Document:

Exhibit 4.26

 

SECURED PROMISSORY NOTE

 

THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS SECURED PROMISSORY NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS.  THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO BORROWER, 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.

 

OPEN ENERGY CORPORATION

 

	
  Date: April 30, 2008

  	
   

  	
  U.S. $3,500,000

  

 

FOR VALUE RECEIVED, Open Energy Corporation, a
Nevada corporation (“Borrower”),
hereby promises to pay to The Quercus Trust, or its registered assigns (“Lender”), the sum of Three Million Five Hundred Thousand
Dollars ($3,500,000.00) or such lesser amount as shall equal the outstanding
amount of advances made by Lender to Borrower (the “Loan”) pursuant to Section 1.2
of the Loan and Security Agreement (the “Advances”).

 

(1)   PAYMENTS OF PRINCIPAL.  On the Maturity Date, Borrower shall pay to
Lender, in cash, all outstanding principal under this Secured Promissory Note
(this “Note”). 
The “Maturity  Date”
shall be October 30, 2008.  Borrower
may prepay all or any portion of the outstanding principal at any time without
fee, charge or premium.

 

(2)   MANDATORY PREPAYMENTS OF PRINCIPAL.

 

(a)   Prepayments
Upon Failure of Meet Borrowing Conditions.  For so long as any amount remains outstanding
under this Note, Borrower shall provide Lender with a written report (each a “Borrowing Base Report”) within five (5) Business Days
immediately following the end of each week, which Borrowing Base Report shall
specify the carried value of the Qualified Accounts Receivable, Inventory and
cash accounts on Borrower’s financial records as of the last day of the
applicable week (each a “Reporting Date”),
and shall certify that the Borrowing Conditions continue to be satisfied as of
such Reporting Date.  In the event that
any Borrowing Base Report indicates that the Borrowing Conditions are not
satisfied as of the applicable Reporting Date, then, within five (5) Business
Days immediately following such Reporting Date (each a “Mandatory
Prepayment Date”), Borrower shall prepay an amount of principal
under the Loan as shall be required to satisfy the Borrowing Conditions in full
as of such Mandatory Prepayment Date.

 

1

 

(b)   Prepayments
Upon Receipt of Rebates.  Upon
the receipt by Borrower of funds in respect of Rebates (as defined in herein),
Borrower shall prepay an amount of principal under the Loan equal to such funds
received in respect of such Rebates. 
Prepayments pursuant to this Section 1.5(ii) shall be made
within five (5) Business Days of the receipt of the applicable Rebate
funds.

 

(3)   INTEREST.  This Note shall bear interest at the rate of
18% per annum payable as follows:  Lender
shall receive warrants (“Interest Warrants”) in the form attached to the Loan
and Security Agreement as Exhibit A to purchase that number of shares of
common stock of the Borrower (“Common Stock”) that will equate to an 18% annual
percentage rate return on the Loan, assuming it is repaid upon maturity (which
equates to 1,389,096 shares of Common Stock as of the date hereof assuming the
Loan is fully funded at $3.5 million), at an exercise price per share of
$0.506, exercisable for seven (7) years commencing six months from the
closing of the Loan. In the event that the Loan is funded at less than $3.5
million, a ratably lower number of Interest Warrants shall be issued.  In the event Subsequent Advances are made,
Borrower shall issue to Lender a ratable number of additional Interest
Warrants.

 

(4)   SECURITY.  Borrower’s performance of the obligations and
covenants of this Note, including but not limited to repayment, shall be
secured by the lien and security interest in the Collateral, as set forth in
the Loan and Security Agreement.

 

(5)   EVENT
OF DEFAULT.

 

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

 

(i) 
Borrower’s failure to pay to the Lender any amount when and as due
under this Note; or

 

(ii) 
any Event of Default under the Loan and Security Agreement.

 

(b)   Acceleration.  Upon the occurrence of an Event of Default
under this Note, Lender shall have, at its option, the right, without further
notice or demand, which Borrower hereby expressly waives, to declare the unpaid
principal immediately due and payable and to exercise any other rights and
remedies that Lender may have; provided, however, that Lender has delivered to
Borrower written notice of such default and Borrower has not cured said default
within five (5) business days after said notice.  Lender’s failure to accelerate the payment of
this Note upon the occurrence of one or more events of default shall not
constitute a waiver of Lender’s right to exercise such options at any
subsequent time with respect to the same or any other event of default.  Lender’s acceptance of any payment under this
Note which is less than payment in full of all amounts then due and payable
shall not constitute a waiver by Lender of any right to declare a default
hereunder or to pursue any remedy available under this Note, at law or in
equity, or under any other agreement, instrument or document entered into by
and between Borrower and Lender.

 

(6)   LOST, STOLEN OR MUTILATED NOTE.  Upon
receipt by Borrower of evidence reasonably satisfactory to Borrower of the
loss, theft, destruction or mutilation of this Note, and, in the case of loss,
theft or destruction, of any indemnification undertaking by the Lender to
Borrower in customary form and, in the case of mutilation, upon surrender and
cancellation of this Note, Borrower shall execute and deliver to the Lender a
new Note representing the outstanding principal.

 

2

 

(7)   CUMULATIVE
RIGHTS AND INJUNCTIVE RELIEF.  The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note, or any other agreement between Lender and Borrower,
at law or in equity (including a decree of specific performance and/or other
injunctive relief) and nothing herein shall limit the Lender’s right to pursue
actual and consequential damages for any failure by Borrower to comply with the
terms of this Note.  Borrower
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Lender and that the remedy at law for any such breach
may be inadequate.  Borrower therefore
agrees that, in the event of any such breach or threatened breach, the Lender
shall be entitled, upon posting a bond and demonstrating economic loss, in
addition to all other available remedies, to an injunction restraining any
breach.

 

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

 

(9)   CONSTRUCTION; HEADINGS.  This Note shall be
deemed to be jointly drafted by Borrower and the Lender and shall not be
construed against any person as the drafter hereof.  The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.

 

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

 

(11)         NOTICES; PAYMENTS.

 

(a)   Notices.  Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (Pacific time) on a Business Day, (b) the next Business Day after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto on a day
that is not a Business Day or later than 5:30 p.m. (Pacific time) on any
Business Day, (c) the 2nd Business Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service, or (d) upon actual 

 

3

 

receipt by the party to whom
such notice is required to be given.  The
address for such notices and communications shall be as set forth below:

 

	
   

  	
  If to Lender:

  
	
   

  	
   

  
	
   

  	
  The Quercus Trust

  
	
   

  	
  1835 Newport Blvd.

  
	
   

  	
  A109 - PMB 467

  
	
   

  	
  Costa Mesa, CA 92627

  
	
   

  	
  Facsimile No: (949)
  631-2325

  
	
   

  	
  Attention: David Gelbaum

  
	
   

  	
   

  
	
   

  	
  If to Borrower:

  
	
   

  	
   

  
	
   

  	
  Open Energy
  Corporation

  
	
   

  	
  514 Via de la
  Valle, Suite 200

  
	
   

  	
  Solana Beach,
  California 92075

  
	
   

  	
  Facsimile No.:
  (858) 794-8811

  
	
   

  	
  Attention:
  General Counsel

  

 

(b)   Payments.
 Whenever any payment of cash is to be
made by Borrower to any Person pursuant to this Note, such payment shall be
made in lawful money of the United States of America by a check drawn on the
account of Borrower and sent via overnight courier service to such Person at
the address provided for notice pursuant to Section 11(a) above, or
as subsequently provided to the other party in writing; provided that the
Lender may elect to receive a payment of cash via wire transfer of immediately
available funds by providing Borrower with prior written notice setting out
such request and the Lender’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day.

 

(12)         CANCELLATION.  After all principal,  interest (in the form of the Interest Warrants) and other
amounts at any time owed on this Note have been indefeasibly paid in full, this
Note shall automatically be deemed canceled, shall be surrendered to Borrower
for cancellation and shall not be reissued, and the security interest granted
in the Collateral shall terminate.  The
Lender agrees to promptly execute, file and/or deliver any and all documents
reasonably required or requested to further evidence such termination,
including a UCC termination statement.

 

(13)         WAIVERS BY BORROWER.  Borrower
(a) waives diligence, grace, demand, presentment for payment, exhibition
of this Note, protest, notice of protest, notice of dishonor, notice of demand,
notice of nonpayment, and any or all other notices whatsoever, and any and all
exemption rights against the indebtedness evidenced by this Note; (b) agrees
to any and all extensions or renewals from time to time without notice and to
any partial payments of this Note; (c) consents to offsets of any sums
owed to Borrower by Lender at any time and to any release of all or any part of
the security for this Note, or to any release of any party liable for 

 

4

 

payment of this Note; and (d) agrees
that any such waiver, extension, renewal, release, consent, or partial payment
may be made without notice to Borrower or any other party and shall not release
or discharge any one or all of them from the obligation of payment of this Note
or any installment of this Note or any other liability under this Note.  Any security given for the obligations of
Borrower may be waived, exchanged, surrendered or otherwise dealt with by
Lender without affecting the liability of Borrower or any other party who might
subsequently become liable hereon.

