Document:

EXHIBIT
10.25

	
  Re:

  	
   

  	
  LETTER OF INTENT

  	
   

  	
  May 13, 2006

  

 

	
  Ben Cowart

  
	
  Jason Gehrig

  
	
  2323 Clearlake City Blvd., #180-184

  
	
  Houston, TX 77062

  

 

Gentlemen :

Please accept this
Letter of Intent (“LOI”) as the basis upon which Earth Biofuels, Inc. (the “Company”),
is prepared to enter into substantive negotiations with you to achieve the
purposes and goals as described herein.

EXCEPT FOR
PROVISIONS IN THIS DOCUMENT RELATED TO THE $500,000 DEPOSIT AND ANY EXPENDITURES
RELATED THERETO, NOTHING CONTAINED IN THIS LOI SHALL ACT TO CREATE ANY LEGAL
OBLIGATION WHATSOEVER OF ANY NATURE, EITHER IN LAW OR IN EQUITY, AMONG THE
PARTIES HERETO OR OTHERWISE BINDING UPON EITHER OF SUCH PARTIES EITHER TO THE
OTHER PARTY OR TO ANY THIRD PARTY. NO OBLIGATIONS OF ANY NATURE SHALL BE
CREATED UNLESS AND UNTIL DEFINITIVE DOCUMENTS HAVE BEEN FULLY EXECUTED AND
PROPERLY DELIVERED ACCORDING TO THE TERMS THEREIN.

1.                                      The
Parties

The Parties to
this proposed transaction shall consist of the Company, which may also be
referred to as the “Acquiror” and Vertex Energy, LP [verify – Vertex Energy is
not the general partner of Vertex Processing, according to Texas state public
records.  The GP is VTX, Inc.], which may
also be referred to as the “Seller”.  The
subject “Target” Company is Vertex Processing, LP.

2.                                      The
Transaction

Seller owns 100%
of the equity interests in a company (named Vertex Processing, LP) which owns a
chemical processing facility (the “Plant”) which resides on approximately 11
acres leased by Seller adjacent to the Houston Ship Channel in Houston, TX.  The parties envision the , Acquiror purchasing
a 51% equity interest in Vertex Processing from the current owner, Vertex
Energy, LP.  The intent of both parties
is to create a structure that would allow Acquiror to consolidate the
operations, in accordance with GAAP, with it’s financial statements.

3.                                      The
Consideration

In return, and
Subject to terms and conditions that will be more fully described in definitive
documents, the Acquiror shall pay to the Seller consideration as follows:

·                      $500,000
cash deposit paid to Seller upon execution of this LOI. Seller is entitled to
utilize such deposit for the sole purpose of converting Seller’s Plant to the
manufacture of Biodiesel fuel, during the period prior to the execution of the
Parties’ anticipated definitive agreements. 
Such expenditures incurred are non-refundable in the event of
non-execution of the definitive agreements. 
Any remaining funds not utilized are refundable in the event definitive
agreements are not executed within 60 days of the execution of this LOI.   .

·                      $2,000,000 paid
to Seller  at closing.

·                      1,500,000
shares of restricted “144”“ shares of common stock in the Company (OTCBB: EBOF)
at the Closing.

 

·                      Acquiror will
agree to become an obligor of the $947,500 existing senior bank indebtedness
currently owed by Vertex Processing, L.P., with Acquiror’s financial exposure
to be limited to the extent of Acquiror’s percentage ownership interest in
Target.

·                      Seller and Acquiror
agree to each pay $850,000.00 cash at closing, to pay off the existing $1.5
million bank line of credit in the name of Vertex Energy, L.P, and to which the
Target also has access for working capital purposes.  The parties agree that within 120 days after
execution of the definitive agreements, the  Target will establish its own banking
relationship and credit facilities in its own name to replace the existing one.
  EBOF shall guarantee the prospective line of
credit with third party lenders.

4.                                      Non-Transferability

Consistent with
the restricted status of the shares of stock to be delivered to Seller, Seller
shall not be allowed to sell, barter, encumber or otherwise hypothecate the Company
common stock at any time subsequent to the execution of the definitive
agreements except in accordance with Rule 144, provided, however, that any such
disposition is subject to the absolute right of Acquiror to exercise its first
right of refusal to re-acquire its Stock.

5.                                      The
Other Terms

Additionally,
Acquiror agrees to fund the necessary improvements to the facility to quickly
achieve a minimum biodiesel production rate of 10 million gallons per
year.  This funding is not to exceed $650,000.

In the event
capital requirements are in excess of $650,000 the equity owners of the Target
will bear such costs on a pro-rata basis.

180 days from the
date of the Closing, Seller, at its sole discretion, has the option to require
Acquiror to “buy back” the above mentioned 1,500,000 shares of restricted “144”
common stock of the Company at a purchase price of $2,000,000.

The parties shall
work together in good faith to conclude any and all other issues and matters
that will be memorialized in definitive documents, including but not limited
to, the resulting financing, ownership and management structure of the Company.

6.                                      No
Binding Agreement

EXCEPT FOR
PROVISIONS IN THIS DOCUMENT RELATED TO THE $500,000 DEPOSIT AND ANY EXPENDITURES
RELATED THERETO, NOTHING CONTAINED IN THIS LOI SHALL ACT TO CREATE ANY LEGAL
OBLIGATION WHATSOEVER OF ANY NATURE, EITHER IN LAW OR IN EQUITY, AMONG THE
PARTIES HERETO OR OTHERWISE BINDING UPON EITHER OF SUCH PARTIES EITHER TO THE
OTHER PARTY OR TO ANY THIRD PARTY. NO OBLIGATIONS OF ANY NATURE SHALL BE
CREATED UNLESS AND UNTIL DEFINITIVE DOCUMENTS HAVE BEEN FULLY EXECUTED AND
PROPERLY DELIVERED ACCORDING TO THE TERMS THEREIN.

The terms as described
herein shall remain available to you for a period that expires at 5:00 PM,
Dallas time, on or before May    13       ,
2006.

If the above terms
accurately reflect your understanding of our conversations and mutual intent,
please so indicate by your execution in the space provided below. The Company
shall then cause definitive documents to be prepared for your review and
consideration.

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We look forward to
working with you.

Very truly yours,

	
  /s/ DARREN L. MILES

  	
   

  
	
  Darren L. Miles

  
	
  Chief Financial Officer

  
	
  Earth Biofuels, Inc.

  
	
   

  
	
  UNDERSTOOD AND AGREED THIS     13    DAY
  OF MAY, 2006.

  
	
   

  
	
   

  
	
  /s/ Ben Cowart

  	
   

  
	
  VTX, Inc., General Partner of Vertex Energy, LP, by:

  
	
  Ben Cowart, President of VTX, Inc.

  
			

 

 3EXHIBIT
10.27

Execution Copy

AMENDED
AND RESTATED

SECURITIES PURCHASE AGREEMENT

AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated
as of May 26, 2006, is by and between Earth Biofuels, Inc., a Delaware
corporation (the “Company”),
and each purchaser listed on Exhibit A
attached hereto (individually, a “Purchaser”
and, collectively, the “Purchasers”).

A.            The Company and the Purchasers are
party to a Securities Purchase Agreement, dated as of May 26, 2006 (the “Original Agreement”).  Pursuant
to Section 4.21 of the Original Agreement, the Company and the Purchasers
desire to amend and restate the Original Agreement and the Notes, the Warrants
and the Registration Rights Agreement (each, as defined below) to reflect the
more favorable terms contained in the Subsequent Closing (as defined in the
Original Agreement).  References in this
Agreement to the Notes, the Warrants and the Registration Rights Agreement
shall be deemed to include the Notes, the Warrants and the Registration Rights
Agreement, as amended and restated in connection herewith and as may be further
amended and/or restated from time to time in accordance with their respective
terms.

B.            Each Purchaser wishes to purchase
and the Company wishes to sell, upon the terms and subject to the conditions
stated in this Agreement, (i) an 8% Senior Note in the form attached hereto as Exhibit B (a “Note”
and, collectively, the “Notes”) and
(ii) a warrant in the form of Exhibit C
hereto. The Notes will be convertible under certain conditions into shares of
the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Warrant issued to a Purchaser will entitle
the holder thereof to purchase a number of shares of Common Stock equal to the
150% of the original principal amount of the Note purchased by such Purchaser
divided by ten dollars ($10.00).

C.            The
shares of Common Stock into which the Notes are convertible are referred to
herein as the “Conversion Shares” and the
shares of Common Stock into which the Warrants are exercisable are referred to
herein as the “Warrant Shares”. The Notes,
the Conversion Shares, the Warrants and the Warrant Shares are collectively
referred to herein as the “Securities”.

D.            The Company has agreed to effect the
registration of the Conversion Shares and the Warrant Shares under the
Securities Act of 1933, as amended (the “Securities
Act”), pursuant to a Registration Rights Agreement in the form
attached hereto as Exhibit D (the “Registration Rights Agreement”).

E.             The sale of the Notes, the Warrants
and the Warrant Shares to the Purchasers will be effected in reliance upon the
exemption from securities registration afforded by Section 4(2) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the Securities and
Exchange Commission (the “Commission”)
hereunder.

