Document:

Exhibit 10.2

 

FORM OF BONUS PAYMENT AGREEMENT

 

                This
BONUS PAYMENT AGREEMENT (this “Agreement”) is made
and entered into as of             ,
2006, by and between Venoco, Inc., a Delaware corporation (the “Company”), and                         
(“Participant”).

 

Recitals

 

A.            The
Company has declared and paid dividends on its common stock, and may declare
and pay additional dividends on such stock, in the form of cash or property.

B.             Participant has entered into that
certain Nonqualified Stock Option Agreement, dated             
and amended as of the date hereof, pursuant to the Company’s 2000 Stock
Incentive Plan (the “Stock
Option Agreement”), under which Participant holds an unexercised
option (the “Option”)
to purchase             
shares (the “Option Shares”)
of the Company’s common stock.

C.             On March 22, 2006, the Company paid
a dividend consisting of 100% of the membership interests in its subsidiary
6267 Carpinteria Avenue, LLC to its sole stockholder (the “LLC Dividend”).

D.            The Company expects to pay a
dividend consisting of either (i) a distribution of approximately 50 acres of
land located in Carpinteria, California, or (ii) an option to purchase such
land (the “Bluffs
Property Dividend”).  The
terms of the planned distribution are generally described in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2005.

E.             The Company would like to amend the
“change in control” provisions in the Stock Option Agreement as set forth in an
amendment to that agreement  (the “Amendment”)

F.             As consideration
for entering into the Amendment and the economic effect that payment of the LLC
Dividend may have had on the Option Shares, and the economic effect that the
payment of subsequent dividends (including the Bluffs Property Dividend) may
have on those shares, the Company wishes to grant Participant bonus payments
related to dividends granted by the Company as more particularly set forth
herein.

Agreement

In
consideration of the terms and conditions of this Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

 

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1.             Bonus Payment.  If and when the Company declares and pays any
dividend on its common stock, Participant shall be entitled to receive a cash
payment (the “Bonus
Payment”) from the Company calculated as follows:

(a)           In the case of a
cash dividend, the Bonus Payment shall be equal to the product of (i) the per
share amount of the dividend payable to holders of the Company’s common stock
and (ii) the number of Option Shares subject to the Option as of the record
date relating to the dividend (whether vested or unvested).

(b)           In the case of a
non-cash dividend, the Bonus Payment shall be equal to the product of (i) (A)
the fair market value of the dividend as determined by the board of directors
of the Company or a committee thereof divided by (B) the total number of shares
of common stock outstanding as of the record date relating to the dividend and
(ii) the number of Option Shares subject to the Option as of the record date
relating to the dividend (whether vested or unvested).

2.             Payment Date.  The Company shall pay the Bonus Payment to
Participant on the 45th calendar day after the date on which
the Company declares a dividend on its common stock and all contingencies to
payment of the dividend have been satisfied.

3.             LLC Dividend.  The Company shall pay a Bonus Payment
relating to the LLC Dividend on June 6, 2006. 
The amount of the Bonus Payment will be calculated pursuant to the
formula set forth in Section 1(b) of this Agreement.

4.             Agreed Valuation.  The Company and Participant agree that for
purposes of Section 1(b) of this Agreement, the fair market value of the LLC
Dividend was $4,929,511.86 or $0.15 per share and the fair market value of the
proposed Bluffs Property Dividend will be an amount as determined by the
Company’s Corporate Governance Committee.

5.             Withholding.  The Company shall deduct and withhold from
all payments under this Agreement an amount sufficient to satisfy any federal,
state, and local tax withholding requirements.

6.             Source of Funds.  Amounts payable under this Agreement shall be
from the general funds of the Company. 
Participant’s rights to unpaid amounts under this Agreement shall be
solely those of an unsecured creditor of the Company.

7.             Section 409A.  This
Agreement is intended to comply with Section 409A of the Internal Revenue Code
of 1986, as amended, and shall be interpreted in a manner consistent with that
intention.

8.             No Guarantee.  Nothing in this Agreement shall obligate the
Company to declare or pay dividends of any kind on shares of its common stock,
nor does anything herein entitle Participant to any benefit until the Company
pays a dividend on its common 

 

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stock.  Nothing in this Agreement shall entitle
Participant to a Bonus Payment for dividends paid prior to March 22, 2006.

9.             Entire Agreement.  This Agreement is the entire agreement
between the parties with respect to the subject matter hereof and supersedes
all prior and contemporaneous oral and written agreements and discussions
regarding the subject matter hereof.

10.           Term.      This Agreement shall terminate on the first to occur of the date
all Options have been exercised and the date all unexercised Options expire
pursuant to the terms of the Stock Option Agreement.

