 	LP	 	 	 	 	 	 	 	919 Third Avenue
	 
	 	598 Madison Avenue, 14th Floor	 	 	 	 	 	 	 	New York, New York  10022
	 
	 	New York, NY 10022	 	 	 	 	 	 	 	Attention:  Eleazer Klein, Esq.
	 
	 	Attention:  Erik M.W. Caspersen	 	 	 	 	 	 	 	Facsimile: (212) 593-5955
	 
	 	and Brandon L. Jones	 	 	 	 	 	 	 	Telephone:  (212) 756-2376
	 
	 	Facsimile:  (212) 359-7303	 	 	 	 	 	 	 	 
	 
	 	Telephone:  (212) 359-7300	 	 	 	 	 	 	 	 
	 
	 	Jurisdiction:  Delaware	 	 	 	 	 	 	 	 
	 
	Capital Ventures
	 	c/o Heights Capital Management,	 	4,000,000	 	1,886,793	 	1,509,434	 	 
	International
	 	 Inc.	 	 	 	 	 	 	 	 
	 
	 	101 California Street, Suite 3250	 	 	 	 	 	 	 	 
	 
	 	San Francisco, California 94111	 	 	 	 	 	 	 	 
	 
	 	Attention: Sam Winer	 	 	 	 	 	 	 	 
	 
	 	Facsimile: (415) 403-6525	 	 	 	 	 	 	 	 
	 
	 	Telephone: (415) 403-6500	 	 	 	 	 	 	 	 
	 
	 	Jurisdiction:  Cayman Islands	 	 	 	 	 	 	 	 
	 
	 		 	 	 	 	 	 	 	 
	SF Capital Partners Ltd.
	 	c/o Stark Offshore Management, LLC	 	4,000,000	 	1,886,793	 	1,509,434	 	 
	 
	 	3600 South Lake Drive	 	 	 	 	 	 	 	 
	 
	 	St. Francis, WI  53235	 	 	 	 	 	 	 	 
	 
	 	Attention:  Brian Davidson	 	 	 	 	 	 	 	 
	 
	 	Facsimile: (414) 294-7700	 	 	 	 	 	 	 	 
	 
	 	Telephone: (414) 294-7000	 	 	 	 	 	 	 	 
	 
	 	Jurisdiction:  British Virgin	 	 	 	 	 	 	 	 
	 
	 	Islands	 	 	 	 	 	 	 	 
	 
	 		 	 	 	 	 	 	 	 
	RHP Master Fund, Ltd
	 	c/o Rock Hill Investment Management, LP	 	3,000,000	 	1,415,095	 	1,132,076	 	 
	 
	 	3 Bala Plaza East, Suite 585	 	 	 	 	 	 	 	 
	 
	 	Bala Cynwyd, PA  19004	 	 	 	 	 	 	 	 
	 
	 	Facsimile:(610)-949-9600	 	 	 	 	 	 	 	 
	 
	 	Telephone:(610) 949-9700	 	 	 	 	 	 	 	 
	 
	 	Jurisdiction:  Cayman Islands	 	 	 	 	 	 	 	 

 

 

EXHIBITS

	 	 	 
	Exhibit A

	 	Form of Notes
	Exhibit B-1

	 	Form of Series A Warrants
	Exhibit B-2

	 	Form of Series B Warrants
	Exhibit C

	 	Registration Rights Agreement
	Exhibit D

	 	Irrevocable Transfer Agent Instructions
	Exhibit E

	 	Form of Outside Company Counsel Opinion
	Exhibit F

	 	Form of Secretary’s Certificate
	Exhibit G

	 	Form of Officer’s Certificate
	Exhibit H

	 	Voting Agreement
	Exhibit I-1

	 	Lock-Up Agreement
	Exhibit I-2

	 	Harrington Lock-Up Agreement

SCHEDULES

	 	 	 
	Schedule 3(a)

	 	Subsidiaries
	Schedule 3(d)

	 	No Conflicts
	Schedule 3(k)

	 	SEC Documents; Financial Statements
	Schedule 3(l)

	 	Absence of Certain Changes
	Schedule 3 (p)

	 	Sarbanes-Oxley Act
	Schedule 3(q)

	 	Transactions with Affiliates
	Schedule 3(r)

	 	Capitalization
	Schedule 3(s)

	 	Indebtedness and Other Contracts
	Schedule 3(t)

	 	Litigation
	Schedule 3(w)

	 	Title
	Schedule 3(x)

	 	Intellectual Property
	Schedule 3(z)

	 	Subsidiary Rights
	Schedule 3(dd)

	 	Ranking of Notesexv10w2

 

Exhibit 10.2

[FORM OF SENIOR CONVERTIBLE NOTE]

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

Touchstone Resources USA, Inc.

Senior Convertible Note

	 	 	 
	Issuance Date: April 4, 2006

	 	Principal: U.S. $                    

          FOR VALUE RECEIVED, Touchstone Resources USA, Inc., a Delaware corporation, (the “Company”),
hereby promises to pay to [KINGS ROAD HOLDINGS II LLC] [CAPITAL VENTURES INTERNATIONAL] [SF CAPITAL
PARTNERS LTD.] [RHP MASTER FUND, LTD] or registered assigns (“Holder”) the amount set out above as
the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date, on any Installment Date with
respect to the Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding Principal at the rate of 7.5% per annum (the “Interest
Rate”), from the date set out above as the Issuance Date (the “Issuance Date”) until the same
becomes due and payable, whether upon an Interest Date (as defined below), any Installment Date,
the Maturity Date, acceleration, conversion, redemption or otherwise (in each case, in accordance
with the terms hereof). This Senior Convertible Note (including all Senior Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Senior
Convertible Notes issued pursuant to the Securities Purchase Agreement (as

 

 

defined below) on the Closing Date (collectively, the “Notes” and such other Senior
Convertible Notes, the “Other Notes”). Certain capitalized terms used herein are defined in
Section 28.

          (1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and the Company shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if any.

          (2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve 30-day
months and shall be payable in arrears on the last day of each Calendar Quarter during the period
beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an “Interest
Date”) with the first Interest Date being June 30, 2006. Interest shall be payable on each
Interest Date in cash. Prior to the payment of Interest on an Interest Date, Interest on this Note
shall accrue at the Interest Rate. Upon the occurrence and during the continuance of an Event of
Default, the Interest Rate shall be increased to twelve percent (12%) per annum (the “Default
Rate”). In the event that such Event of Default is subsequently cured, the adjustment referred to
in the preceding sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such Event of Default
shall continue to apply to the extent relating to the days after the occurrence of such Event of
Default through and including the date of cure of such Event of Default. Interest on overdue
interest shall accrue at the same rate compounded quarterly.

          (3) CONVERSION OF NOTES. This Note shall be convertible into shares of common stock
of the Company, par value $0.001 per share (the “Common Shares”), on the terms and conditions set
forth in this Section 3.