In consideration of the
mutual promises made herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and

 

each Purchaser
hereby agree that the Original Agreement is amended and restated to read in its
entirety as follows:

1.             PURCHASE AND SALE OF NOTES AND WARRANTS; DEFINITIONS.

1.1           Purchase of Notes and Warrants.  Upon the terms and subject to the
satisfaction or waiver of the conditions set forth herein, the Company agrees
to sell and each Purchaser agrees to purchase (i) a Note with a principal
amount equal to the amount set forth opposite such Purchaser’s name on Exhibit A hereto and (ii) a
Warrant.  The purchase price for the Note
and Warrant being purchased by a Purchaser (the “Purchase
Price”) shall be equal to the principal amount of such Note. The
date on which the closing of the purchase and sale of the Notes and Warrants
occurs (the “Closing”) is hereinafter
referred to as the “Closing Date”. The Closing
will be deemed to occur when (A) this Agreement and the other Transaction
Documents (as defined below) have been executed and delivered by the Company
and each Purchaser (which delivery may be effected by facsimile transmission),
(B) each of the conditions to the Closing described in Section
5 hereof has been satisfied or waived as specified therein and
(C) full payment of each Purchaser’s Purchase Price has been made by such
Purchaser to the Company by wire transfer of immediately available funds
against physical delivery by the Company of duly executed instruments
representing the Note and Warrant purchased by such Purchaser at the Closing.

1.2           Certain Definitions.  When used herein, the following terms shall
have the respective meanings indicated:

“Affiliate” means, as to any
Person (the “subject Person”), any other
Person (a) that directly or indirectly through one or more intermediaries
controls or is controlled by, or is under direct or indirect common control
with, the subject Person, (b) that directly or indirectly beneficially
owns or holds ten percent (10%) or more of any class of voting equity of the
subject Person, or (c) ten percent (10%) or more of the voting equity of
which is directly or indirectly beneficially owned or held by the subject
Person. For the purposes of this definition, “control”
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, through representation on such Person’s Board
of Directors or other management committee or group, by contract or otherwise.

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

“Business Day” means any day other than a Saturday, a Sunday or a day
on which the New York Stock Exchange is closed or on which banks are authorized
by law to close in New York, New York.

“Closing” and “Closing Date” have the respective
meanings specified in Section 1.1
hereof.

“Common Stock”
means the common stock, par value $0.001 per share, of the Company.

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“Common Stock Equivalent” means,
collectively, Options and Convertible Securities.

“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.

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

“Conversion Price”
has the meaning specified in the Notes.

“Debt”
means, as to any Person at any time: (A) all indebtedness for borrowed money,
(B) all obligations issued, undertaken or assumed as the deferred purchase
price of property or services (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 Debt 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.

“Disclosure Documents”
has the meaning specified in Section 3.11
hereof.

“EDGAR” means the Commission’s
Electronic Data Gathering, Analysis, and Retrieval system

“Effective Date” has the
meaning set forth in the Registration Rights Agreement.

“Environmental Law” means all federal, state, local or foreign laws
relating to pollution or protection of human health or the environment
(including,without

 3
 

 

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.

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

“Event of Default” has the
meaning set forth in the Notes.

“Exchange Act” means the
Securities Exchange Act of 1934, as amended (or any successor act), and the
rules and regulations thereunder (or respective successors thereto).

“Excluded Securities” means
Common Stock or Common Stock Equivalents issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon exercise of any Options or
conversion of any Convertible Securities which are outstanding on the day
immediately preceding the Closing Date and are disclosed in a schedule to this
Agreement, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Closing Date; (iii)
pursuant to a bona fide firm commitment underwritten public offering with a nationally-recognized
investment banking firm which generates gross proceeds to the Company in excess
of $35,000,000 (other than an “at-the-market offering” as defined in Rule
415(a)(4) under the Securities Act or an “equity line” arrangement); (iv) in
connection with any acquisition by the Company, whether through an acquisition
of stock 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, 10% of the outstanding shares of Common Stock in any calendar
year; and (v) an anticipated issuance of no more than 10 million shares of
Common Stock to an agricultural conglomerate.

“Exercise Price”
shall have the meaning specified in the Warrants.

“GAAP” means generally accepted
accounting principles, applied on a consistent basis, as set forth in (i)
opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (ii) statements of the Financial Accounting
Standards Board (iii) interpretations of the Commission and the Staff of the
Commission and each of their respective successors and which are applicable in
the circumstances as of the date in question. 
Accounting principles are applied on a “consistent basis” when the
accounting principles applied in a current period are comparable in all
material respects to those accounting principles applied in a preceding period.

“Governing Documents” means,
as of any date, (i) in the case of a corporation, its certificate of
incorporation and by-laws, (ii) in the case of a partnership, its certificate
of partnership and partnership agreement, (iii) in the case of a limited
liability company, its certificate of organization and limited liability
company operating agreement, and 

 4
 

 

(iv) any similar governing document of any such entity, in each such case
as amended through such date.

“Governmental Authority” means
any nation or government, any state, provincial or political subdivision
thereof and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.

“Governmental Requirement”
means any law, statute, code, ordinance, order, rule, regulation, judgment,
decree, injunction, franchise, license or other directive or requirement of any
federal, state, county, municipal, parish, provincial or other Governmental
Authority or any department, commission, board, court, agency or any other instrumentality
of any of them.

“Insolvent” means, with
respect to the Company, that (i) the Company is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (ii) 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 (iii) the Company has unreasonably small capital with
which to conduct the business in which it is engaged as such business is now
conducted or is about to be conducted

“Intellectual Property” means
any U.S. or foreign patents, patent rights, patent applications, trademarks,
trade names, service marks, brand names, logos and other trade designations
(including unregistered names and marks), trademark and service mark
registrations and applications, copyrights and copyright registrations and
applications, inventions, invention disclosures, protected formulae,
formulations, processes, methods, trade secrets, computer software, computer
programs and source codes, manufacturing research and similar technical
information, engineering know-how, customer and supplier information,
assembly and test data drawings or royalty rights.

“Lien” means, with respect to
any Property, any mortgage or mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, tax lien, financing statement, pledge,
charge, or other lien, charge, easement, encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including, without limitation,
any conditional sale or other title retention agreement having substantially
the same economic effect as any of the foregoing).

“Market Price” means, as of a
particular date, the lower of (i) the average of daily VWAP for each of
the five (5) consecutive Trading Days occurring immediately prior to (but not
including) such date and (ii) the daily VWAP on the Trading Day occurring
immediately prior to (but not including) such date.

“Material Adverse Effect”
means an effect that is material and adverse to (i) the consolidated business, operations, properties, financial
condition, prospects or results of operations of the Company and its
Subsidiaries taken as a whole or (ii) the ability of the Company to perform its
obligations under this Agreement or the other Transaction Documents (as defined
below).

 5
 

 

“Material Contracts” means, as
to the Company, any agreement required pursuant to Item 601 of Regulation S-B
or Item 601 of Regulation S-K, as applicable, promulgated under the Securities
Act to be filed as an exhibit to any report,
schedule, registration statement or definitive proxy statement filed or
required to be filed by the Company with the Commission under the Exchange Act
or any rule or regulation promulgated thereunder, and any and all
amendments, modifications, supplements, renewals or restatements thereof.

“NASD” means the National
Association of Securities Dealers, Inc.

“Obligations” means any and
all indebtedness, liabilities and obligations of the Company to the
Purchaser evidenced by and/or arising pursuant to this Agreement or the Notes,
now existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several, including, without limitation, the obligations of the Company to
repay principal of the Notes, to pay interest on the Notes (including, without
limitation, interest accruing after any bankruptcy, insolvency, reorganization
or other similar filing) and to pay all fees, indemnities, costs and expenses
(including attorneys’ fees) provided for in this Agreement or the Notes.

“Options” means any rights, warrants or options to subscribe for, purchase or receive
Common Stock or Convertible Securities.

“OTCBB” means the OTC Bulletin Board quotation service operated by the Nasdaq
Stock Market, Inc (“Nasdaq”).

“Pension Plan” means an
employee benefit plan (as defined in ERISA) maintained by the Company for
employees of the Company or any of its Affiliates.