 

(14)         GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL.  This
Note shall be construed and enforced in accordance with, and all questions
concerning the construction, validity, interpretation and performance of this
Note shall be governed by, the internal laws of the State of California,
without giving effect to any choice of law or conflict of law provision or rule (whether
of the State of California or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of California.  Borrower hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in Los Angeles
County, California, 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.  Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law.  In the event that any
provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. 
Any such provision which may prove invalid or unenforceable under any
law shall not affect the validity or enforceability of any other provision of
this Note.  Nothing contained herein
shall be deemed or operate to preclude the Lender from bringing suit or taking
other legal action against Borrower in any other jurisdiction to collect on Borrower’s
obligations to the Lender, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor
of the Lender.  BORROWER
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 NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY

 

(15)         RECORDS OF PAYMENT.  The records of Lender shall be prima facie evidence
of the amount owing on this Note.

 

(16)         USURY SAVINGS.  Borrower and Lender intend to contract in
compliance with all state and federal usury laws governing the loan evidenced
by this Note.  Lender and Borrower agree
that none of the terms of this Note shall be construed to require payment of
interest at a rate in excess of the maximum interest rate allowed by any
applicable state or federal usury laws. 
If Lender receives sums which constitute interest that would otherwise
increase the effective interest rate on this Note to a rate in excess of that permitted
by any applicable law, then all such sums constituting interest in excess of
the maximum lawful rate shall at Lender’s option either be credited to the
payment of principal or returned to Borrower. 
The provisions of this Section 16 control the other provisions of
this Note and any other agreement between Borrower and Lender

 

5

 

(17)         SEVERABILITY.  All provisions hereof are severable.  If any provision hereof is declared invalid
for any reason, that invalidity shall not affect any other provision of this
Note, all of which shall remain in full force and effect

 

(18)         NO IMPAIRMENT.  No provision of this Note or of the other
Loan Documents shall alter or impair the obligation of Borrower, which is
absolute and unconditional, to pay the principal amounts and the interest
payable thereon at the place, time and in the currency prescribed in this
Note.  Borrower agrees that to the extent
Borrower makes any payment to Lender in connection with the indebtedness
evidenced by the Note, and all or any part of such payment is subsequently
invalidated, declared-to be fraudulent or preferential, set aside or required
to be repaid by Lender or paid over to a trustee, receiver or any other entity,
whether under any bankruptcy act or otherwise (any such payment is hereinafter
referred to as a “Preferential Payment”),
then the indebtedness of Borrower under the Note shall continue or shall be
reinstated, as the case may be, and, to the extent of such payment or repayment
by Borrower, the indebtedness evidenced by the Note or part thereof intended to
be satisfied by such Preferential Payment shall be revived and continued in
full force and effect as if said Preferential Payment had not been made.

 

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

 

(a)   “Borrowing Base” means an amount equal to the lower of (1) 100%
of the Company’s aggregate Qualified Accounts Receivable and (2) 50% of
the sum of (A) the Company’s aggregate Qualified Accounts Receivable, (B) the
Company’s Inventory, and (C) the Company cash account balances

 

(b)   “Borrowing Conditions” means that the amount of the Initial
Advance plus the amount of any proposed Subsequent Advance does not exceed the
Borrowing Base.

 

(c)   “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in the city of Los Angeles are authorized
or required by law to remain closed

 

(d)   “Inventory” means all inventory of the Company carried on the
Company’s financial statements, to the extent the same qualify as “goods” under
the UCC.

 

(e)   “Lender” shall have the meaning set forth in the first
paragraph hereof.

 

(f)    The “Loan Documents” are this Note, the Loan and Security
Agreement, the Deposit Account Control Agreement, all financing statements
filed or to be filed against Borrower in favor of Lender and any and all other
instruments, certificates, agreements, and other documents executed by Borrower
at the direction or request of Lender in connection with the loan evidenced by
this Note, and any amendments thereto.

 

6

 

(g)           The “Loan and Security Agreement” is that certain Loan and
Security Agreement entered into by and between Borrower and Lender, executed on
or about even date herewith, whereby Borrower grants to Lender a lien and
security interest on that certain personal property described in detail in the
Loan and Security Agreement (collectively, the “Collateral”) and shall secure performance of this Note and all
Obligations of Borrower to Lender, as such term is defined in the Loan and
Security Agreement.

 

(h)           “Note” means this secured promissory note and shall include
all notes issued in exchange thereof or replacement thereof.

 

(i)            “Person” means an individual or legal entity, including but
not limited to a corporation, a limited liability company, a partnership, a
joint venture, a trust, an unincorporated organization and a government or any
department or agency thereof.

 

(j)            “Qualified Accounts Receivable” shall mean all accounts receivable
of Borrower reflected in its financial records from time to time, to the extent
such accounts receivable meet one or more of the following qualifications:

 

(i)         accounts
receivable from Borrower’s customers that have not been outstanding for more
than sixty (60) days from the applicable invoice date;

 

(ii)        rebates from the
California Solar Initiative that have been assigned to Borrower in connection
with sales of its products and reserved with the State of California; and

 

(iii)       rebates that have not
been reserved with the State of California, if the applicable customer of
Borrower has guaranteed the payment of such Rebate or receipt by Borrower of
all necessary documentation and information to submit a claim for such Rebate
on or prior to a date within 180 days of the later of April 10, 2008 or
the applicable invoice date.  Section 13(b) and
(c) shall together be referred to herein as “Rebates”.

 

(20)         DISCLOSURE. Upon receipt or delivery by Borrower of any notice in
accordance with the terms of this Note, unless Borrower has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to Borrower or its Subsidiaries, Borrower shall
comply with the disclosure requirements under the U.S. federal securities laws.

 

[Signature Page Follows]

 

7

 

IN WITNESS
WHEREOF, Borrower has caused this Note to be duly executed as of the set forth
above.

 

 

	
   

  	
    OPEN ENERGY CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

8Exhibit 4.28

 

SECURITIES
PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated as of September 12,
2008, by and among Open Energy Corporation, a Nevada corporation (the “Company”) and The Quercus Trust (the “Buyer”).

 

WITNESSETH

 

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

 

B.            WHEREAS, the Buyer wishes to purchase, and the Company wishes to sell,
upon the terms and conditions stated in this Agreement, warrants, in
substantially the form attached hereto as Exhibit A (the “September 2008 Warrants”) to acquire
up to two hundred thirty-five million (235,000,000) shares of Common Stock (as
exercised, the “September 2008 Warrant Shares”);

 

C.            WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company and the Buyer desire to amend, as described in Section 4
herein (i) that certain Series B Convertible Notes issued in favor of
the Buyer on September 19, 2007 and in favor of certain other investors
(the “Other Series B Holders”) on December 7,
2007 (collectively the “Series B Notes”),
(ii) those certain Series B Warrants currently held by the Buyer and
the Other Series B Holders (collectively, the “Series B
Warrants”), and (iii) the Secured Promissory Note and Loan and
Security Agreement dated April 30, 2008 by and between the Company and
Buyer (the “Secured Loan”) (collectively, the “Amendments” and together with the purchase of the September 2008
Warrants, the “Transaction”), which amendments
are approved by Buyer hereby in its capacity as the holder of over
ninety-five percent (95%) of the outstanding principal amount of Series B
Notes;

 

D.            WHEREAS, following the consummation of the Transaction, the Company also desires
to amend its Articles of Incorporation to effect the amendment of the Series B
Notes and to increase the number of authorized shares of Common Stock to enable
the exercise of all of the September 2008 Warrants and of all other issued
and outstanding convertible securities, all in accordance with their respective
terms; and

 

E.             WHEREAS, the September 2008 Warrants and the September 2008
Warrant Shares are sometimes collectively referred to herein as the “Securities.”

 

 

NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement, the Company and Buyer
hereby agree as follows:

 

1.             PURCHASE AND SALE OF WARRANTS.

 

(a)   Purchase of Warrants.

 

(i)            Warrants.  Subject
to the satisfaction (or waiver) of the conditions set forth in Sections 7 and 8
below, the Company shall issue and sell to Buyer, and Buyer agrees to purchase
from the Company on the Closing Date (as defined below) the September 2008
Warrants (the “Closing”).

 

(ii)           Closing.  The date and time of the Closing shall be no
later than September 19, 2008 (or such later date as is mutually agreed to
by the Company and Buyer) (the “Closing Date”)
after notification of satisfaction (or waiver) of the conditions to the Closing
set forth in Sections 7 and 8 below, to occur by exchange of electronic or
facsimile signature pages.

 

(iii)          Purchase
Price.  The aggregate purchase price
for the September 2008 Warrants is Four Million Seven Hundred Thousand
Dollars ($4,700,000) (the “Purchase Price”),
consisting of cash in the amount of Four Million Two Hundred Thousand Dollars
($4,200,000), forgiveness of interest upon the Series B Note held by Buyer
through June 30, 2008, in the amount of Three Hundred Thousand Dollars
($300,000) and a loan modification fee of Two Hundred Thousand Dollars
($200,000) with respect to the Secured Loan.