               (a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times
on or after the Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable
Common Shares in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a Common Share upon any conversion. If the issuance would
result in the issuance of a fraction of a Common Share, the Company shall round such fraction of a
Common Share up to the nearest whole share. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Shares upon conversion of any
Conversion Amount.

               (b) Conversion Rate. The number of Common Shares issuable upon conversion of any
Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion
Amount by (y) the Conversion Price (such number of shares, the “Conversion Rate”).

                    (i) “Conversion Amount” means the portion of the Principal to be converted, redeemed or
otherwise with respect to which this determination is being made.

     (ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of
determination a price equal to $1.06, subject to adjustment as provided herein.

2

 

               (c) Mechanics of Conversion.

                    (i) Optional Conversion. To convert any Conversion Amount into Common Shares on any
date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the first (1st) Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the
Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the third
(3rd) Trading Day following the date of receipt of a Conversion Notice (the “Share
Delivery Date”), the Company shall (1) (x) provided that the Transfer Agent is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate
number of Common Shares to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system or (y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue
and deliver to the address as specified in the Conversion Notice, a certificate, registered in the
name of the Holder or its designee, for the number of Common Shares to which the Holder shall be
entitled and (2) pay to the Holder in cash an amount equal to the accrued and unpaid Interest on
the Conversion Amount plus any accrued and unpaid Late Charges on the Conversion Amount,
each up to and including the Conversion Date. If this Note is physically surrendered for
conversion as required by Section 3(c)(iii) and the outstanding Principal of this Note is greater
than the Principal portion of the Conversion Amount being converted, then the Company shall as soon
as practicable and in no event later than five (5) Trading Days after receipt of this Note and at
its own expense, issue and deliver to the holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or Persons entitled to receive
the Common Shares issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such Common Shares on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the principal amount converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the Conversion Notice.

                    (ii) Failure to Timely Convert. If the Company shall fail to issue a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of Common Shares to which
the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is
three (3) Trading Days after the Conversion Date (a “Conversion Failure”), then (A) the Company
shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 1.5%
of the product of (I) the sum of the number of Common Shares not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of
the Common Shares on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice pursuant to this Section
3(c)(ii) or otherwise. In addition

3

 

to the foregoing, if within three (3) Trading Days after the Company’s receipt of the
facsimile copy of a Conversion Notice, the Company shall fail to issue and deliver a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of Common Shares to which
the Holder is entitled upon such holder’s conversion of any Conversion Amount, and if on or after
such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Shares to
deliver in satisfaction of a sale by the Holder of Common Shares issuable upon such conversion that
the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within
three (3) Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage
commissions and other out-of-pocket expenses, if any) for the Common Shares so purchased (the
“Buy-In Price"), at which point the Company’s obligation to deliver such certificate (and to issue
such Common Shares) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder
a certificate or certificates representing such Common Shares and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of
Common Shares times (B) the Closing Bid Price on the Conversion Date.

                    (iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting reissuance of this
Note upon physical surrender. The Holder and the Company shall maintain records showing the
Principal converted and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

                    (iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall cause the Company to convert from each holder of Notes electing to
have Notes converted on such date a pro rata amount of such holder’s portion of its Notes submitted
for conversion based on the principal amount of Notes submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Notes submitted for conversion on such
date. In the event of a dispute as to the number of Common Shares issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder the number of
Common Shares not in dispute and resolve such dispute in accordance with Section 23.

               (d) Limitations on Conversions. The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any portion of this Note
pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder
(together with the Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum
Percentage”) of the number of Common Shares outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of Common Shares beneficially owned
by the Holder and its affiliates shall include the number of Common Shares issuable upon conversion
of this Note with respect to which the

4

 

determination of such sentence is being made, but shall exclude the number of Common Shares
which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company (including, without
limitation, any Other Notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). For purposes of this Section 3(d)(i), in
determining the number of outstanding Common Shares, the Holder may rely on the number of
outstanding Common Shares as reflected in (x) the Company’s most recent Form 10-K, Form 10-Q or
Form 8-K, as the case may be (y) a more recent public announcement by the Company or (z) any other
notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding.
For any reason at any time, upon the written or oral request of the Holder, the Company shall
within one (1) Trading Day confirm orally and in writing to the Holder the number of Common Shares
then outstanding. In any case, the number of outstanding Common Shares shall be determined after
giving effect to the conversion or exercise of securities of the Company, including this Note, by
the Holder or its affiliates since the date as of which such number of outstanding Common Shares
was reported. By written notice to the Company, the Holder may increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that
(i) any such increase will not be effective until the sixty-first (61st) day after such
notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the
Holder and not to any other holder of Notes.

          (4) RIGHTS UPON EVENT OF DEFAULT.

               (a) Event of Default. Each of the following events shall constitute an “Event of
Default”:

                    (i) the failure of the applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is
sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10)
consecutive days or for more than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));

                    (ii) the suspension from trading or failure of the Common Shares to be listed on an Eligible
Market for a period of seven (7) consecutive Trading Days or for more than an aggregate of twelve
(12) Trading Days in any 365-day period;

5

 

                    (iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of Common Shares within ten (10) Trading Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into Common Shares that is tendered in accordance with the provisions of
the Notes;

                    (iv) (A) at any time prior to the Stockholder Approval (as defined in the Securities Purchase
Agreement) (1) following the tenth (10th) consecutive Trading Day that all of the
Company’s authorized and unissued Common Shares are not reserved in respect of the Notes or (2)
that the Company has issued, or authorized or reserved for issuance, any of its Common Shares,
whether or not pursuant to Options, warrants or any other derivative security, to a Person other
than the Holder or the holders of the Other Notes in accordance with the Transaction Documents or
(B) at any time on or after the Stockholder Approval following the tenth (10th)
consecutive Trading Day that the number of Common Shares that are available for issuance to the
Holder is less than the number of Common Shares that the Holder would be entitled to receive upon a
conversion of the full Conversion Amount of this Note (without regard to any limitations on
conversion set forth in Section 3(d) or otherwise);

                    (v) the Company’s failure to pay to the Holder any amount of Principal (including, without
limitation, the Company’s failure to pay any redemption payments), Interest, Late Charges or other
amounts when and as due under this Note or any other Transaction Document (as defined in the
Securities Purchase Agreement), except, in the case of a failure to pay Interest and Late Charges
when and as due, in which case only if such failure continues for a period of at least three (3)
Trading Days;

                    (vi) the occurrence of any default under, redemption of or acceleration prior to maturity of
Indebtedness of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Notes;

                    (vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11,
U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively,
“Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general assignment for the
benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as
they become due;

                    (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law
that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B)
appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;

                    (ix) a final judgment or judgments are rendered against the Company or any of its Subsidiaries
pursuant to which the Company or its Subsidiary, as the case may be, is responsible for the payment
of money aggregating in excess of $100,000 and which

6

 

judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or
stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such
stay; provided, however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $100,000 amount set forth above so
long as the Company provides the Holder a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the Holder) to the effect that such
judgment is clearly covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such judgment;

                    (x) other than as set forth in item (xi) below, the Company breaches any representation,
warranty, covenant or other term or condition of any Transaction Document, except, in the case of a
breach of a covenant which is curable, only if such breach continues for a period of at least
fifteen (15) consecutive Trading Days;

                    (xi) any breach or failure in any respect to comply with either of Sections 8 or 14 of this
Note; or

                    (xii) any Event of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.