“Permitted Liens” means the
following:

(a)           encumbrances
consisting of easements, rights-of-way, zoning restrictions or
other restrictions on the use of real Property or imperfections to title that
do not (individually or in the aggregate) materially impair the ability of the
Company or any of its Subsidiaries to use such Property in its businesses, and
none of which is violated in any material respect by existing or proposed
structures or land use;

(b)           Liens for taxes,
assessments or other governmental charges (including without limitation in
connection with workers’ compensation and unemployment insurance) that are not
delinquent or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, and for which adequate reserves (as
determined in accordance with GAAP) have been established;

(c)           Liens of mechanics,
materialmen, warehousemen, carriers, landlords or other similar statutory Liens
securing obligations that are not yet due and are incurred in the ordinary
course of business or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, for which adequate reserves (as
determined in 

 6
 

 

accordance with GAAP) have been established and which have been bonded
over and omitted from the Title Policy;

(d)           purchase money Liens
to finance property or assets of the Company or any Subsidiary of the Company
acquired in the ordinary course of business; provided,
however, that (i) the related purchase
money Debt shall not exceed the cost of such property or assets (including the
cost of design, development, improvement, production, acquisition,
construction, installation and integration) and shall not be secured by any
property or assets of the Company or any Subsidiary of the Company other than
the property and assets so acquired or constructed (and any improvements
thereto) and (ii) the Lien securing such Debt shall be created within ten (10)
days of such acquisition, construction or improvement;

(e)           Liens upon specific
items of inventory or other goods and proceeds of any Person securing such
Person’s obligations in respect of bankers’ acceptances issued or created for
the account of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods; and

(f)            Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual, or warranty requirements of the Company or any of its
Subsidiaries, including rights of offset and set-off.

“Person” means any individual,
corporation, trust, association, company, partnership, joint venture, limited
liability company, joint stock company, Governmental Authority or other entity.

“Property” means property
and/or assets of all kinds, whether real, personal or mixed, tangible or
intangible (including, without limitation, all rights relating thereto).

“Principal Market” means any
of the following markets: The OTCBB, The New York Stock Exchange, Inc., the
American Stock Exchange, the Nasdaq National Market or The Nasdaq Capital
Market.

“Purchase Price” has the
meaning specified in Section 1.1 hereof.

“Registrable Securities” has
the meaning set forth in the Registration Rights Agreement.

“Restricted Payment” means (a) any
dividend or other distribution (whether in cash, Property or obligations),
direct or indirect, on account of (or the setting apart of money for a sinking
or other analogous fund for the benefit of) any shares of any class of capital
stock of the Company or any of its Subsidiaries now or hereafter outstanding,
except a dividend payable solely in shares of that class of stock to all of the
holders of that class; (b) any redemption, exchange, retirement, sinking fund
or similar payment, purchase or other acquisition for value, direct or
indirect, of any shares of any class of capital stock of the Company or any of
its Affiliates now or hereafter outstanding, except the Securities;
(c) any prepayment of principal of, premium, if any, or interest on, or
any redemption, conversion, exchange, purchase, 

 7
 

 

retirement,
sinking fund or defeasance of, any Debt (whether upon acceleration of such Debt
or otherwise) other than the Securities; and (d) any loan, advance or
payment to any officer, director or stockholder of the Company or any of its
Affiliates, exclusive of (i) reasonable compensation and reimbursements paid to
officers or directors in the ordinary course of business and (ii) the scheduled
repayment of principal and interest with respect to any loans made by any such
Affiliate to the Company and outstanding as of the date hereof and set forth on
Schedule 3.5 hereto; provided, however, that the following shall not be deemed to
constitute a Restricted Payment: (A) the issuance of securities upon exercise
or conversion of the Company’s Options or Convertible Securities under an
Approved Stock Plan, and (B) the issuance of equity securities to, or making
payments under license, joint venture or similar agreements with, persons with
whom the Company has a joint venture, strategic alliance or other commercial
relationship in connection with the operation of the Company’s business, and
not in connection with a transaction the purpose of which is to raise equity
capital.

“SEC Documents”
has the meaning specified in Section 3.11 hereof.

“Securities” has the
meaning specified in the preamble to this Agreement.

“Security Agreement” has the meaning
specified in the preamble to this Agreement.

“Subordinated Debt” means Debt
of the Company which meets each of the following requirements:  (a) such Debt is wholly unsecured or any
Liens securing such Debt constitute Permitted Liens; and (b) such Debt is
contractually subordinated, as to payment and liquidation, to the payment in
full of the Notes and the Obligations on such terms and pursuant to written
agreements in such form and substance as are reasonably satisfactory to
Purchasers holding at least fifty percent (50%) of the aggregate principal
amount of the Notes outstanding on the date such Debt is incurred (the “Subordinated Debt Documents”).

“Subsidiary” means, with
respect to any Person, any corporation or other entity of which at least a
majority of the outstanding shares of stock or other ownership interests having
by the terms thereof ordinary voting power to elect a majority of the board of
directors (or Persons performing similar functions) of such corporation or
entity (irrespective of whether or not at the time, in the case of a
corporation, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned or controlled by such Person or one or
more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

“Termination Date” means the first
date on which there are no Notes or Obligations outstanding.

“Trading Day”
means any day on which the Common Stock is purchased and sold on the Principal Market.

“Transaction Documents”
means (i) this Agreement, (ii) the
Notes, (iii) the Warrants, (iv) the Registration Rights Agreement, and (vii)
all other agreements, documents and other instruments executed and delivered by
or on behalf of the Company or its officers at the Closing.

 8
 

 

“VWAP” on a Trading Day means
the volume weighted average price of the Common Stock for such Trading Day on
the Principal Market as reported by Bloomberg Financial Markets or, if
Bloomberg Financial Markets is not then reporting such prices, by a comparable
reporting service of national reputation selected by the Holders and reasonably
satisfactory to the Company.  If VWAP
cannot be calculated for the Common Stock on such Trading Day on any of the
foregoing bases, then the Company shall submit such calculation to an
independent investment banking firm of national reputation reasonably
acceptable to the Purchasers, and shall cause such investment banking firm to
perform such determination and notify the Company and the Purchasers of the
results of determination no later than two (2) Business Days from the time such
calculation was submitted to it by the Company. 
All such determinations shall be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.

1.3           Other
Definitional Provisions.  All
definitions contained in this Agreement are equally applicable to the singular
and plural forms of the terms defined. 
The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Agreement refer to this Agreement
as a whole and not to any particular provision of this Agreement.

2.             PURCHASERS  REPRESENTATIONS AND WARRANTIES.

Each
Purchaser represents and warrants to the Company, with respect to itself only,
and agrees with the Company, that:

2.1           No Public Sale or Distribution.
Such Purchaser is acquiring the Note and the Warrant being purchased by it in
the ordinary course of business for its own account and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales that are registered under the Securities Act
or are exempt from the requirement to be registered thereunder. Such Purchaser
does not presently have any agreement, arrangement or understanding, directly
or indirectly, with any Person to distribute or effect any distribution of any
of the Securities (or any securities which are derivatives thereof) to or
through any person or entity; provided, however, that in making such representations, such Purchaser
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 an effective registration statement or an
exemption under the Securities Act.

2.2           Accredited Purchaser Status.
Such Purchaser is an “accredited Purchaser” as that term is defined in Rule
501(a) of Regulation D.

2.3           Reliance on Exemptions. Such
Purchaser 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 Purchaser’s compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
such Purchaser set forth herein in order to determine the availability of such
exemptions and the eligibility of such Purchaser to acquire the Securities.

2.4           Information. Such Purchaser
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
Purchaser. 

 9
 

 

Such Purchaser 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 Purchaser or its advisors, if any, or its representatives
shall modify, amend or affect such Purchaser’s right to rely on the Company’s
representations and warranties contained herein. Such Purchaser understands
that its investment in the Securities involves a high degree of risk and is
able to afford a complete loss of such investment. Such Purchaser 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.

2.5           No Governmental Review. Such
Purchaser 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.

2.6           Transfer
or Resale. Such Purchaser understands that, except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Purchaser shall have delivered to the Company
an opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that the Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
such Purchaser provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144
promulgated under the Securities Act, as amended (or a successor rule thereto)
(“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 through which the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Commission thereunder; and (iii) neither the Company nor any
other Person is under any obligation to register the Securities under the
Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. Notwithstanding the foregoing, the
Securities may be pledged in connection with a bona fide margin account or
other loan 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
Purchaser effecting a pledge of Securities shall be required to provide the
Company with an opinion of counsel otherwise make deliver any notice or
document to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, this Section 2.6; provided, that
in order to make any sale, transfer or assignment of Securities, such Purchaser
and its pledgee must make such disposition in accordance with or pursuant to a
registration statement or an exemption under the Securities Act.

2.7           Legends.
Such Purchaser understands that until the certificates or other instruments
representing the Securities have been registered under the Securities Act, the
stock certificates representing the Securities, except as set forth below,
shall bear any legend 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):

 

 10

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, IN A
GENERALLY ACCEPTABLE FORM, 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 WITHOUT DELIVERY OF ANY SUCH OPINION.

The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it
is stamped or issue to such holder by electronic delivery at the applicable
balance account at DTC, if (i) such Securities are registered for resale under
the Securities Act, (ii) in connection with a sale, assignment or other
transfer other than to an Affiliate or partner, shareholder or member of such
holder, such holder provides the Company with an opinion of counsel reasonably
satisfactory to the Company, in a customary and acceptable form, to the effect
that such sale, assignment or transfer of the Securities may be made without
registration under the Securities Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or
transferred pursuant to Rule 144.