 

(b)   Form of
Payment.  On the Closing Date, (i) Buyer
shall deliver the Purchase Price to the Company in the form of cash of Four
Million Two Hundred Thousand Dollars ($4,200,000) by wire transfer of immediately
available funds, an acknowledgement of the forgiveness of interest and an
acknowledgement of the modification of the Secured Loan, and (ii) the
Company shall deliver to the Buyer the September 2008 Warrants, duly
executed on behalf of the Company and registered in the name of Buyer or its
designee.

 

2.             BUYER’S REPRESENTATIONS AND WARRANTIES.  Buyer represents and warrants that:

 

(a)   Investment Purpose.  Buyer is acquiring the September 2008
Warrants, and upon conversion of such Warrants will acquire the September 2008
Warrant Shares issuable upon exercise of the September 2008 Warrants, as
principal for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, Buyer reserves the right to dispose of
the Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act and pursuant to the
applicable terms of the Transaction Documents (as defined in Section 3(b)).  Buyer is acquiring the Securities hereunder
in the ordinary course of its business. 
Buyer does not presently have any agreement or understanding, directly
or indirectly, with any Person (as defined in Section 3(r)) to distribute
any of the Securities.

 

2

 

(b)   Accredited Investor
Status.  At the time Buyer was
offered the Securities, it was, at the date hereof, and on each date on which
it exercises any Warrants, it will be either: (i) an “accredited investor”
as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under
the Securities Act or (ii) a “qualified institutional buyer” as defined in
Rule 144A(a) under the Securities Act.  Buyer is not required to be registered as a
broker-dealer under Section 15 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).

 

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

 

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

 

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

 

(f)    Transfer or Resale.  Buyer 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) Buyer shall have delivered to the Company an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C) Buyer
provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”),
notwithstanding the foregoing, the requirement to deliver a legal opinion as
set out in clause (B) above shall not apply to transfers to an affiliate
of the Buyer; (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 

 

3

 

Rule 144 is not applicable, any resale
of the Securities under circumstances in which the seller (or the Person
through whom 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 SEC
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.  The Securities may be
pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document (as
defined in Section 3(b)), including, without limitation, this Section 2(f).
 The
Company reserves the right to place stop transfer instructions against the
shares and certificates for the September 2008 Warrant Shares.

 

(g)   Legends.  Buyer understands that the certificates
representing the September 2008 Warrants and, solely with respect to the September 2008
Warrant Shares until such time as the resale of the September 2008 Warrant
Shares has been registered under the Securities Act as contemplated by the
Registration Rights Agreement, the stock certificates representing the September 2008
Warrant Shares, except as set forth below, shall bear any legend as required by
the “blue sky” laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of
such stock certificates):

 

NEITHER THE
ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE
TO THE COMPANY, 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.

 

The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of the Securities upon which it
is stamped, if, unless otherwise required 

 

4

 

by state securities laws, (i) such Securities are registered for
resale under the Securities Act, (ii) in connection with a sale,
assignment or other transfer, such holder provides the Company with an opinion
of a law firm reasonably acceptable to the Company, in a form reasonably
acceptable to the Company, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the Securities Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or
transferred pursuant to Rule 144 or Rule 144A.

 

(h)   Authorization.  Buyer has full power and authority to enter
into the Transaction Documents to which it is a signatory.  All action on the part of the Buyer or its
Trustee necessary for authorization, execution and delivery of the Transaction
Documents has been taken or will be taken prior to the Closing.  Each such agreement shall constitute the legal,
valid and binding obligations of Buyer enforceable against Buyer in accordance
with their respective terms, except as such enforceability may be limited by
general principles of equity or to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

 

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

 

(j)    Residency.  Buyer is a resident of the State of
California.

 

(k)   No Legal Advice From the
Company.  Buyer acknowledges that it
had the opportunity to review this Agreement and the transactions contemplated
by this Agreement with his or its own legal counsel and investment and tax
advisors.  Buyer is relying solely on
such counsel and advisors and not on any statements or representations of the
Company or any of its representatives or agents for legal, tax or investment
advice with respect to this investment, the Transaction Documents, the
transactions contemplated herein or therein or the securities laws of any
jurisdiction.

 

(l)    Buyer’s Broker Fees.  Buyer shall be responsible for the payment of
any placement agent’s fees, financial advisory fees, or brokers’ commissions
for placement agents, financial advisors and/or brokers engaged by Buyer
relating to or arising out of the transactions contemplated hereby.

 

(m)  Certain Trading Activities.  Other than the transactions contemplated
herein, since the time that Buyer was first contacted by the Company or any
other Person 

 

5

 

regarding this
investment in the Company, neither the Buyer nor any Affiliate of Buyer which (x) had
knowledge of the transactions contemplated hereby, (y) has or shares
discretion relating to Buyer’s investments or trading or information concerning
Buyer’s investments and (z) is subject to Buyer’s review or input
concerning such Affiliate’s investments or trading (collectively, “Trading Affiliates”) has directly
or indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with Buyer or Trading Affiliate, effected or agreed to effect any
transactions in the securities of the Company. 
Buyer hereby covenants and agrees not to, and shall cause its Trading
Affiliates not to, engage, directly or indirectly, in any transactions in the
securities of the Company or involving the Company’s securities during the
period from the date hereof until the earlier to occur of (i) such time as
the transactions contemplated by this Agreement are first publicly announced as
described in Section 4(h) hereof or (ii) such time as this
Agreement is terminated in full pursuant to Section 8 hereof.  Other than to other Persons party to this
Agreement and those expressly acknowledged by the Company, Buyer has maintained
the confidentiality of the existence and terms of this transaction.

 

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  Except as set forth in the SEC Documents (as
defined in Section 3(k)) the Disclosure Schedule attached hereto (the “Disclosure Schedule”), which Disclosure Schedule shall be
deemed a part hereof and shall qualify any representation made herein to the
extent of the disclosure contained in the corresponding section of the
Disclosure Schedule, the Company hereby represents and warrants to Buyer that,
as of the date hereof and as of the Closing Date:

 

(a)   Organization and
Qualification.  The Company and its “Subsidiaries” (which for purposes of this
Agreement means any joint venture or any entity in which the Company, directly
or indirectly, owns any of the capital stock or holds an equity or similar
interest) are entities validly existing and in good standing under the laws of
the jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted.  Each of the Company and
its Subsidiaries is duly qualified as a foreign entity to do business and, is
in good standing in every jurisdiction in which its ownership of property or
the nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not reasonably be expected to have a Material Adverse Effect.  As used in this Agreement, “Material Adverse Effect” means any material
adverse effect on the business, properties, assets, operations, results of
operations or condition (financial or otherwise) of the Company and its
Subsidiaries, individually or taken as a whole, or on the transactions
contemplated hereby or in the other Transaction Documents or by the agreements
and instruments to be entered into in connection herewith or therewith, or on
the authority or ability of the Company to perform in any material respect its
obligations under the Transaction Documents (as defined below).

 

(b)   Authorization;
Enforcement; Validity.  Except as
contemplated herein: (i) the Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement, the September 2008
Warrants, and the Amendments, and each of the other agreements entered into by
the parties hereto in connection with the Transaction (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof; (ii) the
execution and delivery of the 

 

6

 

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 September 2008
Warrants, the reservation for issuance and the issuance of the September 2008
Warrant Shares  issuable upon
conversion of the September 2008 Warrants have been duly authorized by the
Company’s Board of Directors and, except as set forth in Section 5(c), no
further filing, consent, or authorization is required by the Company, its Board
of Directors or its stockholders; and (iii) this Agreement and the other
Transaction Documents of even date herewith have been duly executed and
delivered by the Company and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally,
the enforcement of applicable creditors’ rights and remedies.

 

(c)   Issuance of Securities.  As set forth in Section 5(c) below,
as soon as commercially practicable after the Closing Date, and upon approval
by the Company’s stockholders, the Company shall amend its Articles of Incorporation
in the form attached hereto as Exhibit B (the “Amended
Articles”) to, among other things, increase the number of shares of
authorized Common Stock to allow for conversion of the September 2008
Warrants and to provide certain voting rights with respect to the Series B
Notes (as more particularly set forth in Section 4(a) below).  Following filing of the Amended Articles, the
Company shall have reserved from its duly authorized capital stock  not less than the sum of one hundred twenty percent (120%)
of the maximum number of shares of Common Stock issuable (x) upon exercise
of the September 2008 Warrants and all of the Company’s other outstanding
securities which are convertible or exercisable into shares of Common Stock.
Upon exercise in accordance with the September 2008 Warrants, the September 2008
Warrant Shares, will be validly issued, fully paid and nonassessable and free
from all preemptive or similar rights, taxes, liens and charges with respect to
the issue thereof, with the holders being entitled to all rights  accorded to a holder of Common Stock.  Assuming the accuracy of each of the
representations and warranties set forth in Section 2 of this Agreement,
the offer and issuance by the Company of the Securities is exempt from
registration under the Securities Act.