               (b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall deliver written notice thereof via
facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any time after
the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of
an Event of Default, the Holder may require the Company to redeem all or any portion of this Note
by delivering written notice thereof (the “Event of Default Redemption Notice”) to the Company,
which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to
this Section 4(b) shall be redeemed by the Company at a price equal to the greater of (i) the
product of (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the
product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of the
Common Shares on the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 12(b). In the event of a partial redemption of this Note pursuant hereto,
the Principal amount redeemed shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the Event of Default Redemption Notice.

          (5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

               (a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the provisions of
this Section 5(a) pursuant to written agreements in form and substance

7

 

reasonably satisfactory to the Required Holders and approved by the Required Holders prior to
such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange
for such Notes a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the Principal amounts and the Interest Rates of the Notes held by
such holder, having similar conversion rights as the Notes, having similar ranking to the Notes,
and satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent
Entity) is a publicly traded corporation whose common shares are quoted on or listed for trading on
an Eligible Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and shall assume all of
the obligations of the Company under this Note with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity (if other than the Company) shall deliver to the Holder confirmation that there shall be
issued upon conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the Company’s Common Shares (or other securities, cash, assets
or other property) purchasable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such publicly traded common shares (or their equivalent) of the Successor
Entity (including its Parent Entity), as adjusted in accordance with the provisions of this Note.
The provisions of this Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations on the conversion or redemption
of this Note.

               (b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) days
prior to the consummation of a Change of Control, but not prior to the public announcement of such
Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). At any time during the period (the “Change
of Control Period”) beginning after the Holder’s receipt of a Change of Control Notice and ending
on the date that is twenty (20) Trading Days after the consummation of such Change of Control, the
Holder may require the Company to redeem all or any portion of this Note by delivering written
notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. The
portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to 125% of the greater of (x) the sum of (1) the Conversion Amount
being redeemed and (2) the amount of any accrued but unpaid Interest thereon through the date of
such redemption payment and (y) the sum of (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the aggregate cash consideration
and the aggregate cash value of any non-cash consideration per Common Share to be paid to the
holders of the Common Shares upon consummation of the Change of Control (any such non-cash
consideration consisting of marketable securities to be valued at the higher of the Closing Sale
Price of such securities as of the Trading Day immediately prior to or the Trading Day following
the public announcement of such proposed Change of Control) by (II) the Conversion Price plus (2)
the amount of any accrued but unpaid Interest on such Conversion Amount being redeemed through the
date of such redemption payment (the “Change of Control Redemption Price”). Redemptions required
by this Section 5 shall be made in accordance with the provisions of

8

 

Section 12(b) and shall have priority to payments to shareholders in connection with a Change
of Control. Notwithstanding anything to the contrary in this Section 5, until the Change of
Control Redemption Price (together with any interest thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 5(b) may be converted, in whole or in part, by
the Holder into Common Shares, or in the event the Conversion Date is after the consummation of the
Change of Control, shares or equity interests of the Successor Entity substantially equivalent to
the Company’s Common Shares pursuant to Section 3.

          (6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

               (a) Purchase Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase shares, warrants, securities or other property pro
rata to all record holders of any class of Common Shares (the “Purchase Rights”), then the Holder
will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of Common
Shares acquirable upon complete conversion of this Note (without taking into account any
limitations or restrictions on the convertibility of this Note) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Shares are to be determined for
the grant, issue or sale of such Purchase Rights.

               (b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of Common Shares are entitled to receive securities or other assets with respect to or in
exchange for Common Shares (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a conversion of this Note, at
the Holder’s option, (i) in addition to the Common Shares receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with respect to such Common
Shares had such Common Shares been held by the Holder upon the consummation of such Corporate Event
(without taking into account any limitations or restrictions on the convertibility of this Note) or
(ii) in lieu of the Common Shares otherwise receivable upon such conversion, such securities or
other assets received by the holders of Common Shares in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to receive had this Note
initially been issued with conversion rights for the form of such consideration (as opposed to
Common Shares) at a conversion rate for such consideration commensurate with the Conversion Rate.
Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to
the Required Holders. The provisions of this Section shall apply similarly and equally to
successive Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.

          (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

               (a) Adjustment of Conversion Price upon Issuance of Common Shares. If and whenever on
or after the Subscription Date, the Company issues or sells, or in accordance with this Section
7(a) is deemed to have issued or sold, any Common Shares

9

 

(including the issuance or sale of Common Shares owned or held by or for the account of the
Company, but excluding Common Shares deemed to have been issued or sold by the Company in
connection with any Excluded Security) for a consideration per share (the “New Issuance Price”)
less than a price (the “Applicable Price”) equal to the Conversion Price in effect immediately
prior to such issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Conversion Price then in effect shall be reduced to
an amount equal to the New Issuance Price. For purposes of determining the adjusted Conversion
Price under this Section 7(a), the following shall be applicable:

                    (i) Issuance of Options. If the Company in any manner grants or sells any Options and
the lowest price per share for which one Common Share is issuable upon the exercise of any such
Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such Common Share shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of the granting or
sale of such Option for such price per share. For purposes of this Section 7(a)(i), the “lowest
price per share for which one Common Share is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such
Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one Common Share upon granting or sale of the Option,
upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Shares or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Shares upon conversion or exchange or
exercise of such Convertible Securities.

                    (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one Common Share is issuable
upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such
Common Share shall be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price per share. For the
purposes of this Section 7(a)(ii), the “lowest price per share for which one Common Share is
issuable upon such conversion or exchange or exercise” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with respect to any one
Common Share upon the issuance or sale of the Convertible Security and upon the conversion or
exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such Common Shares upon conversion or exchange or
exercise of such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the Conversion Price had
been or are to be made pursuant to other provisions of this Section 7(a), no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.

                    (iii) Change in Option Price or Rate of Conversion. If the purchase price provided
for in any Options, the additional consideration, if any, payable upon the issue, conversion,
exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Shares

10

 

changes at any time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted, issued or sold. For
purposes of this Section 7(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the Subscription Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common Shares deemed issuable
upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of
such change. No adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect.