If
the Company shall fail for any reason or for no reason to issue to the holder
of the Securities within three (3) Trading Days after the occurrence of any of
(i) through (iii) above, a certificate without such legend to the holder or to
issue such Securities to such holder by electronic delivery at the applicable
balance account at DTC, and if on or after such Trading Day the holder
purchases (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the holder of such Securities that the
holder anticipated receiving without legend from the Company (a “Buy-In”), then the Company shall,
within three (3) Business Days after such three (3) Business Day period, and at
the holder’s request and in the holder’s discretion, either (i) pay cash to the
holder in an amount equal to the holder’s total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the
Company’s obligation to deliver such unlegended Securities shall terminate, or
(ii) promptly honor its obligation to deliver to the holder such unlegended Securities
as provided above and pay cash to the holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of shares of
Common Stock, times (B) the closing sales price of the Common Stock on the date
of exercise.

2.8           Validity; Enforcement. This
Agreement and the Registration Rights Agreement have been duly and validly
authorized, executed and delivered on behalf of such Purchaser and, when
executed by all of the parties thereto (including such Purchaser), shall constitute
the legal, valid and binding obligations of such Purchaser enforceable against
such Purchaser in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or to applicable
bankruptcy, insolvency, reorganization, 

 11
 

 

moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.

2.9           No Conflicts. The execution,
delivery and performance by such Purchaser of this Agreement and the
Registration Rights Agreement and the consummation by such Purchaser of the
transactions contemplated hereby and thereby will not (i) result in a violation
of the Governing Documents of such Purchaser 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 Purchaser 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 Purchaser, 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.

2.10         Residency. Such Purchaser is a
resident of the jurisdiction specified below its address on Exhibit A.

2.11         Short Sales; Trading Restriction.
No Purchaser, directly or indirectly, and no Person acting on behalf of or
pursuant to any understanding with any Investor, has engaged in any
transactions in the securities of the Company (including, without limitation,
any Short Sales involving any of the Company’s securities) since the time that
such Purchaser was first contacted by the Company, the Agent or any other
Person regarding an investment in the Company.  Such Purchaser covenants
that neither it nor any Person acting on its behalf or pursuant to any
understanding with such Purchaser will engage, directly or indirectly, in any
transactions in the securities of the Company (including Short Sales) prior to
the time the transactions contemplated by this Agreement are publicly disclosed
or while the Purchaser is in possession of any material non-public
information.  “Short Sales” include, without limitation, all “short sales”
as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act
and all types of direct and indirect stock pledges, forward sale contracts,
options, puts, calls, short sales, swaps, derivatives and similar arrangements
(including on a total return basis), and sales and other transactions through
non-U.S. broker-dealers or foreign regulated brokers.

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents
and warrants to each Purchaser, and agrees with each Purchaser, that:

3.1           Organization and Qualification.
Each of the Company and its Subsidiaries is a corporation or other legal entity
duly organized and validly existing in good standing under the laws of the
jurisdiction in which it is incorporated or organized, and has the requisite
power and authority (corporate or otherwise) to own its properties and to carry
on its business as now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation 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. The Company has no Subsidiaries
except as set forth on Schedule 3.1.

 12
 

 

3.2           Authorization;
Enforcement; Validity. The Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement and
the other Transaction Documents, including without limitation its obligation to
issue the Notes and Warrants in accordance with the terms hereof. The execution
and delivery of the Transaction Documents by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby, including
without limitation the issuance of the Notes and the Warrants and the
reservation for issuance and issuance of Conversion Shares and Warrant Shares,
have been duly authorized by the Company’s Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders. This Agreement and the other Transaction Documents 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.

3.3           Issuance of Securities. The
Notes and the Warrants are duly authorized and, upon issuance in accordance
with the terms of this Agreement, will be validly issued and free from all
taxes, Liens and charges with respect to the issue thereof. The Conversion
Shares and the Warrant Shares are duly authorized and, upon issuance in
accordance with the terms of the Notes and the Warrants, respectively, will be
validly issued, fully paid and non-assessable and free from all taxes, Liens
and charges with respect to the issue thereof. The issuance by the Company of
the Securities is exempt from registration under the Securities Act.

3.4           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 Warrants and the
reservation for issuance and issuance of the Conversion Shares or the Warrant
Shares) will not (i) result in a violation of the Governing Documents of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material 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 Principal Market) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected.

3.5           Consents. Except for filings
and approvals required by the Principal Market, the  filing by the Company of a Form D in
accordance with Regulation D, and any filings to be made with state securities
regulatory authorities, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other
Person in order for it to execute, deliver or perform any of its obligations
under or contemplated by the Transaction Documents, in each case in accordance
with the terms hereof or thereof. The Company and its Subsidiaries are unaware
of any facts or circumstances that might prevent the Company from obtaining or
effecting any of the registration, application or filings pursuant to the
preceding sentence. The Company is not in violation of the listing requirements
of the Principal Market and 

 13
 

 

has no knowledge
of any facts that would reasonably lead to delisting or suspension of the
Common Stock in the foreseeable future.

3.6           Acknowledgment Regarding Purchaser’s
Purchase of Securities. The Company acknowledges and agrees that each
Purchaser is acting solely in the capacity of an arm’s length Purchaser with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby and that no Purchaser is (i) an officer or director of the Company,
(ii) an Affiliate of the Company or (iii) to the knowledge of the Company, a “beneficial
owner” of more than 10% of the Common Stock (as defined for purposes of Rule
13d-3 of the Exchange Act). The Company further acknowledges that under no
circumstances is any Purchaser acting or to be deemed to be acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby, and has not received or relied on any advice given by a Purchaser
or any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby. The Company
further represents to each Purchaser 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.

3.7           No General Solicitation; Placement
Agent’s Fees. Neither the Company, nor any of its Affiliates, nor any
Person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in connection
with the offer or sale of the Securities. The Company shall be responsible for
the payment of any placement agent’s fees, financial advisory fees, or brokers’
commissions (other than for Persons engaged by any Purchaser or its investment
advisor, if any) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold each Purchaser harmless against, any
liability, loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim.  The Company acknowledges that it has engaged
Cowen and Company as its exclusive placement agent (the “Agent”) in connection with
the sale of the Securities.  Other than the Agent, the Company has not
engaged any placement agent or other agent in connection with the sale of the
Securities.

3.8           No Integrated Offering. None
of the Company, its Subsidiaries, any of their respective Affiliates, or 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 Securities Act or cause the offer and sale of the Securities pursuant to
this Agreement and the Transaction Documents to be integrated with prior
offerings by the Company for purposes of the Securities Act in a manner that
would make unavailable the exemption from registration afforded by Section 4(2)
of the Securities Act or Rule 506 of Regulation D promulgated under the
Securities Act, or any applicable stockholder approval provisions, including,
without limitation, under the rules and regulations of any exchange or
automated quotation system on which any of the securities of the Company are
listed or designated. None of the Company, its Subsidiaries, their respective
affiliates or 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 Securities Act or cause the offering of the Securities
to be so integrated with other offerings.

 14
 

 

3.9           Dilutive Effect. The Company
acknowledges that the issuance of Conversion Shares upon conversion of the
Notes and the issuance of Warrant Shares upon exercise of the Warrants may
result in dilution of the outstanding shares of Common Stock, which dilution
may be substantial under certain market conditions. The Company understands and
acknowledges that its obligation to issue Conversion Shares and Warrants Share
is absolute and unconditional regardless of the dilutive effect that any such
issuance may have on the ownership interests of other stockholders of the
Company. The Company acknowledges and agrees that such Purchaser may enter into
short sales in the Company’s securities to the extent permitted by this
Agreement and applicable law, and that such transactions may result in selling
pressure on the outstanding shares of Common Stock.

3.10         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 its
Governing Documents or the laws of the State of Delaware which is or could
become applicable to any Purchaser as a result of the transactions contemplated
by this Agreement, including, without limitation, the Company’s issuance of the
Securities and any Purchaser’s ownership of the Securities. The Company has not
adopted a shareholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company. Except as set forth on Schedule 3.10,
the transactions and obligations of the Company contemplated by the Transaction
Documents, including without limitation, the issuance and sale of the
Securities, will not trigger any preemptive or anti-dilution rights (including
without limitation pursuant to any “reset” or similar provisions) or rights of
first refusal or first offer, or any other rights that would allow or permit
the holders of the Company’s securities or other Persons to purchase shares of
Common Stock or other securities of the Company.

3.11         Commission Documents; Financial
Statements. The Company is subject to the reporting requirements of the
Exchange Act and, except as set forth on Schedule 3.11,  has filed with the Commission all reports,
schedules, registration statements and definitive proxy statements that the
Company was required to file with the Commission on and after October 7, 2005
(collectively, the “SEC Documents”).  The Company is not aware of any event
occurring or expected to occur on or prior to the Closing Date (other than the
transactions effected hereby) that would require the filing of, or with respect
to which the Company intends to file, a Form 8-K after the Closing. Each SEC
Document, as of the date of the filing thereof with the Commission, complied in
all material respects with the requirements of the Securities Act or Exchange
Act, as applicable, and the rules and regulations promulgated thereunder and,
as of the date of such filing (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing), such SEC Document
(including all exhibits and schedules thereto and documents incorporated by
reference therein) did not contain an untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  All documents required
to be filed as exhibits to the SEC Documents have been filed as required.
Except as set forth in SEC Documents filed and available to the public on EDGAR
at least five (5) Business Days prior to the date of this Agreement (the “Disclosure Documents”), the Company
has no liabilities, contingent or otherwise, other than liabilities incurred in
the ordinary course of business which, under GAAP, are not required to be
reflected in the financial statements included in the Disclosure Documents and
which, individually or in the aggregate, are 

 15
 

 

not material to
the consolidated business or financial condition of the Company and its
Subsidiaries taken as a whole.  As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto. Such financial statements have been prepared in accordance
with GAAP consistently applied at the times and 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 adjustments). No other information provided by or on behalf
of the Company to the Purchasers which is not included in the Commission
Documents, including, without limitation, the information referred to in Section 2.4 of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.