 

(d)   No Conflicts.  Except as set forth in the Disclosure
Schedule or the SEC Documents, and after giving effect to the Amended Articles,
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 September 2008
Warrants and reservation for issuance and issuance of the September 2008
Warrant Shares) will not (i) result in a violation of any articles of
incorporation, articles of formation, any articles of designations or other
constituent documents of the Company or any of its Subsidiaries, any capital
stock of the Company or any of its Subsidiaries or bylaws 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) in any
respect under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to
which the Company or any of its Subsidiaries is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree
(including foreign, federal 

 

7

 

and state
securities laws and regulations and the rules and regulations of the NASD’s
OTC Bulletin Board (the “Principal Market”)
applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected, except
in the case of each of clauses (ii) and (iii), such as would not be
reasonably likely to have or reasonably be expected to result in a Material
Adverse Effect.

 

(e)   Consents.  Neither the Company nor any of its
Subsidiaries is required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof, except for the following consents, authorizations, orders, filings and
registrations (none of which is required to be filed or obtained before the
Closing): (i) the filing with the SEC and the California Department of
Corporations of a Form D; (ii) the filing with the SEC of one or more
registration statements (“Registration Statement”)
in accordance with the requirements of the Registration Rights Agreement, and (iii) the
filing of a listing application for the Warrant Shares with the Principal
Market, if applicable, which shall be done pursuant to the rules of the
Principal Market, NASD or applicable securities or “Blue Sky” laws of the
states of the United States and the filing with the Nevada Secretary of State
of the Amended Articles.  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 on the Principal Market in the
foreseeable future.

 

(f)    No General Solicitation;
Placement Agent’s Fees.  Neither the
Company, nor any of its Subsidiaries or affiliates, nor any Person acting on
its or their behalf, including, without limitation, any Person related to
Buyer, 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.  Neither the Company nor
any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.

 

(g)   Dilutive Effect.  The Company understands and acknowledges that
the number of the September 2008 Warrant Shares issuable upon exercise of
the Warrants will increase in certain circumstances in accordance with the
terms thereof.  The Company further
acknowledges that its obligation to issue the September 2008 Warrant
Shares upon exercise of the September 2008 Warrants in accordance with
this Agreement and the September 2008 Warrants is, in each case, absolute
and unconditional, regardless of the dilutive effect that such issuance may
have on the ownership interests of other stockholders of the Company.

 

(h)   Application of Takeover
Protections; Rights Agreement. 
Except as set forth in the Disclosure Schedule or the SEC Documents, the
Company and its board of directors have taken all necessary action in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights 

 

8

 

agreement) or
other similar anti-takeover provision under the Articles of Incorporation or
the laws of the state of its incorporation which is or could become applicable
to Buyer as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company’s issuance of the Securities and
Buyer’s ownership of the Securities.

 

(i)    SEC Documents; Financial
Statements.  Except as set forth in
the Disclosure Schedule or the SEC Documents, during the two (2) years
prior to the date hereof, the Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
pursuant to the reporting requirements of the Exchange Act (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the “SEC Documents”), or has received a valid
extension of such time of filing and has filed all SEC Documents prior to the
expiration of any such extension.  The
Company has delivered to Buyer or its representatives true, correct and complete
copies of the SEC Documents not available on the EDGAR system.  As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents, at
the time they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  As of their respective filing dates, the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto.  Such financial statements have been prepared
in accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).  No other information provided by or on behalf
of the Company to the Buyer which is not included in the SEC Documents,
including, without limitation, information referred to in Section 2(d) of
this Agreement or in the disclosure schedule, 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.

 

(j)    Absence of Certain
Changes.  Since
the date of the latest audited financial statements included in the Company’s Form 10-KSB
filed on September 13, 2007 and except as specifically disclosed in a
subsequent SEC Report filed prior to the date hereof or as set forth the
Disclosure Schedule, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in a
Material Adverse Effect, or be required to be disclosed by the Company under
applicable securities laws on a registration statement filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade 

 

9

 

payables and
accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the
Company’s financial statements pursuant to GAAP or disclosed in filings made
with the SEC, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has
not issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans or pursuant to conversion of
outstanding debt or exercise of outstanding warrants.  The Company does not have pending before the
SEC any request for confidential treatment of information.  Except as set forth in the Disclosure
Schedule or the SEC Documents or as part of the Transaction or contemplated
hereby, no event, liability or development has occurred or exists with respect
to the Company or its Subsidiaries or their respective business, properties,
operations or financial condition, that would be required to be disclosed by
the Company under applicable securities laws at the time this representation is
made or deemed made that has not been publicly disclosed at least one (1) Trading
Day prior to the date that this representation is made.

 

(k)   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 respective Certificates or Articles of Incorporation or its
Bylaws or their organizational charter or bylaws, respectively.  To the Company’s knowledge, neither the
Company nor any of its Subsidiaries is in violation of any judgment, decree or
order or any statute, ordinance, rule or regulation applicable to the
Company or its Subsidiaries, and neither the Company nor any of its
Subsidiaries will conduct its business in violation of any of the foregoing,
except for possible violations which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.  Without limiting the generality of the
foregoing, the Company is not in violation of any of the rules, regulations or
requirements of the
Approved Market and has no knowledge of any facts or circumstances that
would reasonably lead to delisting or suspension of the Common Stock by its
Approved Market in the foreseeable future. 
Since January 1, 2006, (i) the Common Stock has been
designated for quotation on the Principal Market, (ii) trading in the
Common Stock has not been suspended by the SEC or the Principal Market and (iii) the
Company has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market.  Except as set
forth in the Disclosure Schedule or in the SEC Documents, the Company and its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not be reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect, and neither the Company nor any
such Subsidiary has received any written notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.

 

(l)    Foreign Corrupt
Practices.  Neither the Company nor
any of its Subsidiaries nor any director, officer, agent, employee or other
Person acting on behalf of the Company or any of its Subsidiaries has, in the
course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful 

 

10

 

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

 

(m)  Sarbanes-Oxley Act.  To the knowledge of the Company, except as
set forth in the Disclosure Schedule or the SEC Documents, the Company is in
compliance with any and all applicable requirements of the Sarbanes-Oxley Act
of 2002 that are effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

 

(n)   Transactions With
Affiliates.  Except as set forth in
the SEC Documents filed at least ten (10) days prior to the date hereof and
other than the grant of stock options disclosed on the Disclosure Schedule,
none of the senior executive officers or directors of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as senior executive
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 senior executive officer or director or, to the knowledge of the Company
or any of its Subsidiaries, any corporation, partnership, trust or other entity
in which any such senior executive officer or director has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of Sixty Thousand Dollars ($60,000) other than for (i) payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) other employee benefits,
including stock option agreements under any stock option plan of the Company

 

(o)   Equity Capitalization.  As of the date hereof, the capitalization of
the Company is as set forth in the Disclosure Schedule or the SEC
Documents.  The Company has less than two
hundred (200) stockholders of record. 
Except as disclosed in the Disclosure Schedule or the SEC Documents: (i) none
of the Company’s capital stock is subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries; (iii) other than
the Series B Notes issued in September of 2007 and the Secured Promissory
Note issued to Buyer in April of 2008 (the “Secured Note”)
there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing
Indebtedness of the Company or any of its Subsidiaries or by which the Company
or any of its Subsidiaries is or 

 

11

 

may become
bound; (iv) there are no financing statements, other than the financing
statement filed in connection with the Secured Note, securing obligations in
any material amounts, either singly or in the aggregate, filed in connection
with the Company or any of its Subsidiaries; (v) there are no agreements
or arrangements under which the Company or any of its Subsidiaries is obligated
to register the sale of any of their securities under the Securities Act
(except pursuant to the Registration Rights Agreement); (vi) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (vii) except as set forth on Schedule 3(q) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities; (viii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company’s or its Subsidiaries’
respective businesses and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect. 
The Company has furnished to the Buyer true, correct and complete copies
of the Company’s Certificate of Incorporation, as amended and as in effect on
the date hereof (the “Articles of Incorporation”), and the
Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock
and the material rights of the holders thereof in respect thereto.

 

(p)   Indebtedness and Other
Contracts.  Since the date of the
latest audited financial statements included in the Company’s Form 10-KSB
filed on September 13, 2007 and except as disclosed in the Disclosure
Schedule or the SEC Documents, neither the Company nor any of its Subsidiaries (i) has
any additional outstanding Indebtedness (as defined below), (ii) is a
party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or
instrument could reasonably be expected to result in a Material Adverse Effect,
(iii) is in violation of any term of or in default under any contract,
agreement or instrument relating to any Indebtedness, except where such
violations and defaults would not result, individually or in the aggregate, in
a Material Adverse Effect, or (iv) is a party to any contract, agreement
or instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person means, without
duplication, (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in
accordance with generally accepted accounting principles (other than trade
payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either 

 

12

 

case with
respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through
(F) above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property
or assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any indebtedness, lease, dividend or other obligation of
another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or
that any agreements relating thereto will be complied with, or that the holders
of such liability will be protected (in whole or in part) against loss with
respect thereto; and (z) “Person”
means an individual or legal entity, including but not limited to a
corporation, a limited liability company, a partnership, a joint venture, a
trust, an unincorporated organization and a government or any department or
agency thereof.