                    (iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued for a consideration of $.01. If
any Common Shares, Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to be the net amount
received by the Company therefor. If any Common Shares, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of receipt. If any Common
Shares, Options or Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common Shares, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the Required Holders. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation
(the “Valuation Event”), the fair value of such consideration will be determined within five (5)
Trading Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders. The determination of
such appraiser shall be deemed binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.

                    (v) Record Date. If the Company takes a record of the holders of Common Shares for
the purpose of entitling them (A) to receive a dividend or other distribution payable in Common
Shares, Options or in Convertible Securities or (B) to subscribe for or purchase Common Shares,
Options or Convertible Securities, then such record date will be deemed to be the date of the issue
or sale of the Common Shares deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.

               (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Shares.
If the Company at any time on or after the Subscription Date subdivides (by any share split, share
dividend, recapitalization or otherwise) one or more classes of its

11

 

outstanding Common Shares into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the Company at any time
on or after the Subscription Date combines (by combination, reverse share split or otherwise) one
or more classes of its outstanding Common Shares into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination will be proportionately increased.

               (c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions (including, without limitation,
the granting of share appreciation rights, phantom share rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.

          (8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

               (a) General. Subject to and in accordance with the terms of this Section 8, on each
applicable Installment Date, the Company shall pay to the Holder of this Note the Installment
Amount as of such Installment Date by the combination of any of the following, (i) provided that
there has been no Equity Conditions Failure, requiring the conversion of a portion of the
applicable Installment Amount, in whole or in part, in accordance with this Section 8 (a “Company
Conversion”), and/or (ii) redeeming for cash the applicable Installment Amount, in whole or in
part, in accordance with this Section 8 (a “Company Redemption”); provided that all of the
outstanding applicable Installment Amount as of each such Installment Date must be converted and/or
redeemed by the Company on the applicable Installment Date, subject to the provisions of this
Section 8. Unless the Company Installment Notice (as defined below) indicates otherwise or if
there is an Equity Conditions Failure, the entire Installment Amount to be paid on such Installment
Date shall be paid through a Company Conversion. On or prior to the date which is the tenth
(10th) Trading Day prior to each Installment Date (each, an “Installment Notice Due
Date”), the Company shall deliver written notice (each, a “Company Installment Notice”) to the
Holder which Company Installment Notice shall state (i) the portion, if any, of the applicable
Installment Amount to be converted pursuant to a Company Conversion, which amount when added to the
Company Redemption Amount must equal the applicable Installment Amount; provided that the Company
shall not convert an Installment Amount under this section in excess of the Holder’s Pro Rata
Amount of 15% of the aggregate dollar trading volume (as reported on Bloomberg) of the Common
Shares over the twenty (20) consecutive Trading Day period ending on the Trading Day immediately
preceding the applicable Installment Date (the “Company Conversion Amount”), (ii) the portion, if
any, of the applicable Installment Amount which the Company elects to redeem pursuant to a Company
Redemption (the “Company Redemption Amount”), which amount when added to the Company Conversion
Amount must equal the applicable Installment Amount and (iii) unless the Company has elected to pay
the applicable Installment Amount entirely through a Company Redemption, the Company Installment
Notice shall certify that the Equity Conditions have been satisfied as of the date of the Company
Installment Notice. Each Company Installment Notice whether actually given or deemed given shall
be irrevocable. Except as expressly provided in this Section 8(a), the Company shall redeem and
convert the applicable Installment Amount of this Note pursuant

12

 

to this Section 8 and the corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the Installment Amount being
redeemed and converted hereunder. The Company Redemption Amount (whether set forth in the Company
Installment Notice or by operation of this Section 8) shall be redeemed in accordance with Section
8(b) and the Company Conversion Amount shall be converted in accordance with Section 8(c).

               (b) Mechanics of Company Redemption. If the Company elects, or is deemed to have
elected, a Company Redemption in accordance with Section 8(a), then the Company Redemption Amount,
if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by
the Company on such Installment Date, and the Company shall pay to the Holder on such Installment
Date, by wire transfer of immediately available funds, an amount in cash (the “Company Installment
Redemption Price”) equal to 100% of the Company Redemption Amount. If the Company fails to redeem
the Company Redemption Amount on the applicable Installment Date by payment of the Company
Installment Redemption Price on such date, then at the option of the Holder designated in writing
to the Company (any such designation, a “Conversion Notice” for purposes of this Note), the Holder
may require the Company to convert all or any part of the Company Redemption Amount at the Company
Conversion Price. Conversions required by this Section 8(b) shall be made in accordance with the
provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 8(b), but
subject to Section 3(d), until the Company Installment Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Shares pursuant to Section 3. In the
event the Holder elects to convert all or any portion of the Company Redemption Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence, the Company
Redemption Amount so converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the applicable Conversion Notice.

               (c) Mechanics of Company Conversion.

                    (i) Subject to Section 3(d), if the Company pays any part of an Installment Amount pursuant to
a Company Conversion in accordance with Section 8(a), then on the Trading Day prior to the
Installment Date the Company shall (i) cause the Transfer Agent to deliver to the Holder’s account
with DTC a number of Common Shares equal to the quotient of (x) such Company Conversion Amount
divided by (y) the Initial Company Conversion Price (the “Pre-Installment Conversion Shares”) and
(ii) pay to the Holder, in cash by wire transfer of immediately available funds, the amount of any
accrued and unpaid interest on such Company Conversion Amount and any accrued and unpaid Late
Charges on such Conversion Amount and Interest. On the Trading Day immediately after the end of
the Company Conversion Measuring Period (the “Installment Settlement Date”), the Company shall, or
shall direct the Transfer Agent to, deliver to the Holder’s account with DTC a number of additional
Conversion Shares, if any, equal to the Installment Balance Conversion Shares. If an Event of
Default occurs during any applicable Company Conversion Measuring Period and the Holder elects an
Event of Default Redemption in accordance with Section 4(b), then, at the Holder’s option, either
(A) the Holder, upon receipt of the Event of Default Redemption Price (which Redemption Price
includes redemption of any portion of a Company Conversion Amount represented by Pre-

13

 

Installment Conversion Shares that the Holder shall return to the Company), shall return any
Pre-Installment Conversion Shares delivered in connection with the applicable Installment Date,
which the Holder has not otherwise sold, transferred or disposed of, to the Company or (B) the
Conversion Amount used to calculate the Event of Default Redemption Price shall be reduced by the
product of (I) the Company Conversion Amount applicable to such Installment Date multiplied by (II)
the Conversion Share Ratio.

