Document:

Exhibit 10.12

 

Exhibit 10.12

INNOVIVE PHARMACEUTICALS, INC.

2007 STOCK PLAN

 

 

ARTICLE I

 DEFINITIONS

1.01. Acquiring Person

     Acquiring Person means that a Person, considered alone or as part of a “group” within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, is or becomes
directly or indirectly the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of
securities representing at least fifty percent (50%) of either (A) the combined voting power of the
Company’s then outstanding securities or (B) the then outstanding Common Stock of the Company (in
either case other than as a result of an acquisition of securities directly from the Company).

1.02. Affiliate

     Affiliate means any “subsidiary” or “parent” corporation (as such terms are defined in Section
424 of the Code) of the Company.

1.03. Agreement

     Agreement means a written agreement (including any amendment or supplement thereto) between
the Company and a Participant specifying the terms and conditions of a Stock Award, an award of
Performance Shares, an Option, SAR or Other Equity-Based Award granted to such Participant.

1.04. Associate

     Associate, with respect to any Person, is defined in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act. An Associate does not include the Company or a majority-owned
subsidiary of the Company.

1.05. Board

     Board means the Board of Directors of the Company.

1.06. Change in Control

     “Change in Control” means (i) a Person is or becomes an Acquiring Person; provided, however,
that in no event shall a Change in Control be deemed to have occurred upon an initial public
offering or a subsequent public offering of the Common Stock under the Securities Act; (ii) the
closing of any agreement with a Person that involves the sale, lease, exchange or other transfer
(in one transaction or a series of transactions contemplated or arranged by any party as a single
plan) of all or substantially all of the Company’s total assets on a consolidated basis, as
reported in the Company’s consolidated financial statements, other than a sale or disposition by
the Company of all

 

 

or substantially all of the Company’s assets to an entity at least 50% (fifty percent) of the
combined voting power of the voting securities of which are owned by Persons in substantially the
same proportion as their ownership of the Company immediately prior to such sale; (iii)
consummation of a transaction pursuant to which the Company will undergo a merger, consolidation,
or statutory share exchange with a Person, regardless of whether the Company is intended to be the
surviving or resulting entity after the merger, consolidation, or statutory share exchange, other
than a transaction that results in the voting securities of the Company carrying the right to vote
in elections of persons to the Board outstanding immediately prior to the closing of the
transaction continuing to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 50% (fifty percent) of the Company’s voting
securities carrying the right to vote in elections of persons to the Company’s Board, or such
securities of such surviving entity or its ultimate parent corporation, if any, outstanding
immediately after the closing of such transaction; (iv) the Continuing Directors cease for any
reason to constitute a majority of the Board; (v) holders of the securities of the Company entitled
to vote thereon approve a plan of complete liquidation of the Company or an agreement for the
liquidation by the Company of all or substantially all of the Company’s assets (or, if such
approval is not required by applicable law and is not solicited by the Company, the commencement of
actions constituting such a plan or the closing of such an agreement); or (vi) the Board adopts a
resolution to the effect that, in its judgment, as a consequence of any one or more transactions or
events or series of transactions or events, a Change in Control of the Company has effectively
occurred. The Board shall be entitled to exercise its sole and absolute discretion in exercising
its judgment and in the adoption of such resolution, whether or not any such transaction(s) or
event(s) might be deemed, individually or collectively, to satisfy any of the criteria set forth in
subparagraphs (i) through (v) above.

1.07.  Code

     Code means the Internal Revenue Code of 1986, and any amendments thereto.

1.08. Committee

     Committee means the Compensation Committee of the Board. During any period in which awards
under this Plan are subject to Section 16 of the Exchange Act, the Compensation Committee will be
comprised of at least two members who are non-employee directors under Rule 16b-3 under the
Exchange Act. During any period in which the Company is subject to Code section 162(m), the
Compensation Committee will be comprised of members who are outside directors under Code Section
162(m). No action of the Compensation Committee will be invalidated because any member of the
Compensation Committee fails to satisfy the non-employee director or outside director requirements
of Rule 16b-3 or Code Section 162(m), respectively. The Board or a committee appointed by the Board
shall serve as the Committee during any period in which there is no Compensation Committee.