 

(q)   Absence of Litigation.  To the knowledge of the Company, except as set
forth in the Disclosure Schedule or the SEC Documents, there is no action,
suit, proceeding, inquiry or investigation before or by the Principal Market,
any court, public board, government agency, self-regulatory organization or
body pending or, threatened against or affecting the Company or any of its
Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of
the Company’s or its Subsidiaries’ officers or directors that, if adversely
decided against the Company, would have a Material Adverse Effect on the
Company.

 

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

 

(s)   Employee Relations.  Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a labor union in connection with work performed for the Company.  The Company and its Subsidiaries believe that
their relations with their employees are good. 
No executive officer of the

 

13

 

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

 

(t)    Title. Except as set
forth in the Disclosure Schedule or the SEC Documents, the Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described
in the Disclosure Schedule or the SEC Documents or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and any of its
Subsidiaries.  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.

 

(u)   Intellectual Property
Rights.  The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, service marks
and all applications and registrations therefor, trade names, patents, patent
rights, copyrights, original works of authorship, inventions, trade secrets and
other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses
as now conducted.  None of the Company’s
registered, or applied for, Intellectual Property Rights, to the extent the
Company has such Intellectual Property Rights, have expired or terminated or
have been abandoned, or are expected to expire or terminate or expected to be
abandoned, within three (3) 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 its
Subsidiaries regarding its Intellectual Property Rights.  Neither the Company nor any of its
Subsidiaries is aware 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, except where failure to do so
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

14

 

(v)   Environmental Laws.  Except as set forth in the Disclosure
Schedule or the SEC Documents, the Company and its Subsidiaries, to their
knowledge, (i) are in compliance with any and all Environmental Laws (as
hereinafter defined), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses, (iii) are in compliance with all terms and
conditions of any such permit, license or approval, (iv) do not own or
operate any real property contaminated with any substance that is in violation
of Environmental Laws, and (v) is not liable for any off-site disposal or
contamination pursuant to any Environmental Laws where, in each of the
foregoing clauses (i), (ii), (iii), (iv) and (v) the failure to so
comply could be reasonably expected to have, individually or in the aggregate,
a Material Adverse Effect.  There is no
civil, criminal or administrative action, suit, investigation, inquiry or
proceeding pending or, to the knowledge of the Company, threatened by or before
any court or governmental authority against the Company or any of its
Subsidiaries relating to or arising from the Company’s nor any Subsidiary’s
non-compliance with any Environmental Laws, nor has the Company received
written notice of any alleged violations of Environmental Laws.  The term “Environmental
Laws” means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants, or
toxic or hazardous substances or wastes (collectively, “Hazardous
Materials”)  into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or
demand letters, injunctions, judgments, licenses, notices or notice letters,
orders, permits, plans or regulations issued, entered, promulgated or approved
thereunder.

 

(w)  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.

 

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

 

(y) 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 

 

15

 

preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset and liability accountability, (iii) access
to assets or incurrence of liabilities is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference.  The Company
maintains disclosure controls and procedures (as such term is defined in Rule 13a-14
under the 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 SEC, including,
without limitation, controls and procedures designed in to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the 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. 
During the twelve (12) 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.

 

(z)  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.

 

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

 

(bb)               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 Buyer
hereunder will be, or will have been, fully paid or provided for by the
Company, and all laws imposing such taxes will be or will have been complied
with.

 

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

 

(dd)               Disclosure.  To the Company’s knowledge, all disclosure
provided by the Company to the Buyer regarding the Company or any of its
Subsidiaries, their 

 

16

 

business and
the transactions contemplated hereby in the Transaction Documents and the Schedules
to this Agreement is true and correct and does not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading.  No event
or circumstance has occurred or information exists with respect to the Company
or any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.

 

4.             AMENDMENTS;
ACKNOWLEDGEMENTS.  Buyer, as the
holder of over ninety-five percent (95%) of the principal amount of the outstanding
Series B Notes and the Series B Warrants, hereby consents to the
following amendments of such agreements, which amendments shall apply to all
outstanding Series B Notes and Series B Warrants.  The Series B Notes, the Series B
Warrants, the Secured Loan and the Interest Warrants (defined below), are
hereby amended (or the effect of the Transaction is hereby acknowledged),
effective at Closing without further instruments or action, as follows:

 

(a)   Amendment to Series B
Notes.

 

(i)            Section 2
of the Series B Notes (captioned “Interest; Interest Rate”) shall be
deleted, effective upon the Closing, and the following substituted in its place
and stead:  “During the term of this
Note, interest shall accrue on outstanding Principal at an interest rate equal
to six percent (6%) per annum (the “Interest Rate”)
commencing on July 1, 2008. 
Interest shall be calculated on the basis of a three hundred sixty-five
(365)-day year and the actual number of days elapsed, to the extent permitted
by applicable law.  Any Interest that
shall accrue hereunder shall be payable quarterly in arrears on each January 1,
April 1, July 1 and October 1 (each an “Interest
Payment Due Date”) beginning on October 1, 2008.  Interest shall be paid by the issuance of
Warrants valued at Two Cents ($0.02)  per
Warrant Share, with a term of three (3) years from the date of issuance
with an exercise price of Six and Seven-Tenths of a Cent ($0.067) per Warrant
Share and otherwise substantially in the form of the Warrant to Purchase Common
Stock, dated June 10, 2008, issued to the Quercus Trust, represented by
Warrant No.: Quercus 2008-IW3.”

 

(ii)           Based
upon the issuance of the September 2008 Warrants and the application of Section 8
of the Series B Notes, the Company acknowledges that the Conversion Price
of the Series B Notes is reduced to Eight and Seven-Tenths of a Cent
($0.087) effective upon the Closing. 
Company further acknowledges that, as a result of the reduction of such
Conversion Price, without taking into account accrued and unpaid Interest, if
any, the Twenty Million Dollar ($20,000,000) Series B Note issued to
the Quercus Trust, as of the Closing, will be convertible into two hundred
twenty-nine million eight hundred eighty-five thousand fifty-eight
(229,885,058) Warrant Shares.

 

(iii)          Section (3)(e) of
the Series B Notes shall be deleted in its entirety.

 

(iv)          Section 4(a) of
the Series B Notes shall be amended by adding the following: “(xiii) the
Company has failed to obtain Shareholder approval of, and has failed to file 

 

17

 

with the
Secretary of State of Nevada, an Amendment to its Articles of Incorporation
within six (6) months of Closing, as required by the 2008 Securities
Purchase Agreement.”

 

(v)           The
following shall be added as Section 13(f) of the Series B Notes:
“Protective Provisions.  So long
as Notes remain outstanding with a principal balance of at least Ten Million
Dollars ($10,000,000), consent of the holders of a majority of the principal
amount of the outstanding Notes shall be required for any action, by merger,
reclassification or otherwise) that (i) results in the redemption or
repurchase of any stock, (ii) results in any merger or any other corporate
reorganization that results in a change of control of the Company, or in any
transaction in which all or substantially all of the assets of the Company are
sold, (iii) authorizes indebtedness in excess of Five Hundred Thousand
Dollars ($500,000), (iv) changes the business of the Company in any
material respect or (v) involves any transaction or compensation
arrangements between the Company and its officers and directors; provided,
however, that the Company may set aside fifteen percent (15%) of the Company’s
common stock, on a fully-diluted basis, as an option pool for management and
other key employees.”

 

(vi)          Effective
as of the filing of the Amended Articles pursuant to Section 5(c) hereof,
the following shall be added as Section 29 of the Series B
Notes:  “29. Voting Rights.  Each Holder in whose name the indebtedness
represented by the Series B Convertible Note is registered on the books of
the Company on the record date for any action of shareholders established
pursuant to applicable law shall have voting rights identical to those held by
the holders of the Common Stock and shall vote as a class with the Common
Stock.  Each Holder shall have the right
to one (1) vote for each share of Common Stock into which the Note
registered in such Holder’s name could be converted on the record date for the
vote or written consent of stockholders. 
With respect to such vote, such Holder shall have full voting rights and
powers equal to the voting rights and powers of the holders of the Common
Stock, and shall be entitled, notwithstanding any provision hereof, to notice
of any stockholders’ meeting in accordance with the bylaws of the Company and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which the holders of Common Stock have the right to vote.”

 

(b)   Amendment to Series B
Warrants.

 

(i)            Section 1(f) of
the Series B Warrants shall be deleted in its entirety.