                    (ii) If there is an Equity Conditions Failure, then at the option of the Holder designated in
writing to the Company, the Holder may require the Company to do any one or both of the following:
(x) the Company shall redeem all or any part designated by the Holder of the unconverted Company
Conversion Amount (such designated amount is referred to as the “First Redemption Amount”) on such
Installment Date or Installment Settlement Date, as applicable, and the Company shall pay to the
Holder on such Installment Date or Installment Settlement Date, as applicable, by wire transfer of
immediately available funds, an amount in cash equal the First Redemption Amount, or (y) the
Company Conversion shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Conversion Amount and the Holder shall be entitled to all the rights of
a holder of this Note with respect to such amount of the Company Conversion Amount; provided,
however, that the Conversion Price for such unconverted Company Conversion Amount shall thereafter
be adjusted to equal the lesser of (1) the Company Conversion Price as in effect on the date on
which the Holder voided the Company Conversion and (2) the Company Conversion Price as in effect on
the date on which the Holder delivers a Conversion Notice relating thereto. In the event of an
Equity Conditions Failure, at the Holder’s option, either (A) the Holder shall, upon receipt of a
First Redemption Amount (which amount includes redemption of any portion of a Company Conversion
Amount represented by Pre-Installment Conversion Shares that the Holder shall return to the
Company), return any Pre-Installment Conversion Shares delivered in connection with the applicable
Installment Date, which the Holder has not otherwise sold, transferred or disposed of, to the
Company or (B) any related First Redemption Amount shall be reduced by the product of (I) the
Company Conversion Amount applicable to such Installment Date multiplied by (II) the Conversion
Share Ratio. If the Company fails to redeem any First Redemption Amount on or before the
applicable Installment Date or Installment Settlement Date, as applicable, by payment of such
amount on the applicable Installment Date or Installment Settlement Date, as applicable, then the
Holder shall have the rights set forth in Section 12(b) as if the Company failed to pay the
applicable Company Redemption Price and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section 4(a)(xi)).
Notwithstanding anything to the contrary in this Section 8(c), but subject to 3(d), until the
Company delivers Common Shares representing the Company Conversion Amount to the Holder, the
Company Conversion Amount may be converted by the Holder into Common Shares pursuant to Section 3.
In the event the Holder elects to convert the Company Conversion Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the Company Conversion Amount
so converted shall be deducted from the Installment Amounts relating to the Installment Dates as
set forth in the applicable Conversion Notice.

               (d) Deferred Installment Amount. Notwithstanding any provision of this Section 8 to
the contrary, the Holder may, at its option and in its sole discretion, deliver a notice to the
Company at least five (5) Trading Days prior to the applicable Installment Date

14

 

electing to have all or any portion of the Installment Amount payable on such Installment Date
(such amount, the “Deferral Amount”) deferred until one or more later Installment Dates (each, a
“Deferral Date”). Any notice delivered by either the Holder pursuant to this Section 8(d) shall
set forth (A) the Deferral Amount and (B) the Deferral Date(s).

          (9) COMPANY’S RIGHT OF MANDATORY CONVERSION.

               (a) Mandatory Conversion. If at any time from and after the one-year anniversary of
the Effective Date (the “Mandatory Conversion Eligibility Date”) (i) the Closing Sale Price of the
Common Shares equals or exceeds 125% of the Conversion Price on the Issuance Date (subject to
appropriate adjustments for share splits, share dividends, share combinations and other similar
transactions after the Subscription Date) for each of any twenty (20) consecutive Trading Days
following the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”)
and (ii) the Equity Conditions shall have been satisfied during the period commencing on the
Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date (each, as defined
below), then the Company shall have the right to require the Holder to convert all or any
designated portion of the Conversion Amount then remaining under this Note as designated in the
Mandatory Conversion Notice (as defined below) into fully paid, validly issued and nonassessable
Common Shares in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may exercise its right
to require conversion under this Section 9(a) by delivering within not more than two (2) Trading
Days following the end of such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of Notes and the
Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”). The Mandatory
Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section 9(a), which Trading
Day shall be at least ten (10) Trading Days but not more than sixty (60) Business Days following
the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the aggregate
Conversion Amount of the Notes subject to such Mandatory Conversion from the Holder and all of the
holders of the Notes pursuant to this Section 9 (and analogous provisions under the Other Notes),
and (iii) the number of Common Shares to be issued to such Holder on the Mandatory Conversion Date;
provided, however, that the Company shall not convert a Conversion Amount under this Section in
excess of the Holder’s Pro Rata Amount of 25% of the aggregate dollar trading volume (as reported
on Bloomberg) of the Common Shares over the twenty (20) consecutive Trading Day period ending on
the Trading Day immediately preceding the Mandatory Conversion Notice Date; provided further that
nothing in this Section 9(a) shall, in any way or at any time (including, for the benefit of doubt,
at any time following the time that the Company provides a Mandatory Conversion Notice), limit the
ability of the Holder to exercise its right to convert Common Shares pursuant to Section 3. All
Conversion Amounts converted by the Holder after the Mandatory Conversion Notice Date shall reduce
the Conversion Amount of this Note required to be converted on the Mandatory Conversion Date. The
Company may not effect more than one (1) Mandatory Conversion during any consecutive thirty (30)
Trading Day period. The Company may not exercise its right to a Mandatory Conversion if it has not
reserved and made available out of its authorized and unissued shares of Common Stock the number of
shares of Common Stock as is necessary to allow the exercise of

15

 

any Series B Warrants (as defined in the Securities Purchase Agreement) that are exercisable
after such Mandatory Conversion.

               (b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 9(a), then it must simultaneously take the
same action in the same proportion with respect to the Other Notes. If the Company has elected a
Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall apply, to the
extent applicable, as if the Company and the Transfer Agent had received from the Holder on the
Mandatory Conversion Date a Conversion Notice with respect to the Conversion Amount being converted
pursuant to the Mandatory Conversion.

          (10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Note, and will at all times in good faith carry out all of the provisions of this
Note and take all action as may be required to protect the rights of the Holder of this Note.

          (11) RESERVATION OF AUTHORIZED SHARES.

               (a) Reservation. Commencing on the Issuance Date and until the Capital Increase has
been obtained, the Company shall reserve in respect of the Notes all of its authorized and unissued
Common Shares, which amount shall be sufficient to convert no less than 100% of the Notes at the
initial Conversion Price. Immediately upon the Company’s obtaining the Stockholder Approval, the
Company shall reserve out of its authorized and unissued Common Shares a number of Common Shares
for each of the Notes equal to 130% of the Conversion Rate with respect to the Conversion Amount of
each such Note as of the Issuance Date and, for so long thereafter as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep available out of its
authorized and unissued Common Shares, solely for the purpose of effecting the conversion of the
Notes, 130% of the number of Common Shares as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding; provided that at no time shall the number of
Common Shares so reserved be less than the number of shares required to be reserved by the previous
sentence (without regard to any limitations on conversions) (the “Required Reserve Amount”). The
initial number of Common Shares reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of the Notes based on
the principal amount of the Notes held by each holder at the Closing (as defined in the Securities
Purchase Agreement) or increase in the number of reserved shares, as the case may be (the
“Authorized Share Allocation”). In the event that a holder shall sell or otherwise transfer any of
such holder’s Notes, each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation. Any Common Shares reserved and allocated to any Person which ceases
to hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the
principal amount of the Notes then held by such holders.