Executed
as of the day and year first above written.

 

	
   

  	
  VENOCO, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Timothy
  M. Marquez

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  PARTICIPANT

  
	
   

  	
   

  	
   

  
	
   

  	
   

  

 

 

3Exhibit 4.1

 

Execution Copy

 

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated
as of June 7, 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.                                 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).

 

B.                                     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”.

 

C.                                   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”).

 

D.                                    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 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.

 

                                                “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

 

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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 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,

 

3

 

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

 

4

 

                                                                                                “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

 

6

 

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 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

 

7

 

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, 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.

 

8

 

                                                                                                                                                “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.

 

                                                                                                                                                “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.

 

9

 

                                                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. 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

 

10

 

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):

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

 

11

 

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, 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

 

12

 

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.

 

                                                                                                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

 

13

 

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 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

 

14

 

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.

 

                                                                                                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

 

15

 

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 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

 

16

 

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 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.

 

17

 

                                                                                                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) 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

 

18

 

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) is a
party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or
instrument would result in a Material Adverse Effect, (ii) 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 (iii) 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 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 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

 

19

 

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 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

 

20

 

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
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

 

21

 

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

 

22

 

                                                                                                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.

 

 

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 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

 

23

 

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 (including the expenses of Schulte Roth & Zabel LLP up
to a maximum of $50,000) in connection with the preparation, execution and
performance of this Agreement and the transactions contemplated hereby, 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. The Company shall
be responsible for the

 

24

 

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

 

25

 

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, 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

 

26

 

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

 

                                                                                                4.13                           Opinion
of Counsel. The Company shall cause its outside counsel to deliver to each Purchaser
a written opinion, dated as of and delivered on the Closing Date, in
substantially the form of Exhibit E attached
hereto.

 

                                                                                                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

 

27

 

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
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.

 

 

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

 

28

 

Notice, in the name of such
Purchaser or its nominee, (ii) to issue certificates representing 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 1933 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 1933 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 1933 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

 

29

 

transaction that effectively
requires or rewards physical delivery of certificates evidencing the Common
Stock.

 

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

 

30

 

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 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, Warrants,
Conversion Shares and Warrant Shares.

 

                                                                                                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

 

31

 

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; provided, however, this
if this Agreement is terminated pursuant to this Section 8, the Company shall
remain obligated to reimburse the non-breaching Purchasers for the expenses
described in Section 4.7 above.

 

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 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.

 

32

 

                                                                                                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,
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 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.  No such amendment shall be effective
to the extent that it applies to less than all of the holders of the
Registrable Securities then outstanding.  No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents unless the same
consideration also is offered to all of the parties to the Transaction
Documents, holders of Registrable Securities.  The Company has not,
directly or indirectly, made any agreements with any Purchasers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents.

 

                                                                                                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:

  

 

33

 

	
  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,

 

                                                with
a copy (for informational purposes only) to:

 

	
  Schulte Roth & Zabel LLP

  
	
  919 Third Avenue

  
	
  New York, New York 10022

  
	
  Telephone:

  	
  (212) 756-2000

  
	
  Facsimile:

  	
  (212) 593-5955

  
	
  Attention:

  	
  Eleazer N. Klein, Esq.

  

 

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

 

                                                                                                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 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.

 

34

 

                                                                                                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 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.

 

35

 

                                                                                                (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 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

 

36

 

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]

 

37

 

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:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: Dennis
  G. McLaughlin, III

  
	
   

  	
   

  	
   

  	
   

  	
  Title: Chief
  Executive Officer

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Castlerigg
  Master Investments Ltd.

  By: Sandell Asset Management Corp.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Capital
  Ventures International

  By: Heights Capital Management, Inc.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

38

 

	
   

  	
   

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Radcliffe SPC, Ltd. for and on behalf of the Class A

  Convertible Crossover Segregated Portfolio

  By: RG Capital Management, L.P.

  By: RGC
  Management Company, LLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: Gerald
  F. Stahlecker

  
	
   

  	
   

  	
   

  	
   

  	
  Title: Managing
  Director

  

 

39

 

Schedule
3.1

	
  Subsidiary

  	
   

  	
  State of
  Incorporation / Organization

  
	
  Earth
  Biofuels Operating, Inc.,

  	
   

  	
  Mississippi
  corporation

  
	
  Durant
  Biofuels, LLC

  	
   

  	
  Oklahoma
  limited liability company

  
	
  The Wing
  Sail Company

  	
   

  	
  Texas
  corporation

  
	
  Earth
  Biofuels Technology Company, LLC

  	
   

  	
  Texas
  limited liability company

  
	