 

(ii)           Company
acknowledges that, based upon the issuance of the September 2008 Warrants,
and the application of Section 2 of the Series B Warrants, from and
after the Closing, the Exercise Price of the Series B Warrants shall be
Eight and Seven-Tenths of a Cent ($0.087) per Warrant Share, subject to further
adjustment as provided in the Series B Warrants and that, as a result
thereof, as of Closing, the Series B Warrants issued to The Quercus Trust,
originally exercisable into forty-three million three thousand three hundred
seventy (43,003,370) Warrant Shares will be exercisable into two hundred fifty
million one hundred eleven thousand five hundred fifty-four (250,111,554) Warrant
Shares.

 

(c)   Acknowledgement Regarding
Interest Warrants.  Company
acknowledges with respect to Warrant No. Quercus 2008-IW1, Warrant No. Quercus

 

18

 

2008-IW2 and
Warrant No. Quercus 2008-IW3 (collectively, the “Interest
Warrants”), based upon the issuance of the September 2008
Warrants and the application of Section 2 of such Warrants, from and after
the Closing the Exercise Price shall be Eight and Seven-Tenths of a Cent
($0.087) per Warrant Share, subject to further adjustment as provided in such
Warrants and that, as a result thereof, as of Closing, such Warrants will be
exercisable into eight million seventy-nine thousand one hundred ten
(8,079,110) Warrant Shares.

 

(d)   Amendment to Secured Loan.

 

(i)            The
provisions of the Secured Loan documents with respect to the Borrowing Base are
amended to provide that, notwithstanding anything to the contrary in any of the
documents constituting the Secured Loan, the Borrowing Base shall be one
hundred percent (100%) of the sum of the Company’s aggregate Qualified Accounts
Receivable, the Company’s Inventory and the Company’s cash account balances.

 

(ii)           The
provisions of the Secured Loan requires prepayment upon receipt by the Company
of Rebates are deleted and Company may retain such Rebates upon receipt
thereof.

 

(iii)          The
Maturity Date of the Secured Loan is extended to March 30, 2009.

 

5.             COVENANTS.

 

(a)   Best Efforts.  Each party shall use its reasonable best
efforts to timely satisfy each of the conditions to be satisfied by it as
provided in Sections 7 and 8 of this Agreement.

 

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

 

(c)   Amended Articles of
Incorporation.  As soon as commercially
practicable, the Company shall solicit shareholder approval of the Amended
Articles attached hereto as Exhibit B (the “Amended
Articles”) and shall promptly file the Amended Articles with the
Nevada Secretary of State following receipt of such approval.

 

(d)   Reporting Status.  Until the date on which the Buyer shall have
sold all the September 2008 Warrant Shares  and none of the September 2008 Warrants is 

 

19

 

outstanding,
(the “Reporting Period”), the
Company shall file, in a timely manner, all reports required to be filed with
the SEC 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 permit such
termination.

 

(e)   Use of Proceeds.  The Company will use the proceeds from the
sale of the Securities for general corporate and working capital purposes and
not for (i) the repayment of any outstanding Indebtedness of the Company
or any of its Subsidiaries, except for the repayment of outstanding
indebtedness as set forth on the Disclosure Schedule, or (ii) redemption
or repurchase of any of its or its Subsidiaries’ equity securities.

 

(f)    Financial Information.  The Company agrees to send the following to
Buyer during the Reporting Period (i) unless the following are filed with
the SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy
of its Annual Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or
10-QSB, any interim reports or any consolidated balance sheets, income
statements, stockholders’ equity statements and/or cash flow statements for any
period other than annual, any Current Reports on Form 8-K and any
registration statements (other than on Form S-8) or amendments filed
pursuant to the Securities Act, (ii) on the same day as the release
thereof, facsimile or e-mailed copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.  As used herein, “Business Day” means any day other than
Saturday, Sunday or other day on which commercial banks in the City of New York
are authorized or required by law to remain closed.

 

(g)   Pledge of Securities.  The Company acknowledges and agrees that the
Securities may be pledged by Buyer 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 Buyer shall not be required to provide the Company with any
notice of a pledge of Securities or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document, including,
without limitation, Section 2(f) hereof; provided that an Investor
and its pledgee shall be required to comply with the provisions of Section 2(f) hereof
in order to effect a sale, transfer or assignment of Securities to such
pledgee.  The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such
pledgee by an Investor

 

(h)   Disclosure of
Transactions and Other Material Information.  The Company shall (i) within forty-eight (48)
hours following the date of this Agreement issue a press release describing the
material terms of the transactions contemplated hereby, and (ii) by 8:30 a.m.,
New York City time on or before the fourth (4th)
Business Day immediately following the date of this Agreement, file a Current
Report on Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the

 

 

20

 

form required
by the Exchange Act and attaching the material Transaction Documents
(including, without limitation, this Agreement and the form of the September 2008
Warrants) as exhibits to such filing (including all attachments, the “8-K Filing”).  Neither the Company, its Subsidiaries nor
Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of Buyer, to make any
press release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as
is required by applicable law and regulations. 
Without the prior written consent of Buyer, which consent shall not be
unreasonably withheld, delayed or conditioned, neither the Company nor any of
its Subsidiaries or affiliates shall disclose the name of Buyer in any filing,
announcement, release or otherwise; provided, however, that such consent shall
be deemed to be given for any disclosure required by law in the reasonable
opinion of the Company or its counsel.

 

(i)    Corporate Existence.  So long as Buyer beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction (as
defined in the September 2008 Warrants) unless the Company is in
compliance with the applicable provisions governing Fundamental Transactions
set forth in the September 2008 Warrant.

 

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

 

(k)   Delivery of Certificates.  Upon exercise of September 2008
Warrants, any request for removal of restrictive legends on the shares of
Common Stock issuable in connection therewith, certificates for shares of
Common Stock will be delivered to the Investor within three (3) Trading
Days.  If such delivery is made more than
two (2) additional Trading Days after exercise or request for removal of
legend, as the case may be, the Company will compensate Buyer at a rate of One
Hundred Dollars ($100) per day for each of the first ten (10) Trading Days
and Two Hundred Dollars ($200) per day thereafter for each Ten Thousand Dollars
($10,000) of securities.  In such event,
after the first such ten (10) Trading Days noted above, the Investor
will also have right to rescind its conversion notice for the September 2008
Warrants.  In addition, if the
certificates have not been delivered by the fifth (5th) Trading Day, then, if the Buyer has sold shares of
Common Stock after the conversion or exercise date, as the case may be, the
Company will compensate Buyer for extra costs, if any, incurred to cover the
sale, all as agreed upon and reflected in the Transaction Documents.

 

(l)    Participation in Future
Financing.  From the date hereof
until September 30, 2009, upon any issuance by the Company or any of its
Subsidiaries of Common Stock or Common Stock Equivalents for cash consideration
(a “Subsequent Financing”):

 

(i)            With respect to any Subsequent
Financing or successive Subsequent Financings up to an aggregate of Five
Million One Hundred Thousand Dollars ($5,100,000) in gross proceeds to the
Company, Buyer shall have the right to 

 

21

 

fund all or a part of such
Subsequent Financing by purchasing, at a purchase price of Two Cents ($0.02)
per warrant, warrants containing the same terms as the September 2008
Warrants.  The Company shall deliver a
written notice of its intention to engage in such Subsequent Financing at least
ten (10) Trading Days before any Subsequent Financing is scheduled to
Close, setting forth the amount thereof and any other relevant details
thereof.  Buyer shall have five (5) Trading
Days to notify Company of Buyer’s intention to fund all or a part of such
Subsequent Financing up to the Five Million One Hundred Thousand Dollars
($5,100,000), pursuant to the provisions of this Section 5(l)(i).

 

(ii)           In the event any Subsequent Financing
exceeds Five Million One Hundred Thousand Dollars ($5,100,000) in the
aggregate, or in the event Buyer has not elected to fund the entire Subsequent
Financing up to Five Million One Hundred Thousand Dollars ($5,100,000):

 

(1)           least five (5) Trading Days
prior to the closing of the Subsequent Financing, the Company shall deliver to
Buyer a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask Buyer if it wants
to review the details of such financing (such additional notice, a “Subsequent Financing Notice”).  Upon the request of
Buyer, which shall be delivered to the Company within one (1) Trading Day
of the Company’s delivery of a Pre-Notice, and only upon a request by Buyer,
for a Subsequent Financing Notice, the Company shall promptly, but no later
than one (1) Trading Day after such request, deliver a Subsequent
Financing Notice to Buyer.  The Subsequent Financing Notice shall describe
in reasonable detail the proposed terms of such Subsequent Financing, the
amount of proceeds intended to be raised thereunder and the Person or Persons
through or with whom such Subsequent Financing is proposed to be effected and
shall include a term sheet or similar document relating thereto as an
attachment.

 

(2)           If Buyer desires to participate in
such Subsequent Financing it must provide written notice to the Company by not
later than 5:30 p.m. (New York City time) on the fifth (5th)
Trading Day after the Buyer has received the Pre-Notice that the Buyer is
willing to participate in the Subsequent Financing, the amount of the Buyer’s
participation, and that the Buyer has such funds ready, willing, and available
for investment on the terms set forth in the Subsequent Financing Notice.  If the Company receives no notice from Buyer
as of such fifth (5th) Trading Day, Buyer shall be deemed to have
notified the Company that it does not elect to participate.