               (b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved

16

 

Common Shares to satisfy its obligation to reserve for issuance upon conversion of the Notes
at least a number of Common Shares equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to increase the Company’s
authorized Common Shares to an amount sufficient to allow the Company to reserve the Required
Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure,
the Company shall hold a meeting of its shareholders for the approval of an increase in the number
of authorized Common Shares. In connection with such meeting, the Company shall provide each
shareholder with a proxy statement and shall use its commercially reasonable best efforts to
solicit its shareholders’ approval of such increase in authorized Common Shares and to cause its
board of directors to recommend to the shareholders that they approve such proposal.

          (12) HOLDER’S REDEMPTIONS.

               (a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading Days after the Company’s receipt of the Holder’s Event
of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), then the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and within five (5) Trading
Days after the Company’s receipt of such notice otherwise (the “Change of Control Redemption
Date”). In the event of a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance
with Section 18(d)) representing the outstanding Principal which has not been redeemed. In the
event that the Company does not pay the applicable Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid Redemption Price in
full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together with any Late
Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the Redemption
Notice shall be null and void with respect to such Conversion Amount, (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the
Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common Shares during the
period beginning on and including the date on which the Redemption Notice is delivered to the
Company and ending on and including the date on which the Redemption Notice is voided. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its rights following such
notice shall not affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount subject to such
notice.

               (b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or

17

 

occurrence substantially similar to the events or occurrences described in Section 4(b) or
Section 5(b) (each, an “Other Redemption Notice”), the Company shall immediately, but no later than
one (1) Trading Day of its receipt thereof, forward to the Holder by facsimile a copy of such
notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Trading Day period beginning on and including the date which is three (3)
Trading Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three (3) Trading Days after the Company’s receipt of the Holder’s
Redemption Notice and the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received during such seven
(7) Trading Day period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during
such seven (7) Trading Day period.

          (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as provided by law, the Delaware General Corporation Law and as expressly provided in
this Note.

          (14) COVENANTS.

               (a) Rank. All payments due under this Note (a) shall rank pari passu with all Other
Notes and (b) shall be senior to all other Indebtedness of the Company and its Subsidiaries now in
existence or hereinafter created.

               (b) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by
this Note and the Other Notes and (ii) Permitted Indebtedness.

               (c) Existence of Liens. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the Company or any of
its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

               (d) Restricted Payments; Restricted Distribution. The Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents
(in whole or in part, whether by way of open market purchases, tender offers, private transactions
or otherwise), all or any portion of any Permitted Indebtedness, whether by way of payment in
respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such
payment is due or is otherwise made or, after giving effect to such payment, an event constituting,
or that with the passage of time and without being cured would constitute, an Event of Default, has
occurred and is continuing. In addition, the Company shall not make any Distribution (as defined
below) without the written consent of the Required Holders.

18

 

          (15) RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common
Shares, by way of return of capital or otherwise (including, without limitation, any distribution
of cash, shares or other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a
“Distribution”), at any time after the issuance of this Note, then, in each such case any
Conversion Price in effect immediately prior to the close of business on the record date fixed for
the determination of holders of Common Shares entitled to receive the Distribution shall be
reduced, effective as of the close of business on such record date, to a price determined by
multiplying such Conversion Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the Common Shares on the trading day immediately preceding such record date minus the
value of the Distribution (as determined in good faith by the Company’s Board of Directors)
applicable to one Common Share, and (ii) the denominator shall be the Closing Bid Price of the
Common Shares on the trading day immediately preceding such record date.

          (16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote, at a meeting
duly called for such purpose or the written consent without a meeting, of the Required Holders
shall be required for any change or amendment to this Note or the Other Notes. Any change or
amendment so approved shall be binding upon all existing and future holders of this Note and any
Other Notes. No consideration shall be offered or paid to any Holder of the Notes to amend or
consent to a waiver or modification of any provision of any of the Notes unless the same
consideration is also offered to all of the Holders of the Notes.

          (17) TRANSFER. This Note and any Common Shares issued upon conversion of this Note
may be offered, sold, assigned or transferred by the Holder without the consent of the Company,
subject only to the provisions of Section 2(f) of the Securities Purchase Agreement.

          (18) REISSUANCE OF THIS NOTE.

               (a) Transfer. If this Note is to be transferred, then the Holder shall surrender this
Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the
Holder a new Note (in accordance with Section 18(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and, if less then the entire
outstanding Principal is being transferred, a new Note (in accordance with Section 18(d)) to the
Holder representing the outstanding Principal not being transferred. The Holder and any assignee,
by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of this Note.

               (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

19

 

               (c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 18(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

               (d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 18(a) or Section 18(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest on the Principal of this Note and any accrued and unpaid Late Charges on the Principal and
Interest of this Note, in each case from the Issuance Date.

          (19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of showing economic loss
and without any bond or other security being required.

          (20) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’ rights and involving
a claim under this Note, then the Company shall pay the costs incurred by the Holder for such
collection, enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.

          (21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly

20

 

drafted by the Company and all the Holders and shall not be construed against any person as
the drafter hereof. The headings of this Note are for convenience of reference and shall not form
part of, or affect the interpretation of, this Note.

          (22) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

          (23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Trading Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Trading Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one (1)
Trading Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank
reasonably selected by the Company and approved by the Holder, or if the Company and the Holder
cannot agree on such bank, the Company shall select two independent reputable investment banks and
the Holder shall select one to serve on a panel, (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company’s independent, outside accountant. The
Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Trading Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.

          (24) NOTICES; PAYMENTS.

               (a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Shares, (B) with respect to any
pro rata subscription offer to holders of Common Shares or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

21

 

               (b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Holders, shall initially be as set forth on the Schedule of Buyers attached to the
Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Trading Day, the
same shall instead be due on the next succeeding day which is a Trading Day and, in the case of any
Interest Date which is not the date on which this Note is paid in full, the extension of the due
date thereof shall not be taken into account for purposes of determining the amount of Interest due
on such date. Any amount of Principal or other amounts due under the Transaction Documents, other
than Interest, which is not paid when due shall result in a late charge being incurred and payable
by the Company in an amount equal to interest on such amount at the rate of fifteen percent (15%)
per annum from the date such amount was due until the same is paid in full (“Late Charge”).

22

 

          (25) CANCELLATION. After all Principal, accrued Interest, any Late Charges and
other amounts at any time owed on this Note have been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

          (26) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

          (27) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York. Any action brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the State of New York and waive trial by jury. Both parties agree to
submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from
the other party its reasonable attorney’s fees and costs. In the event that any provision of this
Note is invalid or unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other jurisdiction to collect
on the Company’s obligations to the Holder, to realize on any collateral or any other security for
such obligations, or to enforce a judgment or other court ruling in favor of the Holder.

          (28) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:

               (a) “AMEX” means the American Stock Exchange.