3.12         Absence of Certain Changes.
Except as disclosed in Schedule 3.12,
since December 31, 2005, there has been no material adverse change or development
in the business, properties, operations, condition (financial or otherwise),
results of operations or prospects of the Company or its Subsidiaries. Except
as disclosed in Schedule 3.12, since December
31, 2005, the Company has not (i) declared or paid any dividends, (ii) sold any
assets, individually or in the aggregate, in excess of $100,000 outside of the
ordinary course of business or (iii) effected capital expenditures,
individually or in the aggregate, in excess of $100,000. The Company has not taken
any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to
initiate involuntary bankruptcy proceedings or any actual knowledge of any fact
which would reasonably lead a creditor to do so. The Company is not, as of the
date hereof, and will not be, after giving effect to the transactions
contemplated by this Agreement or the Transaction Documents, Insolvent.

3.13         No Undisclosed Events, Liabilities,
Developments or Circumstances. No event, liability, development or
circumstance has occurred or exists with respect to the Company or its
Subsidiaries or their respective business, properties, prospects, operations or
financial condition, that would be required to have been disclosed by the
Company as of the date hereof under applicable securities laws and which has
not been publicly announced.

3.14         Conduct of Business; Regulatory
Permits. Neither the Company nor any of its Subsidiaries is in violation of
any term of or in default under its Governing Documents. To the best knowledge
of the Company, neither the Company nor any Subsidiary is in violation of any
judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing, except in each case for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect. The Company
and its Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign 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 

 16
 

 

such Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.

3.15         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 (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.

3.16         Sarbanes-Oxley Act. 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 Commission
thereunder that are effective as of the date hereof, except where such
noncompliance would not have, individually or in the aggregate, a Material
Adverse Effect.

3.17         Transactions With Affiliates.
Except as set forth in the Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2005 or the Form 10-QSB for the quarter ended March 31,
2006, none of the officers, directors or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such
officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

3.18         Equity Capitalization; Registration
Rights. As of the date hereof, the authorized capital stock of the Company
consists of (x) 250,000,000 shares of Common Stock, of which as of the date
hereof, 207,376,623 shares are issued and outstanding; 10,320,810 shares are
reserved (or to be reserved) for issuance pursuant to the Company’s employee
incentive plan and other options and warrants outstanding and other securities
exercisable or exchangeable for, or convertible into, shares of Common Stock
and (y) 15,000,000 shares of preferred stock, of which as of the date hereof,
no shares are issued and outstanding. All of such outstanding shares have been,
or upon issuance will be, validly issued and are fully paid and non-assessable.
Except as set forth on Schedule 3.18:
(i) no shares of the Company’s capital stock are subject to preemptive rights
or any other similar rights or any Liens 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 shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries; (iii) 

 17
 

 

there is no
outstanding Debt 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
agreements or arrangements (except the Registration Rights Agreement) under
which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the Securities Act (including “piggy-back” registration rights); (v) 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; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(viii) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the Disclosure Documents (as defined herein) but
not so disclosed in the SEC Documents. The Company has furnished or made
available to each Purchaser upon such Purchaser’s request, true, correct and
complete copies of the Company’s Certificate of Incorporation, as amended and
as in effect on the date hereof, and the Company’s Bylaws, as amended and as in
effect on the date hereof, and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights
of the holders thereof in respect thereto. Schedule 3.18
sets forth the shares of Common Stock owned beneficially or of record and
Common Stock Equivalents (as defined below) held by each director and executive
officer of the Company.

3.19         Debt and Other Contracts. Except
as disclosed in Schedule 3.19, neither the
Company nor any of its Subsidiaries (i) 
has maintained a Lien securing obligations in any material amounts,
either singly or in the aggregate; (ii) is a party to any contract, agreement
or instrument, the violation of which, or default under which, by the other
parties 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 Debt, 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 Debt, the performance of which, in the judgment of
the Company’s officers, has or is reasonably expected to have a Material
Adverse Effect.

3.20
        Absence of Litigation.
Except as set forth on Schedule 3.20,
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, the Common Stock or any of its Subsidiaries
or any of the Company’s or the Company’s Subsidiary’s officers or directors,
whether of a civil or criminal nature or otherwise. The matters set forth on Schedule 3.20, if
determined adversely to the Company or any Subsidiary, would not have a
Material Adverse Effect.

3.21
        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
Subsidiary has been refused any insurance coverage sought or applied for.
Neither the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance 

 18
 

 

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.

3.22         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 (as defined in Rule 501(f) of the Securities Act) has
notified the Company that such officer intends to leave the Company or
otherwise terminate such officer’s employment with the Company. No executive
officer of the Company, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer does not subject the Company or any
of its Subsidiaries to any liability with respect to any of the foregoing
matters. 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.

3.23         Title. The Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all Liens and defects except for Permitted Liens and except as
disclosed on Schedule 3.23. Any real
property and facilities held under lease by the Company and any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.

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

3.25         Environmental Laws. The Company
and its Subsidiaries (i) are in compliance with any and all Environmental Laws,
(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 

 19
 

 

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.

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

3.27         Tax Status. The Company and each
of its Subsidiaries (i) has made or filed all federal and state income and all
other tax returns, reports and declarations (or extensions thereof) 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.

3.28         Internal Accounting and Disclosure
Controls. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii)
access to assets or incurrence of liabilities is permitted only in accordance
with management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference. Other than as described in the Annual Report on Form
10-KSB filed with the Commission for the fiscal year ended December 31, 2005,
the Company does not currently maintain disclosure controls and procedures (as
such term is defined in Rule 13a-14 under the Exchange 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 Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Commission, 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 Exchange 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.
Specifically, the independent auditors for the Company identified deficiencies
in the Company’s controls related to valuation and recording of fixed
assets.  Except as disclosed in the
Company’s Form 10-KSB for the period ending December 31, 2005, which weaknesses
have been corrected, during the six months prior to the date hereof neither the
Company nor any of its Subsidiaries have received any notice or correspondence
from any accountant relating to any potential material weakness in any part of
the system of internal accounting controls of the Company or any of its
Subsidiaries.

3.29         Off Balance Sheet Arrangements.
There is no transaction, arrangement, or other relationship between the Company
and an unconsolidated or other off balance sheet entity

 20

 

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.

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

3.31         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 Purchaser 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.

3.32         Disclosure. The Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their respective 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 Purchasers
will rely on the foregoing representations in effecting transactions in
securities of the Company. All disclosure provided to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the schedules to this Agreement, furnished by or on behalf of the Company are
true and correct and do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each press release issued by the Company since October 7, 2005 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 are made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any Subsidiary or either of
its or their respective 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 (assuming for this purpose that the Company’s reports
filed under the Exchange Act are being incorporated into an effective
registration statement filed by the Company under the Securities Act). The
Company acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section
2.

3.33         Reporting Company; Listing. The
Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange
Act and is eligible for trading on the OTCBB. Without limiting the generality
of the foregoing, the Company is not in violation of any of the rules,
regulations or requirements of Nasdaq as they relate to trading of the Common
Stock on the OTCBB and has no knowledge of any facts or circumstances that
would reasonably be expected to result in a suspension of the Common Stock from
trading on the OTCBB in the foreseeable future. Since December 31, 2005, (i)
the Common Stock has been eligible for quotation on the OTCBB, (ii) trading in
the Common Stock has not been suspended by the Commission or Nasdaq and (iii)
the Company has received no communication, written or oral, 

 21
 

 

from the
Commission or Nasdaq that it does not satisfy such requirements or that such
eligibility is in any way threatened.

3.34         Form SB-2. The Company is
eligible to register the Conversion Shares and Warrant Shares for resale in a
secondary offering by each Purchaser on a registration statement on Form SB-2
under the Securities Act. To the Company’s knowledge, there exist no facts or
circumstances (including without limitation any required approvals or waivers
of any circumstances that may delay or prevent the obtaining of accountant’s
consents) that could reasonably be expected to prohibit or delay the
preparation and filing of a registration statement on Form SB-2 that will be
available for the resale of all Conversion Shares and Warrant Shares by each
Purchaser.

3.35         Investment Company Status. The
Company is not, and immediately after receipt of payment for the Notes and the
Warrants issued under this Agreement will not be, an “investment
company” or an entity “controlled”
by an “investment company” within
the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.