  B20 Customs,
  LLC

  	
   

  	
  Texas
  limited liability company

  

 

Schedule
3.10

	
  Entity

  	
   

  	
  Anti-Dilution
  Rights

  	
   

  	
  Offer
  Rights

  
	
  K Street

  	
   

  	
   

  	
   

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

  
	
  Marc Weill

  Tom Groos

  Joshua Cohen

  	
   

  	
  Conversion price shall be
  thirty cents ($0.30) a share if the following occurs after sixty days from
  the date of this term sheet for a period of one year: (1)
  the share price of the Issuer falls below fifty cents ($0.50); and (2) Issuer has more than two hundred million (200,000,000)
  shares issued and outstanding

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Evolution Capital

  	
   

  	
  If, at any time on or after
  the Issue Date, the number of outstanding shares of Common Stock is increased
  by a stock split, stock dividend, combination, reclassification or other
  similar event, the Exercise Price shall be proportionately reduced, or if the
  number of outstanding shares of Common Stock is decreased by a reverse stock
  split, combination, reclassification or other similar event, the Exercise
  Price shall be proportionately increased.

  	
   

  	
   

  

 

Schedule
3.11

None.

 

Schedule
3.12

Durant Biofuels, LLC expended:
$243,449.24 for the building; $240,003.50 for land; and $4,567,547.27 (half of
which through a stock issuance) for equipment. Approximately $275,000.00 was
expended to acquire land adjacent to the property.

 

40

 

Schedule 3.17

	
  Affiliate of the Company

  	
   

  	
  Outstanding Debt

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  $

  	
  1,245,507.00

  	
   

  
	
  Blackwell
  Star Cars (Bruce Blackwell)

  	
   

  	
  $

  	
  140,000.00

  	
   

  
	
  DGMAC, LLC
  (Dennis McLaughlin)

  	
   

  	
  $

  	
  81,478,.91

  	
   

  

 

Schedule
3.18

(i) None.

(ii) Outstanding options,
reserved shares, etc.:

	
  Entity

  	
   

  	
  Options

  	
   

  	
  Reserved
  Shares

  
	
  Peter Bell

  	
   

  	
  Warrant

  	
   

  	
  3,000,000 shares

  
	
  Greenwich Power, LLC

  	
   

  	
  Convertible Note

  Warrant

  	
   

  	
  920,810 shares

  920,810 shares

  
	
  K Street

  	
   

  	
  Securities Purchase
  Agreement

  	
   

  	
  6,400,000 shares

  
	
  Marc Weill

  	
   

  	
  Confidential Term Sheet
  for Convertible Promissory Note

  	
   

  	
  2,000,000 shares aggregate

  

  (per anti-dilution clause, not to exceed 5,000,000 shares)

  
	
  Tom Groos

  	
   

  	
  Confidential Term Sheet
  for Convertible Promissory Note

  	
   

  
	
  Joshua Cohen

  	
   

  	
  Confidential Term Sheet
  for Convertible Promissory Note

  	
   

  
	
  Evolution Capital

  	
   

  	
  Warrant

  Convertible Note

  	
   

  	
  2,250,000 shares

  2,862,622 shares

  

 

(iii) Outstanding debt

	
  Current Liabilities

  	
   

  	
  Consolidated

  	
   

  
	
  Account
  Payable (aggregate)

  	
   

  	
  $

  	
  981,958.50

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  $

  	
  1,245,507.00

  	
   

  
	
  Blackwell
  Star Cars

  	
   

  	
  $

  	
  140,000.00

  	
   

  
	
  DGMAC, LLC
  (Dennis McLaughlin)

  	
   

  	
  $

  	
  81,478,.91

  	
   

  
	
  MAC
  Partners, LP

  	
   

  	
  $

  	
  83,995.45

  	
   

  
	
  Tom Groos

  	
   

  	
  $

  	
  250,000.00

  	
   

  
	
  Marc Weill

  	
   

  	
  $

  	
  250,000.00

  	
   

  
	
  Joshua Cohen

  	
   

  	
  $

  	
  500,000.00

  	
   

  
	
  Quarles

  	
   

  	
  $

  	
  19,000.00

  	
   

  
	
  Southern Bio
  Fuels, LLC

  	
   

  	
  $

  	
  1,100,053.93

  	
   

  
	
  Greenwich
  Power, LLC

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  

 

(iv)

	
  Entities with Registration Rights

  	
   

  	
  Filing
  Deadline

  
	
  Greenwich Power, LLC

  	
   

  	
  No earlier than August 31,
  2006

  
	
  K Street

  	
   

  	
  August 31, 2006

  
	
  Marc Weill

  	
   

  	
  no later than forty-five
  (45) days upon demand

  
	
  Tom Groos

  	
   

  	
  no later than forty-five
  (45) days upon demand

  
	
  Joshua Cohen

  	
   

  	
  no later than forty-five
  (45) days upon demand

  
	
  Evolution Capital

  	
   

  	
  Sixty days following
  exercise of warrant/conversion of note

  

(v) None.