               (b) “Approved Share Plan” means any employee benefit plan which has been approved by the Board
of Directors of the Company, pursuant to which the Company’s securities may be issued to any
employee, officer or director for services provided to the Company.

               (c) “Bloomberg” means Bloomberg Financial Markets.

               (d) “Calendar Quarter” means each of: (i) the period beginning on and including January 1 and
ending on and including March 31; (ii) the period beginning on and including April 1 and ending on
and including June 30; (iii) the period beginning on and including July 1 and ending on and
including September 30; and (iv) the period beginning on and including October 1 and ending on and
including December 31.

23

 

               (e) “Change of Control” means any Fundamental Transaction other than (i) any reorganization,
recapitalization or reclassification of the Common Shares in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or reclassification continue after
such reorganization, recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

               (f) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 23. All such determinations to be appropriately adjusted for any
share dividend, share split, share combination or other similar transaction during the applicable
calculation period.

               (g) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement,
which date is the date the Company initially issued Notes pursuant to the terms of the Securities
Purchase Agreement.

               (h) “Company Conversion Price” means, as of any date of determination, that price which shall
be the lower of (i) the applicable Conversion Price and (ii) the price computed as 85% of the
arithmetic average of the Weighted Average Price of the Common Shares on the Principal Market
during each of the twelve (12) consecutive Trading Days commencing on the Trading Day immediately
after the applicable Installment Date (such period, the “Company Conversion Measuring Period”).

               (i) “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

24

 

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.

               (j) “Conversion Share Ratio” means, as to any applicable date of determination, the quotient
of (i) the number of Pre-Installment Conversion Shares delivered in connection with such
Installment Date divided by (ii) the number of Post-Installment Conversion Shares relating
to such Installment Date.

               (k) “Convertible Securities” means any shares or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Shares.

               (l) “Effective Date” means the date on which the Registration Statement filed pursuant to the
Registration Rights Agreement is declared effective by the SEC.

               (m) “Eligible Market” means the Principal Market, AMEX, The New York Stock Exchange, Inc,
NASDAQ or The Nasdaq Capital Market.

               (n) “Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning six (6) months prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall not have been any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all Common Shares issuable
upon conversion or redemption of the Notes, payment of Installment Amounts and exercise of the
Warrants shall be eligible for sale without restriction and without the need for registration under
any applicable federal or state securities laws and such shares shall be freely tradable on an
Eligible Market; (ii) on each day during the Equity Conditions Measuring Period, the Common Shares
are designated for quotation on the Principal Market and shall not have been suspended from trading
on such exchange or market (other than suspensions of not more than two (2) days and occurring
prior to the applicable date of determination due to business announcements by the Company) nor
shall delisting or suspension by such exchange or market been threatened or pending either (A) in
writing by such exchange or market or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) during the one (1) year period ending on and
including the date immediately preceding the applicable date of determination, the Company shall
have delivered Conversion Shares upon conversion of the Notes and Common Shares upon exercise of
the Warrants to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and
analogous provisions under the Other Notes) and Section 2(a) of the Warrants; (iv) any applicable
Common Shares to be issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules and regulations of the Principal Market;
(v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Trading Days of when such payment is due pursuant to any Transaction
Document; (vi) during the Equity Conditions Measuring Period, there shall not have

25

 

occurred either (A) the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated or (B) an Event of Default or
an event that with the passage of time or giving of notice would constitute an Event of Default;
(vii) the Company shall have no knowledge of any fact that would cause (x) the Registration
Statements required pursuant to the Registration Rights Agreement not to be effective and available
for the resale of all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) any Common Shares issuable upon conversion or redemption of
the Notes, payment of Installment Amounts and Common Shares issuable upon exercise of the Warrants
not to be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; (viii) the Company otherwise shall have been in material compliance with and shall
not have materially breached any provision, covenant, representation or warranty of any Transaction
Document; (ix) the Common Shares have not traded below $0.50 per share in the immediately preceding
twenty (20) consecutive Trading Days; and (x) the Company has obtained Stockholder Approval.

               (o) “Equity Conditions Failure” means that during any period commencing with the delivery of
the Company Installment Notice through the applicable Installment Date or Installment Settlement
Date, as applicable, the Equity Conditions have not been satisfied (or waived in writing by the
Holder).

               (p) “Excluded Securities” means any Common Shares issued or issuable: (i) in connection with
any Approved Share Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
pursuant to a bona fide firm commitment underwritten public offering at a price per Common Shares
not less than the Conversion Price in effect at the time of such offering with a nationally
recognized underwriter which generates gross proceeds to the Company of at least $50,000,000 (other
than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity
lines”); (iv) in connection with any strategic acquisition or strategic transaction, whether
through an acquisition of shares or a merger of any business, assets or technologies, the primary
purpose of which is not to raise equity capital in an amount not to exceed, in the aggregate twenty
percent (20%) of the outstanding Common Shares in any twelve (12) month period; and (v) upon
conversion of any Options or Convertible Securities which are outstanding on the day immediately
preceding the Subscription Date, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Subscription Date.

               (q) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the properties or assets of the Company to another Person, or (iii)
be subject to an offer from another Person or group of related Persons (as defined in Sections
13(d) and 14(d) of the Exchange Act) other than the Holder to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding Voting Shares (not
including any Voting Shares held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (iv)
consummate a share purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group
of related Persons (as defined in

26

 

Sections 13(d) and 14(d) of the Exchange Act) whereby such other Person or group acquires more
than the 50% of the outstanding Voting Shares (not including any Voting Shares held by the other
Person or other Persons making or party to, or associated or affiliated with the other Persons
making or party to, such share purchase agreement or other business combination), (v) reorganize,
recapitalize or reclassify the Common Shares or (vi) any “person” or “group” (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
50% of the aggregate Voting Stock of the Company.

               (r) “GAAP” means United States generally accepted accounting principles, consistently applied.

               (s) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal
amount of this Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase
Agreement on the Closing Date.

               (t) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (i) through (vii) above.

               (u) “Initial Company Conversion Price” means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as 85%
of the arithmetic average of the Weighted Average Price of the Common Shares on the Principal
Market during each of the five (5) consecutive Trading Days ending on the Trading Day immediately
prior to the Installment Date (such period, the “Initial Company Measuring Period”).

27

 

               (v) “Installment Amount” means, for each Installment Date, an amount equal to the lesser of
(i) (A) the quotient of (x) the aggregate outstanding Principal of this Note as of the first
(1st) Installment Date hereunder divided by (y) the number of whole months from
such Installment Date through the Maturity Date and (ii) the Principal amount outstanding under
this Note, in each case, plus any accrued and unpaid interest on such amount, as any such
Installment Amount may be reduced pursuant to the terms of this Note, whether upon conversion,
redemption or otherwise.