3.36         Customers and Suppliers.  The Company and its Subsidiaries maintain
relationships with their material customers and suppliers on commercially
reasonable terms.  To the Company’s
knowledge, no customer or supplier of the Company or any of its Subsidiaries
has any plan or intention to terminate any agreement or arrangement with the
Company or such Subsidiary, which termination would reasonably be expected to
have a Material Adverse Effect.

3.37         No Other Agreements.  The Company has not, directly or indirectly,
entered into any agreement with or granted any right to any Purchaser relating
to the terms or conditions of the transactions contemplated by the Transaction
Documents, except as expressly set forth in the Transaction Documents.

3.38         Schedules.  The Schedules attached the Original Agreement
are hereby incorporated by reference and shall be deemed a part of and
Schedules to this Agreement.

4.             COVENANTS AND
ACKNOWLEDGEMENTS OF THE PARTIES.

 

4.1           Best Efforts. Each party shall
use its best efforts to satisfy timely the 
terms and conditions of this Agreement.

 

4.2           Form D and Blue Sky; Other Filings
and Consents. The Company agrees to file a Form D in respect of the
Securities as required under Regulation D and to provide a copy thereof to each
Purchaser promptly after such filing. The Company, as promptly as reasonably
practicable after the date hereof, shall 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 Purchasers 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 

 22
 

 

qualification),
and shall promptly thereafter provide evidence of any such action so taken to
the Purchasers. 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. The
Company undertakes as promptly as reasonably practicable after the date hereof
to (i) make such filings and apply for such registrations, or (ii) use its
reasonable best efforts to obtain, as applicable, all such consents,
authorizations and orders, in each such case, which are required to be made or
obtained by the Company pursuant to applicable law, rule or regulation in order
to consummate the transactions contemplated by this Agreement and the other Transaction
Documents.

4.3           Reporting Status. Until the
date on which the Holders (as defined in the Registration Rights Agreement)
have sold all Registrable Securities to the public pursuant to an effective
registration statement or Rule 144 (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the
Commission pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would otherwise permit
such termination.

4.4           Use of Proceeds. The Company
will use the proceeds from the sale of the Notes and Warrants as specified on Schedule
4.4  hereof.

4.5           Financial Information. The
Company agrees to send the following to each Purchaser during the Reporting
Period (i) unless the following are filed with the Commission and are available
to the public through EDGAR, within one (1) Business Day after the filing
thereof with the Commission, a copy of its Annual Reports on Form 10-KSB or
10-K, its Quarterly Reports on Form 10-QSB or 10-Q, any Current Reports on Form
8-K and any registration statements (other than on Form S-8) or amendments
filed pursuant to the Securities Act, (ii) on the same day as the release
thereof, facsimile 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.

4.6           Listing. The Company shall
promptly secure the listing of all of the Registrable Securities upon each
national securities exchange and automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents. The Company shall maintain the
Common Stock’s authorization for listing 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
4.6.

4.7           Fees. Subject to Section 8 below, at the Closing, the
Company shall reimburse the Purchasers for their legal and due diligence
expenses in connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby up to a maximum of $50,000,
which amount (to the extent not already paid by the Company) shall be withheld
from the Purchase Price payable by the Purchasers at the Closing. 

 23
 

 

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
Purchaser) relating to or arising out of the transactions contemplated hereby.
The Company shall pay, and hold each Purchaser harmless against, any liability,
loss or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any
such payment. Except as otherwise set forth in the Transaction Documents, each
party to this Agreement shall bear its own expenses in connection with the sale
of the Securities to the Purchasers.

4.8           Pledge by Purchaser. The
Company acknowledges and agrees that the Securities may be pledged by a
Purchaser 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 Purchaser 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 2.6
of this Agreement; provided that a Purchaser and its pledgee shall be required
to comply with the provisions of Section 2.6
of this Agreement 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 a Purchaser.

4.9           Disclosure of Transactions and
Other Material Information. On or before 8:30 a.m., New York City Time, on
the first Business Day following the Closing Date, 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 Exchange
Act, and attaching the material Transaction Documents (including, without
limitation, this Agreement (and all schedules to this Agreement) and the
Registration Rights Agreement) as exhibits to such filing (including all
attachments, the “8-K Filing”). The Company
acknowledges, agrees and represents that from and after the date of the 8-K
Filing, no Purchaser shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents, that is not disclosed in
the 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries
and each of their respective officers, directors, employees and agents, not to,
provide any Purchaser with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the date of the 8-K Filing without
the express written consent of such Purchaser. In the event of a breach of the
foregoing covenant by the Company, and provided that the Company shall have
failed (following proper written request therefor) to make an appropriate
public disclosure consistent with the requirements of Regulation FD under the Exchange
Act, any Subsidiary, or its each of respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Purchaser shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents. No Purchaser shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, shareholders or agents for any such disclosure. Subject
to the foregoing, neither the Company nor any Purchaser 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, 

 24
 

 

without the prior
approval of any Purchaser, 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, including the applicable rules and regulations of the
Principal Market (provided that in the case of clause (i) each Purchaser shall
be consulted by the Company in connection with any such press release or other
public disclosure prior to its release).

4.10           Intentionally Left Blank

4.11         Corporate Existence. Until the
date on which there are no Notes or Warrants outstanding, the Company shall
maintain its corporate existence and shall not sell all or substantially all of
the Company’s assets, except in the event of a merger or consolidation or sale
of all or substantially all of the Company’s assets, where the surviving or
successor entity in such transaction (i) assumes the Company’s obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (ii) is a publicly traded corporation whose common stock is quoted
on or listed for trading on The Nasdaq National Market, the New York Stock
Exchange or the American Stock Exchange.

4.12         Reservation of Common Stock.  The Company shall, on or before the Closing
Date, authorize and reserve for issuance, free from any preemptive rights, a
number of shares of Common Stock (the “Reserved Amount”)
equal to no less than one hundred and fifty percent (150%) of the maximum
number of shares of Common Stock issuable upon (A) conversion of the
outstanding Notes in full at the Conversion Price then in effect and (B)
exercise of the outstanding Warrants in full at the Exercise Price then in
effect, in each such case without regard to any limitation or restriction on
such conversion or exercise that may be set forth in the Notes or the Warrants.
In the event that, as a result of an adjustment to the Conversion Price of the
Notes or the Exercise Price for the Warrants (pursuant to anti-dilution
adjustments or otherwise), the Reserved Amount is less than 125% of the number
of shares of Common Stock then issuable upon conversion of all of the Notes and
exercise of all of the Warrants then outstanding (without regard to any
limitation or restriction on such conversion or exercise that may be set forth
in the Notes or the Warrants), the Company shall take action (including without
limitation seeking stockholder approval for the authorization or reservation of
additional shares of Common Stock) as soon as practicable (but in no event
later than the tenth (10th)
business day or, in the event that stockholder approval is required, the
sixtieth (60th) day
following such date) to increase the Reserved Amount to no less than 150% of
the number of shares of Common Stock into which such outstanding Notes are then
convertible and such outstanding Warrants are exercisable. The Company shall
not reduce the number of shares reserved for issuance hereunder without
obtaining the written consent of the holders of two-thirds (2/3) of the
Registrable Securities. The initial Reserved Amount shall be allocated pro rata among the Purchasers based on the principal amount
of the Notes issued to each Purchaser at the Closing.  Each increase in the Reserved Amount shall be
allocated pro rata among the Holders based on the
amount of Registrable Securities into which all of the Notes and Warrants held
by such Holder at the time of such increase are convertible or exercisable
(without regard to any limitation on such conversion or exercise). 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 transferor’s Reserved Amount. Any portion of the Reserved
Amount which remains allocated to any person or entity which does not hold any
Notes shall be reallocated to the remaining Holders pro rata
based on the amount of Registrable Securities into which all of the outstanding
Notes 

 25

 

and Warrants at
the time of such increase are convertible or exercisable (without regard to any
limitation on such conversion or exercise).

4.13         Intentionally Left Blank

4.14         Limitation
on Debt, Liens. During
the period beginning on the date of this Agreement and ending on the
Termination Date, the Company shall refrain, and shall ensure that each of its
Subsidiaries refrains, from (A) incurring any Debt (including without
limitation by issuing any Debt securities) or increasing the amount of any
existing line of credit or other Debt facility beyond the amount outstanding on
the date hereof or (B) granting, establishing or maintaining any Lien on any of
its assets, including without limitation any pledge of securities owned or held
by it (including without limitation any securities issued by any such
Subsidiary), other than Permitted Liens. 
Notwithstanding the foregoing, the Company and/or its Subsidiaries may
incur Debt for purposes of effecting one or more acquisitions (by means of
purchase of all or substantially all of the assets of another entity), provided that the aggregate amount of such new Debt shall
not exceed $3 million and provided further,
that such new Debt shall be unsecured Subordinated Debt and subject to the “most
favored nation” provision in Section 4.21 (such
Debt, the “Permitted Subordinated Debt”).