(vi) None.

(vii) None.

(viii) None.

 

41

 

	
  Table of Beneficial Ownership

  	
   

  
	
  Name of Beneficial Owner

  	
   

  	
  Number of Shares

  Beneficially Owned(1)

  	
   

  	
  Percent of

  Outstanding Shares(1)

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  129,381,182

  	
   

  	
  62

  	
  %

  
	
  Dennis G. Mc
  Laughlin, III

  	
   

  	
  2,389,927

  	
   

  	
  1.15

  	
  %

  
	
  Tommy
  Johnson

  	
   

  	
  1,507,659

  	
   

  	
  .7

  	
  %

  
	
  Morgan
  Freeman

  	
   

  	
  3,000,000

  	
   

  	
  1.4

  	
  %

  
	
  William O.
  Luckett, Jr.

  	
   

  	
  1,500,989

  	
   

  	
  .7

  	
  %

  
	
  Willie
  Nelson

  	
   

  	
  6,000,000

  	
   

  	
  2.8

  	
  %

  
	
  Bruce
  Blackwell

  	
   

  	
  1,500,000

  	
   

  	
  .7

  	
  %

  
	
  Darren Miles

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
	
  Kit Chambers

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
	
  Officers and
  directors as a group (8 persons)

  	
   

  	
  15,898,575

  	
   

  	
  7.6

  	
  %

  
							

(1)                                  All
percentages are calculated based upon a total of 207,376,623 shares outstanding as of May 24, 2006.

 

 

Schedule
3.19

(i) None.

(ii) Contract, agreement or
instrument, the violation of which, or default under which, by the other
parties to such, would result in a Material Adverse Effect

	
  Party

  	
   

  	
  Contract,
  Agreement or Instrument

  
	
  Dickerson Petroleum, Inc.

  	
   

  	
  Management Agreement
  (Grenada Property)

  
	
  System Management
  Solutions, Inc.

  	
   

  	
  Major Fuel Supplier

  
	
  Elbow River Marketing, LP

  	
   

  	
  Major Fuel Supplier

  

(iii) None.

(iv) None.

 

Schedule
3.20

None.

 

Schedule
3.23

None.

 

Schedule
4.4

The Company will use the
proceeds from the sale of the Common Shares toward the acquisition of an
ethanol production plant and two biodiesel production facilities; provided
however that if the Acquisition has not occurred prior to August 31, 2006, the
Company may use the proceeds from the sale of the Common Shares for general and
administrative expenses in the ordinary course, consistent with past practice,
but not for the redemption or repurchase of any of its equity securities or the
repayment of any outstanding or future Indebtedness of the Company or any of
its Subsidiaries.

 

42

 

 

Exhibit A

 

 

SCHEDULE OF PURCHASERS

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  
	
  Purchaser

  	
   

  	
  Address

  	
   

  	
  Jurisdiction

  of

  Residence

  	
   

  	
  Principal

  Amount of

  Note

  	
   

  	
  Purchase Price

  	
   

  	
  Legal Representative’s

  Address

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sandell Asset Management Corp./ Castlerigg Master Investments

  	
   

  	
  40 West 57th
  Street,

  26th Floor

  New York, NY 10019

  	
   

  	
   

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  Schulte Roth
  & Zabel LLP

  919 Third Avenue

  New York, NY 10022

  tel: (212) 756-2246

  fax: (212) 593-5955

  	
  )

  
	
  Heights Capital Management, Inc./ Capital Ventures International

  	
   

  	
  c/o Heights
  Capital

  Management

  101 California Street,

  Suite 3250

  San Francisco, CA 94111

  	
   

  	
   

  	
   

  	
  $

  	
  2,500,000

  	
   

  	
  $

  	
  2,500,000

  	
   

  	
   

  	
   

  
	
  RG Capital Management, L.P./ Radcliffe SPC, Ltd. for and on behalf of
  the Class A Convertible Crossover Segregated Portfolio

  	
   

  	
  c/o RG
  Capital

  Management, LP

  3 Bala Plaza-East,

  Suite 501

  Bala Cynwyd, PA 19004

  	
   

  	
   

  	
   

  	
  $

  	
  2,500,000

  	
   

  	
  $

  	
  2,500,000

  	
   

  	
   

  	
   

  

 

43

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