 

 

1.09. Common Stock

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

1.10. Company

     Company means Innovive Pharmaceuticals, Inc., a Delaware corporation.

1.11. Continuing Director

     Continuing Director means any member of the Board, while a member of the Board and (i) who was
a member of the Board on the Effective Date or (ii) whose nomination for or election to the Board
was recommended or approved by a majority of the Continuing Directors.

1.12. Control Change Date

     Control Change Date means the date on which a Change in Control occurs. If a Change in Control
occurs on account of a series of transactions, the “Control Change Date” is the date of the last of
such transactions.

1.13. Corresponding SAR

     Corresponding SAR means an SAR that is granted in relation to a particular Option and that can
be exercised only upon the surrender to the Company, unexercised, of that portion of the Option to
which the SAR relates.

1.14. Dividend Equivalent Right

     Dividend Equivalent Right means the right, subject to the terms and conditions prescribed by
the Committee, of a Participant to receive (or have credited) cash, stock or other property in
amounts equivalent to the cash, stock or other property dividends declared on shares of Common
Stock with respect to the specified shares of Common Stock (“Dividend Equivalents”) subject to an
Option, SAR, an Other Equity-Based Award or a Performance Share award, as determined by the
Committee, in its sole discretion. The Committee may provide that such Dividend Equivalents (if
any) shall be deemed to have been reinvested in additional shares of Common Stock or otherwise
reinvested.

1.15. Effective Date

     Effective Date has the meaning set forth in Article XVII of this Plan.

 

 

1.16. Exchange Act

     Exchange Act means the Securities Exchange Act of 1934, as amended.

1.17. Fair Market Value

     Fair Market Value means, on any given date, the reported “closing” price of a share of Common
Stock on the principal exchange on which the Common Stock is listed for trading. If, on any given
date, the Common Stock is not listed for trading on an exchange, then Fair Market Value shall be
determined by the Committee using any reasonable method in good faith.

1.18. Initial Value

     Initial Value means, with respect to a Corresponding SAR, the option price per share of the
related Option and, with respect to an SAR granted independently of an Option, the price per share
of Common Stock as determined by the Committee on the date of grant; provided, however, that the
price shall not be less than the Fair Market Value on the date of grant.

1.19. Option

     Option means a stock option that entitles the holder to purchase from the Company a stated
number of shares of Common Stock at the price set forth in an Agreement.

1.20. Other Equity-Based Award

     Other Equity-Based Award means any award other than an Option, SAR, a Performance Share Award
or a Stock Award which, subject to such terms and conditions as may be prescribed by the Committee,
entitles a Participant to receive shares of Common Stock or rights valued in whole or in part by
reference to, or otherwise based on, shares of Common Stock (including SARs or securities
convertible into shares of Common Stock) or dividends on shares of Common Stock.

1.21. Participant

     Participant means an employee of the Company or an Affiliate, a member of the Board, or a
person or entity that provides significant services to the Company or an Affiliate and who
satisfies the requirements of Article IV and is selected by the Committee to receive an award of
Performance Shares, Stock Award, Option, SAR, Other Equity-Based Award or a combination thereof.

 

 

1.22. Performance Shares

     Performance Shares means an award, in the amount determined by the Committee, stated with
reference to a specified number of shares of Common Stock, that in accordance with the terms of an
Agreement entitles the holder to receive a payment for each specified share equal to the Fair
Market Value of Common Stock on the date of payment or such other amount as provided in the
Agreement.