4.15         Restricted Payments.  During the period beginning on the date of
this Agreement and ending on the Termination Date, the Company will not, nor
will it permit any Subsidiary of the Company to, make any Restricted Payments,
except that:

(a)           the Company may make regularly
scheduled payments of principal and interest accrued on any Subordinated Debt
if and to the extent (but only if and to the extent) permitted by the express
terms of the documents governing such Subordinated Debt; and

(b)           Subsidiaries of the Company may make
Restricted Payments to the Company;

provided,
however, that no Restricted Payment may
be made pursuant to clause (a) or (b) above if an Event of Default (or an
event or circumstance that, with the giving of notice or lapse of time or both,
would constitute an Event of Default) exists at the time or would exist as a
result of such Restricted Payment.

4.16         Disposition of Property.  During the period beginning on the date of
this Agreement and ending on the Termination Date, the Company will not, nor
will it permit any Subsidiary of the Company to, sell, lease, assign, transfer
or otherwise dispose of any of its Property, except (i) dispositions of
inventory by the Company and its Subsidiaries in the ordinary course of
business and (ii) expenditures of money (including, without limitation, money
held in deposit accounts) made in the ordinary course of business or for the
purpose of making Restricted Payments expressly permitted in accordance with
this Agreement.

4.17         Certain Transactions.  During the period beginning on the date of
this Agreement and ending on the Termination Date, and except as may be
expressly permitted or required by the Transaction Documents, the Company will
not, nor will it permit any Subsidiary of the Company to, create or otherwise
cause or permit to exist or become effective any consensual encumbrance or
restriction of any kind on the ability of the Company or any 

 26
 

 

Subsidiary of the
Company to (a) pay dividends or make any other distribution to the Company
or any Subsidiary of the Company in respect of capital stock or with respect to
any other interest or participation in, or measured by, its profits,
(b) pay any Debt owed to the Company or any Subsidiary of the Company,
(c) make any loan or advance or capital contribution to the Company or any
Subsidiary of the Company, (d) sell, lease or transfer any of its
Property, or (e) grant a Lien on any of its Properties.

4.18         Modification of Certain Agreements.  During the period beginning on the date of
this Agreement and ending on the Termination Date, the Company will not, nor
will it permit any of the Company Subsidiaries to, consent to or implement any
termination, amendment, modification, supplement or waiver of (a) the
certificate or articles of incorporation, articles of organization, bylaws,
regulations or other constituent documents of the Company or any such Company Subsidiary
or (b) any Material Contract to which it is a party; provided,
however, that any of such documents may
be amended or modified if and to the extent that such change or modification is
necessary in order to carry out the intent of any Transaction Document.

4.19         Intentionally Left Blank

4.20         Issuance Limitation.  During the period beginning on the date of
this Agreement and ending on the Termination Date, the Company shall not issue,
sell or exchange, or agree or obligate itself to issue, sell or exchange or
reserve, agree to or set aside for issuance, sale or exchange, (1) any Common
Stock or Common Stock Equivalents, (2) any other equity security of the
Company, including without limitation shares of preferred stock, (3) any other
security of the Company which by its terms is convertible into or exchangeable
or exercisable for preferred stock or other equity security; provided, however, that
the foregoing shall not apply to any Excluded Security.

4.21         Most Favored Nation.  The Company hereby represents and covenants
that none of the terms offered to any Person in a Permitted Subordinated Debt
transaction will be more favorable than the terms offered to the Purchasers
under this Agreement or any of the other Transaction Documents, and in the
event that any of the terms in a Permitted Subordinated Debt transaction are
more favorable than the terms contained in this Agreement or any of the other
Transaction Documents, the applicable terms of this Agreement and the other
Transaction Documents shall be, without any further action by the Purchasers or
the Company, deemed amended and modified in a manner that is economically and
legally equivalent to the more favorable terms contained in such Permitted
Subordinated Debt transaction. 
Notwithstanding the foregoing, the Company agrees, at its expense, to
take such other actions (such as entering into amendments to the Transaction
Documents) as the Purchasers may reasonably request to further effectuate the
foregoing.

5.             TRANSFER AGENT
INSTRUCTIONS.

On
or prior to the Closing Date, the Company shall execute and deliver irrevocable
written instructions to the transfer agent for its Common Stock (the “Transfer Agent”), and provide each
Purchaser with a copy thereof, directing the Transfer Agent (i) to issue
certificates representing Conversion Shares upon conversion of the Notes and
receipt of a valid Conversion Notice (as defined in the Notes) from a
Purchaser, in the amount specified in such Conversion Notice, in the name of
such Purchaser or its nominee, (ii) to issue certificates representing 

 27
 

 

Warrant Shares
upon exercise of the Warrants and (iii) to deliver such certificates to such
Purchaser no later than the close of business on the third (3rd) business day
following the related Conversion Date (as defined in the Notes) or Exercise
Date (as defined in the Warrant), as the case may be.  Such certificates may bear legends pursuant
to applicable provisions of this Agreement or applicable law.  The Company shall instruct the transfer agent
that, in lieu of delivering physical certificates representing shares of Common
Stock to an Purchaser upon conversion of the Notes, or exercise of the
Warrants, and as long as the Transfer Agent is a participant in the Depository
Trust Company (“DTC”) Fast Automated
Securities Transfer program, and such Purchaser has not informed the Company
that it wishes to receive physical certificates therefor, and no restrictive
legend is required to appear on any physical certificate if issued, the
transfer agent may effect delivery of Conversion Shares or Warrant Shares, as
the case may be, by crediting the account of such Purchaser or its nominee at
DTC for the number of shares for which delivery is required hereunder within
the time frame specified above for delivery of certificates.  The Company represents to and agrees with
each Purchaser that it will not give any instruction to the Transfer Agent that
will conflict with the foregoing instruction or otherwise restrict such
Purchaser’s right to convert the Notes or to receive Conversion Shares in
accordance with the terms of the Notes or to exercise the Warrant or to receive
Warrant Shares upon exercise of the Warrants. 
In the event that the Company’s relationship with the Transfer Agent
should be terminated for any reason, the Company shall use its best efforts to
cause the Transfer Agent to continue acting as transfer agent pursuant to the
terms hereof until such time that a successor transfer agent is appointed by
the Company and receives the instructions described above.

The
legend set forth in Section 2.7 shall be removed
and the Company shall issue a certificate without such legend or any other
legend to the holder of the applicable Securities upon which it is stamped, if
(i) such Securities are registered for resale under the Securities Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that such sale, assignment or transfer of such
Securities may be made without registration under the applicable requirements
of the Securities Act, or (iii) such holder provides the Company with
reasonable assurance that such Securities can be sold, assigned or transferred
pursuant to Rule 144.  Following the
Effective Date or at such earlier time as a legend is no longer required, the
Company will no later than three Business Days following the delivery by a
Purchaser to the Company or the Company’s transfer agent of a legended
certificate representing such Securities, deliver or cause to be delivered to
such Purchaser a certificate representing such Securities that is free from all
restrictive and other legends.  Following the Effective Date and upon the
delivery to any Purchaser of any certificate representing Securities that is
free from all restrictive and other legends, such Purchaser agrees that any
sale of such Securities shall be made pursuant to the Registration Statement
and in accordance with the plan of distribution described therein or pursuant
to an available exemption from the registration requirements of the Securities
Act.  The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in Section 2.6.  The Company will not effect or publicly
announce its intention to effect any exchange, recapitalization or other
transaction that effectively requires or rewards physical delivery of
certificates evidencing the Common Stock.

 28
 

 

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

The
obligation of the Company hereunder to issue and sell a Note and Warrant to
each Purchaser at the Closing is subject to the satisfaction, on 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 Purchaser with prior
written notice thereof:

6.1           Such Purchaser shall have executed
and delivered to the Company this Agreement, the Registration Rights Agreement,
each other Transaction Document to which it is a party.

6.2           Such Purchaser shall have tendered to
the Company the Purchase Price (less the amounts withheld pursuant to Section 4.7) for the Note and
Warrant being purchased by such Purchaser at the Closing by wire transfer of
immediately available funds pursuant to wire instructions provided by the
Company prior to the Closing Date.

6.3           The representations and warranties of
such Purchaser 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
Purchaser 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 Purchaser at or prior to the
Closing Date.

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

The obligation of
each Purchaser hereunder to purchase a Note and Warrant 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 such Purchaser’s
sole benefit and may be waived by such Purchaser at any time in its sole
discretion by providing the Company with prior written notice thereof:

7.1           The Company shall have executed and
delivered to such Purchaser (i) this Agreement, (ii) a Note, (iii) a Warrant,
(iv) the Registration Rights Agreement, and (v) each other Transaction
Document.

7.2           The Company shall have delivered to
such Purchaser a copy of the Irrevocable Transfer Agent Instructions, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

7.3           The Company shall have delivered to
such Purchaser a certificate evidencing the incorporation or organization and
good standing of the Company and each of its operating Subsidiaries in such
entity’s state of incorporation or organization issued by the Secretary of
State of such state as of a date within ten (10) days of the Closing Date.