 

(3)           If by 5:30 p.m. (New York City
time) on the fifth (5th) Trading Day after the Buyer has received
the Pre-Notice, notification by the Buyer of its willingness to participate in
the Subsequent Financing (or to cause its designees to participate) is, in the
aggregate, less than the total amount of the Subsequent Financing, then the
Company may effect the remaining portion of such Subsequent Financing on the
terms and with the Persons set forth in the Subsequent Financing Notice.

 

(4)           The Company must provide the Buyer
with a second Subsequent Financing Notice, and the Buyer will again have the
right of participation set forth above in this Section 5(l), if the
Subsequent Financing subject to the initial 

 

22

 

Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within sixty (60) Trading Days after the date
of the initial Subsequent Financing Notice.

 

Notwithstanding the foregoing, this Section 5(l) shall not
apply in respect of an underwritten public offering of Common Stock.

 

(m)  Shareholder Issuance Vote.  If the Company, at any time while any portion
of the Series B Notes, or any of the Series B Warrants, the September 2008
Warrants, or the Interest Warrants (collectively, the “Buyer
Securities”) are outstanding, becomes listed on a National Exchange
(as defined below) (a “National Listing”),
and the rules or regulations of such National Exchange limit the number of
shares of Common Stock which the Company may issue upon exercise of the Buyer
Securities (the amount of such limit is referred to herein as the “Exchange Cap Amount”), or if Buyer so requests in connection
with the solicitation of shareholders pursuant to Section 5(c) hereof,
then, within thirty (30) days of the date of such National Listing or such
request, the Company shall (i) prepare a proxy statement, (ii) file a
preliminary and definitive proxy statement with the SEC and (iii) mail the
definitive proxy statement to its shareholders, requesting and recommending
that they vote affirmatively (a “Shareholder Issuance Vote”)
on a proposal to approve the issuance, under the applicable rules of such
National Exchange, of all of the Warrant Shares and other shares of Common
Stock issuable pursuant to the Transaction Documents, and all other shares of
Common Stock issuable pursuant to the conversion of the Series B Notes or
upon the exercise of the Series B Warrants, or upon exercise of any other
Warrants owned by Buyer, without regard to the Exchange Cap Amount and to
eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company or any of its
securities on the Company’s ability to issue shares of Common Stock in excess
of the Exchange Cap Amount (the shareholder approval of such proposal is
referred to herein as the “Shareholder Issuance
Approval”).  The Shareholder
Issuance Approval, if required hereunder, shall occur before the date that is
ninety (90) days after the date of the National Listing (the “Shareholder Issuance Voting Deadline”).  For purposes hereof, “National
Exchange” shall mean an Approved Market other than NASD’s OTC
Bulletin Board.

 

(n)   Retention of Transfer Agent.  The Company will continue to engage the
services of a transfer agent for its Common Stock that is a participant in the
Depository Trust Company’s Full Fast Program.

 

(o)   Limitation On Sale Or
Disposition Of Intellectual Property to Related Parties.  So long as any portion of the September 2008
Warrants remain outstanding, and so long as the Company shall have any
obligation under the September 2008 Warrants, the Company shall not sell,
convey, dispose of, spin off or assign any or all of its Intellectual Property
Rights (as defined in Section 3(w) above), or the rights to receive
proceeds from patent licensing agreements, patent infringement litigation or
other litigation related to such Intellectual Property Rights to any Related
Party (as defined below) in each case without Buyer’s written consent.  For purposes hereof, “Related Party” shall
mean any of the Company’s or any Subsidiary’s officers, directors, persons who
were officers or directors at 

 

23

 

any time
during the previous two (2) years, stockholders who beneficially own five
percent (5%) or more of the Common Stock, or Affiliates (as defined below) or (ii) with
any individual related by blood, marriage, or adoption to any such individual
or with any entity in which any such entity or individual owns a five percent
(5%) or more beneficial interest.  “Affiliate”
for purposes hereof means, with respect to any person or entity, another person
or entity that, directly or indirectly, (i) has a ten percent (10%) or
more equity interest in that person or entity, (ii) has ten percent (10%)
or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) shares common control with that person or
entity.  “Control” or “Controls”
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.

 

(p)   Retention Agreements.  The Company will offer to Messrs. David
Field, Christopher Gopal, Aidan Shields and Dalton Sprinkle retention
agreements in form and substance satisfactory to Buyer, pursuant to which they
shall be entitled to three (3) month’s severance in the event they are
terminated without cause or terminate their employment voluntarily for good
reason, and pursuant to which all other severance rights or right to employment
other than at-will rights shall be waived (the “Retention
Agreements”).

 

(q)   Saltman.  The Company shall use its best efforts to
enter into a transition services agreement with David Saltman, substantially in
form and substance satisfactory to Buyer (the “Saltman
Agreement”).

 

(r)    Bostater Loan.  The Company shall loan the sum of Sixty-Two
Thousand Dollars ($62,000) to or on behalf of Bostater, which shall be paid
directly to the relevant tax authorities to pay taxes on prior share grants by
the Company,  in connection with the
execution of an agreement in form and substance satisfactory to Buyer, which
the Company shall use its best efforts to obtain (the “Bostater
Agreement”).

 

(s)   Registration Rights
Agreement.  The Company and Buyer
shall enter into a Registration Rights Agreement at, or promptly after,
Closing, in form and substance identical to the Registration Rights Agreement
attached as Exhibit E to the Securities Purchase Agreement dated September 19,
2007; provided, however, that the Registrable Securities shall be all of the
Securities owned by Buyer, that Buyer shall be substituted for the Investors,
and that the initial registration shall be required only on Buyer’s demand at
least six (6) months after Closing.

 

6.             REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a)   Register.  The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to each holder of Securities), a register for the September 2008
Warrants in which the Company shall record the name and address of the Person
in whose name the September 2008 Warrants have been issued (including the
name and address of each transferee) and the number of September 2008 Warrant
Shares issuable upon exercise of the September 2008 Warrants held by such
Person.  The Company shall keep the
register open and available at all times during business hours for inspection
of Buyer or its legal representatives.

 

24

 

(b)   Transfer Agent
Instructions.  The Company shall
issue irrevocable instructions to its transfer agent, and any subsequent
transfer agent, to issue certificates or credit shares to the applicable
balance accounts at The Depository Trust Company (“DTC”), registered in the name of Buyer or its respective
nominee(s), for the September 2008 Warrant Shares issued upon exercise of
the September 2008 Warrants in such amounts as specified from time to time
by Buyer to the Company upon exercise of the September 2008 Warrants (the “Transfer Agent Instructions”).  The Company warrants that no instruction
other than the Transfer Agent Instructions referred to in this Section 6(b),
and stop transfer instructions to give effect to Section 2(g) hereof,
will be given by the Company to its transfer agent, and that the September 2008
Warrant Shares shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the other
Transaction Documents.  If Buyer effects
a sale, assignment or transfer of the Securities in accordance with Section 2(f),
the Company shall permit the transfer and shall promptly instruct its transfer
agent to issue one or more certificates or credit shares to the applicable
balance accounts at DTC in such name and in such denominations as specified by
Buyer to effect such sale, transfer or assignment.  In the event that such sale, assignment or
transfer involves September 2008 Warrant Shares sold, assigned or
transferred pursuant to an effective registration statement or pursuant to Rule 144,
the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to Buyer.  Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 6(b) will
be inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 6(b), that Buyer shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.

 

(c)   Additional Relief.  If the Company shall fail for any reason or
for no reason to issue to such holder unlegended certificates or to credit the
holder’s balance account with DTC within two (2) Trading Days of receipt
of documents necessary for the removal of legend set forth above, then the
Company will compensate the holder at a rate of One Hundred Dollars ($100)
per day for each of the first ten (10) Trading Days and Two Hundred
Dollars ($200) per day thereafter for each Ten Thousand Dollars ($10,000) of
securities.  If the Company shall fail
for any reason or for no reason to issue to such holder unlegended certificates
or to credit the holder’s balance account with DTC within five (5) Trading
Days of receipt of documents necessary for the removal of legend set forth
above (the “Deadline Date”) and if on or after
the Trading Day (as defined in the Warrants) immediately following such
Deadline Date, 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 shares of Common Stock that the holder anticipated receiving from the
Company, then the Company shall, within three (3) Trading Days after the
holder’s request and in the holder’s discretion, 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, at which
point the Company’s obligation to deliver such certificate (and to issue such
shares of Common Stock) shall terminate.

 

25

 

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

 

The obligation of the Company hereunder to issue and sell the September 2008
Warrants to Buyer at the Closing is subject to the satisfaction, at or before
each of 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 Buyer with prior
written notice thereof:

 

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

 

(ii)           Buyer
shall have delivered to the Company the Purchase Price by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company, or by the acknowledgements provided for in Section 1(b).