1.23. Person

     “Person” means any human being, firm, corporation, partnership, or other entity. “Person” also
includes any human being, firm, corporation, partnership, or other entity as defined in sections
13(d)(3) and 14(d)(2) of the Exchange Act. The term “Person” does not include the Company or any
Related Entity, and the term Person does not include any employee-benefit plan maintained by the
Company or any Related Entity, or any person or entity organized, appointed, or established by the
Company or any Related Entity for or pursuant to the terms of any such employee-benefit plan,
unless the Board determines that such an employee-benefit plan or such person or entity is a
“Person.”

1.24. Plan

     Plan means this Innovive Pharmaceuticals, Inc. 2007 Stock Plan.

1.25. Related Entity

     Related Entity means any entity that is part of a controlled group of corporations or is under
common control with the Company within the meaning of Sections 1563(a), 414(b) or 414(c) of the
Code.

1.26. SAR

     SAR means a stock appreciation right that in accordance with the terms of an Agreement
entitles the holder to receive, with respect to each share of Common Stock encompassed by the
exercise of the SAR, the excess, if any, of the Fair Market Value at the time of exercise over the
Initial Value. References to “SARs” include both Corresponding SARs and SARs granted independently
of Options, unless the context requires otherwise.

1.27. Securities Act

     Securities Act means the Securities Act of 1933, as amended.

1.28. Stock Award

     Stock Award means shares of Common Stock awarded to a Participant under Article VIII.

 

 

1.29. Ten Percent Shareholder

     Ten Percent Shareholder means any individual owning (directly or indirectly within the meaning
of Code Section 422) more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or of an Affiliate. An individual shall be considered to own any voting
stock owned (directly or indirectly) by or for his or her brothers, sisters, spouse, ancestors or
lineal descendants and shall be considered to own proportionately any voting stock owned (directly
or indirectly) by or for a corporation, partnership, estate or trust of which such individual is a
shareholder, partner or beneficiary.

ARTICLE II

 PURPOSES

     The Plan is intended to assist the Company and its Affiliates in recruiting and retaining
individuals and other service providers with ability and initiative by enabling such persons or
entities to participate in the future success of the Company and its Affiliates and to associate
their interests with those of the Company and its stockholders. The Plan is intended to permit the
grant of both Options qualifying under Section 422 of the Code (“incentive stock options”) and
Options not so qualifying, and the grant of SARs, Stock Awards, Performance Shares, and Other
Equity-Based Awards in accordance with the Plan and any procedures that may be established by the
Committee. No Option that is intended to be an incentive stock option shall be invalid for failure
to qualify as an incentive stock option. The proceeds received by the Company from the sale of
shares of Common Stock pursuant to this Plan shall be used for general corporate purposes.

ARTICLE III

ADMINISTRATION

     The Plan shall be administered by the Committee. The Committee shall have authority to grant
SARs, Stock Awards, Performance Shares, Options and Other Equity-Based Awards upon such terms (not
inconsistent with the provisions of this Plan), as the Committee may consider appropriate. Such
terms may include conditions (in addition to those contained in this Plan), on the exercisability
of all or any part of an Option or SAR or on the transferability or forfeitability of a Stock
Award, an award of Performance Shares or an Other Equity-Based Award. Notwithstanding any such
conditions, the Committee may, in its discretion, accelerate the time at which any Option or SAR
may be exercised, or the time at which a Stock Award or Other Equity-Based Award may become
transferable or nonforfeitable or the time at which an Other Equity-Based Award or an award of
Performance Shares may be settled. In addition, the Committee shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend, and
rescind rules and regulations pertaining to the

 

 

administration of the Plan; and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific power to the Committee
shall not be construed as limiting any power or authority of the Committee. Any decision made, or
action taken, by the Committee in connection with the administration of this Plan shall be final
and conclusive. The members of the Committee shall not be liable for any act done in good faith
with respect to this Plan or any Agreement, Option, SAR, Stock Award, Other Equity-Based Award or
award of Performance Shares. All expenses of administering this Plan shall be borne by the Company.