7.4           The Common Stock (A) shall be listed
on the Principal Market and (B) shall not have been suspended, as of the
Closing Date, by the Commission or the Principal Market from trading on the
Principal Market nor shall suspension by the Commission or the Principal Market
have been threatened, as of the Closing Date, either (x) in writing by the 

 29
 

 

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

7.5           The Company shall have delivered to
such Purchaser a certificate, signed by the Secretary or an Assistant Secretary
of the Company, attaching (i) the Certificate of Incorporation and By-Laws of
the Company, and (ii) resolutions passed by its Board of Directors, or a duly
authorized committee thereof, to authorize the transactions contemplated hereby
and by the other Transaction Documents, and certifying that such documents are
true and complete copies of the originals and that such resolutions have not
been amended or superseded, it being understood that such Purchaser may rely on
such certificate as a representation and warranty of the Company made herein.

7.6           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 Purchaser 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 Purchaser.

7.7           The Company shall have delivered to
such Purchaser 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.

7.8           The Company shall have obtained all
governmental, regulatory or third party consents and approvals, if any,
necessary for the sale of the Notes and Warrants.

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

8.             TERMINATION.

In
the event that the Closing shall not have occurred with respect to a Purchaser
on or before five (5) days from the date hereof due to the Company’s or such
Purchaser’s failure to satisfy the conditions set forth in Sections
6 and 7 above
(and the non-breaching party’s failure to waive such unsatisfied condition(s)),
the non-breaching 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.

9.             MISCELLANEOUS.

9.1           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

 30

 

party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

9.2           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 any party may deliver an executed copy of
this Agreement to any other party by facsimile transmission, in which case this
Agreement as so delivered shall be deemed duly executed and delivered and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original.

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

9.4           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.

9.5           Entire Agreement; Amendments.
This Agreement supersedes all other prior oral or written agreements between
the Purchasers, the Company, their affiliates and Persons acting on their
behalf with respect to the matters discussed herein (including, without
limitation, the Original Agreement), and this Agreement and the instruments
referenced herein 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 Purchaser makes any
representation, warranty, covenant or undertaking with respect to such matters.
This Agreement and the other Transaction
Documents constitute the entire agreement between the parties with regard to
the subject matter hereof and thereof, superseding all prior agreements or
understandings, whether written or oral, between or among the parties.  Except as expressly provided herein, neither
this Agreement nor any term hereof may be amended or waived except pursuant to
a written instrument executed by the Company and the holders of at least
two-thirds (2/3) of the Registrable Securities into which all of the
Notes and 

 31
 

 

Warrants then outstanding
are convertible or exercisable (without regard to any limitation on such
conversion or exercise), and no provision
hereof may be waived other than by a written instrument signed by the holders
of at least two-thirds (2/3) of the Registrable Securities into which
all of the Notes and Warrants then outstanding are convertible or exercisable
(without regard to any limitation on such conversion or exercise).  Any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

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

	
  if to the Company:

  
	
   

  	
   

  	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite 403,

  
	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  
	
  with a copy (for
  informational purposes only) to:

  
	
   

  	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  
				

 

and if to a
Purchaser, to its address and facsimile number set forth on Exhibit A, with copies to such
Purchaser’s representatives as set forth on Exhibit
A, 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.

9.7           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 Notes or
Warrants. The Company shall not assign this Agreement or any rights or
obligations hereunder, including by merger or consolidation, without the prior
written consent of the Registrable
Securities into which all of the Notes and Warrants then outstanding are
convertible or exercisable (without regard to any limitation on such conversion
or exercise). A Purchaser may assign some or all of its rights hereunder
without the consent of the Company, in which 

 32
 

 

event such
assignee shall be deemed to be a Purchaser hereunder in respect of such
assigned rights.

9.8           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.

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

9.10         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.

9.11         Indemnification.

(a)
In consideration of each Purchaser’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 will
indemnify and hold each Purchaser and its directors, managers, officers,
shareholders, members, partners, employees and agents (each, an “Purchaser Party”) harmless from any
and all losses, liabilities, obligations, claims, contingencies, damages, costs
and expenses, including all judgments, amounts paid in settlements, court costs
and reasonable attorneys’ fees and costs of investigation (collectively, “Losses”) that any such Purchaser
Party may suffer or incur as a result of or relating to (A) any breach of any
of the representations, warranties, covenants or agreements made by the Company
in this Agreement or in the other Transaction Documents or (B) any cause of
action, suit or claim brought or made against such Purchaser Party by a third
party (including for these purposes a derivative action brought on behalf of
the Company) and arising out of or resulting from (i) the execution, delivery,
performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Purchaser or holder of the Securities as a Purchaser. If any
action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has been
specifically authorized by the Company in writing, (ii) the Company has failed
after a reasonable period of time following such Purchaser Party’s written
request that it do so, to assume such defense and to employ counsel or (iii) in
such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Company and
the position of such Purchaser Party. 
The Company 

 33
 

 

will not be liable
to any Purchaser Party under this Agreement (i) for any settlement by an
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to such
Purchaser Party’s wrongful actions or omissions, or gross negligence or to such
Purchaser Party’s breach of any of the representations, warranties, covenants
or agreements made by such Purchaser in this Agreement or in the other
Transaction Documents.

(b)           If the indemnification provided for
in Section 9.11(a) is judicially
determined to be unavailable to a Purchaser Party in respect of any Losses
incurred by them, then, in lieu of indemnifying such Purchaser Party hereunder,
the Person from whom indemnification is sought hereunder shall contribute to
the amount paid or payable by such Purchaser Party as a result of such Losses
(and expense relating thereto): (A) in such proportion as is appropriate to
reflect the relative benefits to the applicable Purchaser Party, on the one
hand, and the Person providing indemnification hereunder, on the other hand, of
transactions contemplated by this Agreement or (B) if the allocation provided
by clause (A) above is not available, in such proportion as is appropriate to
reflect not only the relative benefits referred to in such clause (A) but also
the relative fault of each of the applicable Persons, as well as any other
relevant equitable considerations.

9.12         No Strict Construction. The
language used in this Agreement and the other Transaction Documents 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.

9.13         Remedies. The Company and each
Purchaser and its permitted successors and assigns shall have all rights and
remedies set forth in this Agreement and the Transaction Documents and all
rights and remedies which they may have under any law or in equity. The Company
and each Purchaser and its permitted successors and assigns shall be entitled
to enforce such rights specifically, to recover damages by reason of any breach
of any provision of this Agreement or the Transaction Documents and to exercise
all other rights granted by law or in equity, if available. 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 Purchasers. The Company
therefore agrees that the Purchasers 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.

9.14         Rescission and Withdrawal Right.
Notwithstanding anything to the contrary contained in (and without limiting any
similar provisions of) the Transaction Documents, whenever any Purchaser
exercises a right, election, demand or option under a Transaction Document
(including without limitation a Note) and the Company does not timely perform
its related obligations within the periods therein provided, then such
Purchaser 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.

9.15         Payment Set Aside. To the extent
that the Company makes a payment or payments to the Purchasers hereunder or
pursuant to any of the other Transaction Documents or 

 34
 

 

the Purchasers 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, 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.

9.16         Independent Nature of Purchasers’
Obligations and Rights. The obligations of each Purchaser under any
Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the performance
of the obligations of any other Purchaser under any Transaction Document.
Nothing contained herein or in any other Transaction Document, and no action
taken by any Purchaser pursuant hereto or thereto, shall be deemed to
constitute the Purchasers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Purchasers 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 Purchasers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Purchaser confirms that it has independently participated in
the negotiation of the transaction contemplated hereby with the advice of its
own counsel and advisors. Each Purchaser 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 Purchaser to be joined as an additional
party in any proceeding for such purpose.

[Signature Page
Follows]

 35
 

 

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

 

	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dennis G. McLaughlin, III

  	
   

  
	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

	
  

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EVOLUTION MASTER FUND LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Adrian Brindle

  	
   

  
	
   

  	
   

  	
  Name: Adrian Brindle

  
	
   

  	
   

  	
  Title: Director

  

 

 36
 

 

Exhibit A

SCHEDULE
OF PURCHASERS

 

	
  (1)

  Purchaser

  	
   

  	
  (2)

  Address

  	
   

  	
  (3)

  Jurisdiction

  of

  Residence

  	
   

  	
  (4)

  Principal

  Amount of

  Note

  	
   

  	
  (5)

  Purchase Price

  	
   

  	
  (6)

  Legal Representative’s

  Address

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Evolution Master
  Fund Ltd. SPC, Segregated

  Portfolio M

  	
   

  	
  Walker House, Mary Street

  P.O. Box 908 GT

  George Town, Cayman

  Island

  	
   

  	
  Cayman
 Islands

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  Mazzeo Song LLP

  708 Third Avenue

  19th Floor

  NY, NY 10017

  Attn: Robert Mazzeo

  Tel: 212-599-0700

  Fax: 212-599-8400

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Additional Copy to:

  

  Evolution Capital

  Management, LLC

  1132 Bishop Street,

  Suite 1880

  Honolulu, Hawaii 96813

  Attn: Richard Chisholm

  Tel: 808-441-4917

  Fax: 808-441-4946

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  
														

 

 37

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