 

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

 

8.             CONDITIONS TO BUYER’S OBLIGATION TO PURCHASE.

 

The obligation of Buyer hereunder to purchase the September 2008
Warrants at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for Buyer’s sole benefit and may be waived by Buyer at any time
in its sole discretion by providing the Company with prior written notice
thereof:

 

(i)            The
Company shall have duly executed and delivered (physically or by electronic
copy) to Buyer (i) each of the Transaction Documents and  (ii) the September 2008 Warrants on
the date immediately prior to Closing.

 

(ii)           Buyer
shall have received the opinion of Sheppard, Mullin, Richter & Hampton
LLP, the Company’s outside counsel (“Opinion of Counsel”),
dated as of the Closing Date, in substantially the form of Exhibit C
attached hereto.

 

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

 

(iv)          The
Company shall have delivered to Buyer a certificate evidencing the Company’s
qualification as a foreign corporation and good standing issued by the 

 

26

 

Secretary of State (or
comparable office) in each jurisdiction in which the Company has so qualified,
as of a date within ten (10) days of the Closing Date.

 

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

 

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

 

(vii)         The
Company shall have delivered the Retention Agreements, the Saltman Agreement
and the Bostater Agreement, all in form and substance satisfactory to Buyer.

 

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

 

9.             TERMINATION. 
This Agreement may be terminated by Buyer, as to Buyer’s obligations
hereunder, by written notice to the Company, if the Closing has not been
consummated on or before September 19, 2008; provided, however, that no
such termination will affect the right of any party to sue for any breach by
the other party (or parties).

 

10.           MISCELLANEOUS.

 

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

 

27

 

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.

 

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

 

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

 

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

 

(e)   Entire Agreement;
Amendments.  This Agreement and the
other Transaction Documents supersede all other prior oral or written
agreements between the Buyer, the Company, their affiliates and Persons acting
on their behalf with respect to the matters discussed herein, and this
Agreement, the other Transaction Documents and the instruments referenced
herein and therein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters.  No provision of this Agreement may be amended
other than by an instrument in writing signed by the Company and the holders of
at least eighty-five percent (85%) of the aggregate number of Warrant Shares
issued and issuable  upon exercise of the
September 2008 Warrants, and any amendment to this Agreement made in
conformity with the provisions of this Section 10(e) shall be binding
on Buyer and all holders of Securities as applicable.  No provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
applicable Securities then outstanding. 
No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties
to the Transaction Documents, or holders of the September 2008
Warrants.  The Company has not, directly
or indirectly, made any agreements with Buyer relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except

 

28

 

as set forth
in the Transaction Documents.  Without
limiting the foregoing, the Company confirms that, except as set forth in this
Agreement, Buyer has not made any commitment or promise or has any other
obligation to provide any financing to the Company or otherwise.

 

(f)    Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached
hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the
next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto on a day that is not a Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (c) the
second (2nd) Trading
Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom
such notice is required to be given.  The
address for such notices and communications shall be as set forth on the
signature pages attached hereto.

 

(g)   Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the September 2008 Warrants.  The Company shall not assign this Agreement
or any rights or obligations hereunder without the prior written consent of the
holders of at least seventy-five percent (75%) of the aggregate number of September 2008
Warrant Shares issued and issuable upon exercise of the September 2008
Warrants, including by way of a Fundamental Transaction.  Buyer 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 Buyer hereunder with respect to such assigned rights

 

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

 

(i)    Survival.  Unless this Agreement is terminated under Section 8,
the representations and warranties of the Company and Buyer contained in
Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5
and 6 shall survive the Closing for a period of one (1) year, or such
longer period as is specified in any such provision.

 

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

 

(k)   Indemnification.  In consideration of Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless Buyer
and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or 

 

29

 

indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Buyer Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether Buyer Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by Buyer Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any representation
or warranty made by the Company in the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby or (c) any cause of action, suit or claim
brought or made against Buyer Indemnitee by a third party (including for these
purposes a derivative action brought on behalf of the Company) and arising out
of or resulting from (i) the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any transaction financed
or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Securities, (iii) any disclosure made by
Buyer pursuant to Section 4(g), or (iv) the status of Buyer or holder
of the Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. 
The Company shall not be obligated to indemnify Buyer Indemnitee
pursuant to this Section 10(k) for Indemnified Liabilities to the
extent such Indemnified Liabilities are caused by acts of gross negligence or
willful misconduct on the part of Buyer Indemnitee.  To the extent that the foregoing undertaking
by the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under applicable law.  Except as otherwise set forth herein, the
mechanics and procedures with respect to the rights and obligations under this Section 10(k) shall
be the same as those set forth in Section 6 of the Registration Rights
Agreement.

 

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

 

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

 

30

 

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

 

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

 

[Signature Pages Follow]

 

31

 

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

 

 

	
  Open
  Energy Corporation

  	
   

  	
  Address for
  Notice:

  
	
   

  	
   

  	
  514 Via de
  la Valle, Suite 200

  
	
   

  	
   

  	
  Solana
  Beach, CA 92075

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ David Saltman

  	
   

  	
  Facsimile: (858) 794-8811

  
	
  Name: David Saltman

  	
   

  	
  Attention: David Saltman,

  
	
  Title: Chief Executive Officer

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
  With a copy
  to (which shall not constitute notice):

  	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
   

  
	
  James Mercer
  III

  	
   

  	
  12275 El Camino Real, Suite 200

  
	
  Sheppard, Mullin,
  Richter & Hampton LLP

  	
   

  	
  San Diego, CA 92130

  
	
   

  	
   

  	
  Facsimile: (858) 509-3691

  
				

 

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE
PAGE FOR BUYER FOLLOWS]

 

32

 

[BUYER SIGNATURE PAGES TO OPEN ENERGY
CORPORATION SECURITIES PURCHASE AGREEMENT]

 

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

 

Name of Buyer: The Quercus Trust

 

	
  Signature
  of Authorized Signatory of Buyer:

  	
  /s/ David Gelbaum

  	
   

  

 

Name of Authorized Signatory: David Gelbaum

 

Title of Authorized Signatory: Trustee

 

Email Address of Buyer: xaixai@pacbell.net

 

Fax Number of Buyer: (949) 631-2325

 

Address for Notice of Buyer: 1835 Newport Blvd., A109 - PMB 467, Costa
Mesa, CA 92627

 

Address for Delivery of Securities for Buyer (if not same as address
for notice):

 

September 2008 Warrant Shares: 235,000,000

 

 

EIN Number:  [PROVIDE
THIS UNDER SEPARATE COVER]

 

33

 

SCHEDULE OF
WARRANT BUYER

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Number of

  	
   

  	
   

  	
   

  	
  Legal Representative’s

  	
   

  
	
   

  	
   

  	
  Address and

  	
   

  	
  September 2008

  	
   

  	
  Aggregate Purchase

  	
   

  	
  Address and Facsimile

  	
   

  
	
  Buyer

  	
   

  	
  Facsimile Number

  	
   

  	
  Warrant Shares

  	
   

  	
  Price

  	
   

  	
  Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The Quercus Trust

  	
   

  	
  1835 Newport Blvd.

  A109 - PMB 467

  Costa Mesa, CA 92627

  	
   

  	
  235,000,000

  	
   

  	
  $4,700,000

  	
   

  	
  David Gelbaum  Trustee

  	
   

  

 

 

EXHIBITS

 

	
  Exhibit A

  	
   

  	
  Form of September 2008 Warrant

  
	
  Exhibit B

  	
   

  	
  Amended Articles

  
	
  Exhibit C

  	
   

  	
  Form of Opinion of Company’s Counsel

  

 

 

EXHIBIT B

 

AMENDMENT TO
ARTICLES

 

ARTICLE FOURTH HAS BEEN DELETED AND REPLACED IN ITS ENTIRETY AS
FOLLOWS:

 

“FOURTH:  The total number of
authorized shares of common stock that may be issued by the Corporation is
                                    
(                        ),
with a par value of One-Tenth of a Cent ($0.001) and no other class of stock
shall be authorized.  Said shares may be
issued by the corporation from time to time for such consideration as may be
fixed by the Board of Directors.”

 

THE FOLLOWING IS ADDED TO THE ARTICLES AS ARTICLE FIFTEENTH:

 

“FIFTEENTH:  Each Holder in whose
name the indebtedness represented by those certain Series B Convertible
Notes issued by the Corporation on September 19 2007 and December 7,
2007, and any substitutions for such Series B Convertible Notes, is
registered on the books of the Corporation on the record date for any action of
stockholders established pursuant to applicable law shall have voting rights
identical to those held by the holders of the Common Stock and shall vote as a
class with the Common Stock.  Each Holder
shall have the right to one (1) vote for each share of Common Stock into
which the Series B Convertible Note registered in such Holder’s name could
be converted on the record date for the vote or written consent of
stockholders.  With respect to such vote,
each such Holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of the Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders’ meeting in
accordance with the bylaws of the Corporation and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
the holders of Common Stock have the right to vote.”

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