ARTICLE IV

ELIGIBILITY

     Any employee of the Company or an Affiliate (including a corporation that becomes an Affiliate
after the adoption of this Plan) and any member of the Board is eligible to participate in this
Plan. In addition, any other person or entity that provides significant services to the Company or
an Affiliate is eligible to participate in this Plan if the Committee, in its sole discretion,
determines that the participation of such person or entity is in the best interest of the Company.

ARTICLE V

COMMON STOCK SUBJECT TO PLAN

5.01. Common Stock Issued

     Upon the award of shares of Common Stock pursuant to a Stock Award, an Other Equity-Based
Award or in settlement of an award of Performance Shares, the Company may deliver to the
Participant shares of Common Stock from its treasury shares or from its authorized but unissued
Common Stock. Upon the exercise of any Option, SAR or Other Equity-Based Award denominated in
shares of Common Stock, the Company may deliver to the Participant (or the Participant’s broker if
the Participant so directs), shares of Common Stock from its treasury shares or from its authorized
but unissued Common Stock.

5.02. Aggregate Limit

     (a) The maximum aggregate number of shares of Common Stock that may be issued under this Plan
pursuant to the exercise of Options and SARs, the grant of Stock Awards or Other Equity-Based
Awards and the settlement of Performance Shares is equal to 1,500,000.

     (b) The maximum number of shares of Common Stock that may be issued under this Plan in
accordance with Section 5.02(a) shall be subject to adjustment as provided in Article XI.

 

 

5.03. Reallocation of Shares

     If (i) any award or grant under the Plan expires or is terminated without having been
exercised or paid (whether in cash or Common Stock) or (ii) any shares of Common Stock are tendered
by a Participant to pay the exercise price of, or are withheld or delivered to satisfy tax
obligations in respect of, any award or grant under this Plan, then any shares of Common Stock
covered by such lapsed, cancelled, expired or settled portion of such award or grant and any such
withheld or tendered shares of Common Stock shall be available for the grant of other Options,
SARs, Stock Awards, Other Equity-Based Awards and settlement of Performance Shares under this Plan.

5.04. Section 162(m) Award Limits.

     The following limits shall apply to the grant of any award under the Plan if, at the time of
grant, the Company is a “publicly held corporation” within the meaning of Section 162(m) of the
Code.

     (a) Options and Stock Agreement Rights. Subject to adjustment as provided in Article XI, no
employee shall be granted within any fiscal year of the Company one or more Options or SARs which
in the aggregate are for more than one-third (1/3) of the shares of Common Stock for issuance under
the Plan.

     (b) Other Awards. Subject to adjustment as provided in Article XI, no employee shall be
granted within any fiscal year of the Company one or more awards (other than options or SARs)
subject to vesting based on the attainment of performance goals as described in Section 9.09, for
more than one-third (1/3) of the shares of Common Stock in the aggregate under the Plan.

ARTICLE VI

OPTIONS

6.01. Award

     In accordance with the provisions of Article IV, the Committee will designate each individual
to whom an Option is to be granted and will specify the number of shares of Common Stock covered by
such awards.

6.02. Option Price

     The price per share of Common Stock purchased on the exercise of an Option shall be determined
by the Committee on the date of grant, but shall not be less than the Fair Market Value on the date
the Option is granted. Notwithstanding the preceding sentence, the price per share for Common Stock
purchased on the exercise of any Option that is an incentive stock option granted to an individual
who is a Ten Percent

 

 

Shareholder on the date such option is granted, shall not be less than one hundred ten percent
(110%) of the Fair Market Value on the date the Option is granted.

6.03. Maximum Option Period

     The maximum period in which an Option may be exercised shall be determined by the Committee on
the date of grant, except that no Option shall be exercisable after the expiration of ten years
from the date such Option was granted. In the case of an incentive stock option granted to a
Participant who is a Ten Percent Shareholder on the date of grant, such Option shall not be
exercisable after the expiration of five years from the date of grant. The terms of any Option may
provide that it is exercisable for a period less than such maximum period.