               (w) “Installment Balance Conversion Shares” means, for any Installment Date, a number of
Common Shares equal to (i) the Post-Installment Conversion Shares for such date minus (ii)
the amount of any Pre-Installment Conversion Shares delivered on such date; provided that in the
event that the amount of Pre-Installment Conversion Shares exceeds the Post-Installment Conversion
Shares for such date (such excess, the “Installment Conversion Shares Excess”), the outstanding
Principal under this Note shall be reduced by the product of (x) the Installment Conversion Share
Excess and (y) the Company Conversion Price and the Installment Balance Conversion Shares shall
equal zero (0).

               (x) “Installment Date” means April 1, 2007, and the first (1st) day of each month
thereafter prior to the Maturity Date.

               (y) “Maturity Date” means April 4, 2009; provided however, that the Maturity Date may be
extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default
shall have occurred and be continuing or any event shall have occurred and be continuing which with
the passage of time and the failure to cure would result in an Event of Default and (ii) through
the date that is ten (10) Trading Days after the consummation of a Change of Control in the event
that a Change of Control is publicly announced or a Change of Control Notice is delivered prior to
the Maturity Date.

               (z) “NASDAQ” means the Nasdaq National Market.

               (aa) “Options” means any rights, warrants or options to subscribe for or purchase Common
Shares or Convertible Securities.

               (bb) “OTCBB” means the Over-The-Counter Bulletin Board.

               (cc) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common shares or equivalent equity security are quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

               (dd) “Permitted Indebtedness” means (i) Indebtedness incurred by the Company, or their
Subsidiaries that is made expressly subordinate in right of payment to the Indebtedness evidenced
by this Note, as reflected in a written agreement acceptable to the Required Holders and approved
by the Required Holders in writing, and which Indebtedness does not provide at any time for the
payment, prepayment, repayment, redemption, repurchase or defeasance, directly or indirectly, of
any principal or premium, if any, thereon until 91 days after

28

 

the Maturity Date or later, (ii) Indebtedness secured by Permitted Liens and (iii)
Indebtedness to trade creditors incurred in the ordinary course of business.

               (ee) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv)
any Lien on the Company’s proven hydrocarbon reserves approved by the Required Holders in writing
and (v) Liens (A) upon or in any equipment acquired or held by the Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment
at the time of its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment.

               (ff) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.

               (gg) “Post-Installment Conversion Shares” means, for any Installment Date, that number of
Common Shares equal to the applicable Company Conversion Amount for such Installment Date
divided by the Company Conversion Price (without taking into account the delivery of any
Pre-Installment Conversion Shares).

               (hh) “Principal Market” means the OTCBB.

               (ii) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, Change
of Control Redemption Notices, and any Company Installment Notices (in the event a Company
Redemption is elected in any such notices) and, each of the foregoing, individually, a “Redemption
Notice”.

               (jj) “Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (vi) and (ix) — (xii), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) — (viii), 100%.

               (kk) “Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, and any Company Installment Redemption Price (in the event a Company
Redemption is elected with respect to any Installment Date) and, each of the foregoing,
individually, a “Redemption Price”.

               (ll) “Registration Rights Agreement” means that certain registration rights agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Shares issuable upon conversion of
the Notes and exercise of the Warrants.

29

 

               (mm) “Required Holders” means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.

               (nn) “SEC” means the United States Securities and Exchange Commission.

               (oo) “Securities Purchase Agreement” means that certain securities purchase agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes.

               (pp) “Subscription Date” means April 4, 2006.

               (qq) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
shares or equivalent equity security are quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.

               (rr) “Trading Day” means any day on which the Common Shares are quoted on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common Shares, then
on the principal securities exchange or securities market on which the Common Shares are then
traded or quoted, as the case may be; provided that “Trading Day” shall not include any day on
which the Common Shares is scheduled to trade on any such exchange or market for less than 4.5
hours or any day that the Common Shares are suspended from trading during the final hour of trading
on any such exchange or market (or if such exchange or market does not designate in advance the
closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m.,
New York Time).

               (ss) “Voting Shares” of a Person means capital shares of such Person of the class or classes
pursuant to which the holders thereof have the general voting power to elect, or the general power
to appoint, at least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time capital shares of any other class or classes shall have
or might have voting power by reason of the happening of any contingency).

               (tt) “Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement,
and shall include all warrants issued in exchange therefor or replacement thereof.

               (uu) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of

30

 

trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market
publicly announces is the official close of trading) as reported by Bloomberg, if no dollar
volume-weighted average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately
adjusted for any share dividend, share split, share combination or other similar transaction during
the applicable calculation period.

          (29) DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within two (2) Trading Days after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information, relating to the Company or its Subsidiaries, the Company shall indicate to the Holder
contemporaneously with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

31

 

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

	 	 	 	 	 
	 	Touchstone Resources USA, Inc. 

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

32

 

	 	 	 	 	 

EXHIBIT I

TOUCHSTONE RESOURCES USA, INC.

CONVERSION NOTICE

Reference is made to the Senior Convertible Note (the “Note”) issued to the undersigned by
Touchstone Resources USA, Inc. (the “Company”). In accordance with and pursuant to the Note, the
undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of common stock, par value $0.001 per share (the “Common Shares”), as
of the date specified below.

	 	 	 	 	 	 	 
	 

	 	Date of Conversion:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Aggregate Conversion Amount to be converted:	 	 
	 

	 	 	 	 	 	 

Please confirm the following information:

	 	 	 	 	 	 	 
	 

	 	Conversion Price:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Number of Common Shares to be issued:	 	 
	 

	 	 	 	 	 	 

Please apply the Aggregate Conversion Amount to reduce the Installment
Amount(s) to be paid on the following Installment Date(s) as indicated below:

	 	 	 	 	 	 	 
	 

	 	Installment Date(s):	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Reduction in Installment Amount(s):	 	 
	 

	 	 	 	 	 	 

Please issue the Common Shares into which the Note is being converted in the
following name and to the following address:

	 	 	 	 	 
	 

	 	Issue to:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 	 
	 	 	Facsimile Number:	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Authorization:	 	 	 	 
	 	 	 	 	 

	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 
	 

	 	 	 	 	 	 

	 	 	 
	Dated:
	 	 
	 

	 	 

 

 

	 	 	 	 	 
	Account Number:
	 	 	 	 
	 	 	 
	(if electronic book entry transfer)
	 
	 	 	 	 
	Transaction Code Number:	 	 
	 

	 	 	 	 
	(if electronic book entry transfer)

34

 

ACKNOWLEDGMENT

          The Company hereby acknowledges this Conversion Notice and hereby directs StockTrans, Inc to
issue the above indicated number of Common Shares in accordance with the Transfer Agent
Instructions dated April 4, 2006 from the Company and acknowledged and agreed to by StockTrans,
Inc.

	 	 	 	 	 
	 	Touchstone Resources USA, Inc. 

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:

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