6.04. Nontransferability

     Except as provided in Section 6.05, each Option granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution. In the event of any
transfer of an Option (by the Participant or his transferee), the Option and any Corresponding SAR
that relates to such Option must be transferred to the same person or persons or entity or
entities. Except as provided in Section 6.05, during the lifetime of the Participant to whom the
Option is granted, the Option may be exercised only by the Participant. No right or interest of a
Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of
such Participant.

6.05. Transferable Options

     Section 6.04 to the contrary notwithstanding, if the Agreement provides, an Option that is not
an incentive stock option may be transferred by a Participant to the Participant’s children,
grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership
in which such family members are the only partners, on such terms and conditions as may be
permitted under the rules of Form S-8 as in effect from time to time. The holder of an Option
transferred pursuant to this Section shall be bound by the same terms and conditions that governed
the Option during the period that it was held by the Participant; provided, however, that such
transferee may not transfer the Option except by will or the laws of descent and distribution. In
the event of any transfer of an Option (by the Participant or his transferee), the Option and any
Corresponding SAR that relates to such Option must be transferred to the same person or persons or
entity or entities.

6.06. Employee Status

     For purposes of determining the applicability of Section 422 of the Code (relating to
incentive stock options), or in the event that the terms of any Option provide that it may be
exercised only during employment or continued service or within a specified period of time after
termination of employment or continued service, the Committee may decide to what extent leaves of
absence for governmental or military service, illness,

 

 

temporary disability, or other reasons shall not be deemed interruptions of continuous employment
or service.

6.07. Exercise

     Subject to the provisions of this Plan and the applicable Agreement, an Option may be
exercised in whole at any time or in part from time to time at such times and in compliance with
such requirements as the Committee shall determine; provided, however, that incentive stock options
(granted under the Plan and all plans of the Company and its Affiliates) may not be first
exercisable in a calendar year for shares of Common Stock having a Fair Market Value (determined as
of the date an Option is granted) exceeding $100,000; any excess will be treated as a nonstatutory
stock option. An Option granted under this Plan may be exercised with respect to any number of
whole shares less than the full number for which the Option could be exercised. A partial exercise
of an Option shall not affect the right to exercise the Option from time to time in accordance with
this Plan and the applicable Agreement with respect to the remaining shares subject to the Option.
The exercise of an Option shall result in the termination of any Corresponding SAR to the extent of
the number of shares with respect to which the Option is exercised.

6.08. Payment

     Subject to rules established by the Committee and unless otherwise provided in an Agreement,
payment of all or part of the Option price may be made in cash, certified check, by tendering
shares of Common Stock (or for other lawful consideration), by a broker-assisted cashless exercise.
If shares of Common Stock are used to pay all or part of the Option price, the sum of the cash and
cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise)
of the shares surrendered must not be less than the Option price of the shares for which the Option
is being exercised.

6.09. Change in Control

     Section 6.07 to the contrary notwithstanding, the Committee shall have the authority to cause
any or all of the Options outstanding as of any Control Change Date to become fully exercisable on
and after such Control Change Date.

6.10. Stockholder Rights

     No Participant shall have any rights as a stockholder with respect to shares subject to an
Option until the date of exercise of such Option. Notwithstanding the foregoing, the Committee may
provide in an Agreement that the holder of an Option is entitled to Dividend Equivalents during the
period beginning on the date of the award and ending on the date the Option is exercised.

 

 

6.11. Disposition of Shares

     A Participant shall notify the Company of any sale or other disposition of shares of Common
Stock acquired pursuant to an Option that was an incentive stock option if such sale or disposition
occurs (i) within two years of the grant of an Option or (ii) within one year of the issuance of
shares of Common Stock to the Participant. Such notice shall be in writing and directed to the
Secretary of the Company.

ARTICLE VII

SARS

7.01. Award

     In accordance with the provisions of Article IV, at the time of grant, the Committee will
designate each individual to whom SARs are to be granted, will specify the number of shares of
Common Stock covered by such awards and will specify whether each SAR is to be settled in shares of
Common Stock or in cash. No Participant may be granted Corresponding SARs (under the Plan and all
plans of the Company and its Affiliates) that are related to incentive stock options which are
first exercisable in any calendar year for shares of Common Stock having an aggregate Fair Market
Value (determined as of the date the related Option is granted) that exceeds $100,000.

7.02. Maximum SAR Period

     The term of each SAR shall be determined by the Committee on the date of grant, except that no
SAR shall have a term of more than ten years from the date of grant. In the case of a Corresponding
SAR that is related to an incentive stock option and is granted to a Participant who is a Ten
Percent Shareholder on the date of grant, such Corresponding SAR shall not be exercisable after the
expiration of five years from the date of grant. The terms of any SAR may provide that it has a
term that is less than such maximum period.

7.03. Nontransferability

     Except as provided in Section 7.04, each SAR granted under this Plan shall be nontransferable
except by will or by the laws of descent and distribution. In the event of any such transfer, a
Corresponding SAR and the related Option must be transferred to the same person or persons or
entity or entities. Except as provided in Section 7.04, during the lifetime of the Participant to
whom the SAR is granted, the SAR may be exercised only by the Participant. No right or interest of
a Participant in any SAR shall be liable for, or subject to, any lien, obligation, or liability of
such Participant.

7.04. Transferable SARs

     Section 7.03 to the contrary notwithstanding, if the Agreement provides, an SAR, other than a
Corresponding SAR that is related to an incentive stock option, may be transferred by a Participant
to the Participant’s children, grandchildren, spouse, one or

 

 

more trusts for the benefit of such family members or a partnership in which such family members
are the only partners, on such terms and conditions as may be permitted under the rules of Form S-8
as in effect from time to time. The holder of an SAR transferred pursuant to this Section shall be
bound by the same terms and conditions that governed the SAR during the period that it was held by
the Participant; provided, however, that such transferee may not transfer the SAR except by will or
the laws of descent and distribution. In the event of any transfer of a Corresponding SAR (by the
Participant or his transferee), the Corresponding SAR and the related Option must be transferred to
the same person or person or entity or entities.

7.05. Exercise

     Subject to the provisions of this Plan and the applicable Agreement, an SAR may be exercised
in whole at any time or in part from time to time at such times and in compliance with such
requirements as the Committee shall determine; provided, however, that a Corresponding SAR that is
related to an incentive stock option may be exercised only to the extent that the related Option is
exercisable and only when the Fair Market Value exceeds the option price of the related Option. An
SAR granted under this Plan may be exercised with respect to any number of whole shares less than
the full number for which the SAR could be exercised. A partial exercise of an SAR shall not affect
the right to exercise the SAR from time to time in accordance with this Plan and the applicable
Agreement with respect to the remaining shares subject to the SAR. The exercise of a Corresponding
SAR shall result in the termination of the related Option to the extent of the number of shares
with respect to which the SAR is exercised.

7.06. Change in Control

     Section 7.05 to the contrary notwithstanding, the Committee shall have the authority to cause
any or all of the SARs outstanding as of any Control Change Date to become fully exercisable on and
after such Control Change Date.

7.07. Employee Status

     If the terms of any SAR provide that it may be exercised only during employment or continued
service or within a specified period of time after termination of employment or continued service,
the Committee may decide to what extent leaves of absence for governmental or military service,
illness, temporary disability or other reasons shall not be deemed interruptions of continuous
employment or service.

7.08. Settlement

     At the Committee’s discretion, the amount payable as a result of the exercise of an SAR may be
settled in cash, shares of Common Stock, or a combination of cash and Common Stock. No fractional
share will be deliverable upon the exercise of an SAR but a cash payment will be made in lieu
thereof.

 

 

7.09. Stockholder Rights

     No Participant shall, as a result of receiving an SAR, have any rights as a stockholder of the
Company or any Affiliate until the date that the SAR is exercised and then only to the extent that
the SAR is settled by the issuance of Common Stock. Notwithstanding the foregoing, the Committee
may provide in an Agreement that the holder of an SAR is entitled to Dividend Equivalents during
the period beginning on the date of the award and ending on the date the SAR is exercised.

ARTICLE VIII

STOCK AWARDS

8.01. Award

     In accordance with the provisions of Article IV, the Committee will designate each individual
to whom a Stock Award is to be made and will specify the number of shares of Common Stock covered
by such awards.

8.02. Vesting

     The Committee, on the date of the award, may prescribe that a Participant’s rights in a Stock
Award shall be forfeitable or otherwise restricted for a period of time or subject to such
conditions as may be set forth in the Agreement. By way of example and not of limitation, the
Committee may prescribe that a Participant’s rights in a Stock Award shall be forfeitable or
otherwise restricted subject to the attainment of objectives stated with reference to the
Company’s, an Affiliate’s or a business unit’s attainment of objectives stated with respect to
performance criteria established by the Committee.

8.03. Employee Status

     In the event that the terms of any Stock Award provide that shares may become transferable and
nonforfeitable thereunder only after completion of a specified period of employment or continuous
service, the Committee may decide in each case to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons shall not be deemed interruptions
of continuous employment or service.

8.04. Change in Control

     Sections 8.02 and 8.03 to the contrary notwithstanding, the Committee shall have the authority
to cause any or all of the Stock Awards outstanding as of any Control Change Date to become
nonforfeitable and transferable on and after such Control Change Date.

 

 

8.05. Stockholder Rights

     Unless otherwise specified in accordance with the applicable Agreement, while the shares of
Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable, a
Participant will have all rights of a stockholder with respect to a Stock Award, including the
right to receive dividends and vote the shares; provided, however, that during such period (i) a
Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares
granted pursuant to a Stock Award, (ii) the Company shall retain custody of the certificates
evidencing shares granted pursuant to a Stock Award, and (iii) the Participant will deliver to the
Company a stock power, endorsed in blank, with respect to each Stock Award. The limitations set
forth in the preceding sentence shall not apply after the shares granted under the Stock Award are
transferable and are no longer forfeitable.

ARTICLE IX

 PERFORMANCE SHARE AWARDS

9.01. Award

     In accordance with the provisions of Article IV, the Committee will designate each individual
to whom an award of Performance Shares is to be made and will specify the number of shares of
Common Stock covered by such awards.

9.02. Earning the Award

     The Committee, on the date of the grant of an award, shall prescribe that the Performance
Shares will be earned, and the Participant will be entitled to receive payment pursuant to the
award of Performance Shares, only upon the satisfaction of performance objectives and such other
criteria as may be prescribed by the Committee, including those described in Section 9.09.

9.03. Payment

     In the discretion of the Committee as set forth in the Agreement at time of grant, the amount
payable when an award of Performance Shares is earned may be settled in cash, by the issuance of
shares of Common Stock, or a combination thereof. A fractional share of Common Stock shall not be
deliverable when an award of Performance Shares is earned, but a cash payment will be made in lieu
thereof. Performance Awards may be paid in a lump sum or in installments following the close of the
performance measuring period or, in accordance with procedures established by the Committee, on a
deferred basis.

 

 

9.04. Stockholder Rights

     A Participant, as a result of receiving an award of Performance Shares, shall not have any
rights as a stockholder until, and then only to the extent that, the award of Performance Shares is
earned and settled in shares of Common Stock. After an award of Performance Shares is earned and
settled in shares, a Participant will have all the rights of a stockholder as described in Section
8.05. Notwithstanding the foregoing, the Committee may provide in an Agreement that the holder of
an award of Performance Shares is entitled to Dividend Equivalents beginning on the date of the
award and ending on the date the Performance Shares are earned and settled.

9.05. Nontransferability

     Except as provided in Section 9.06, Performance Shares granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution. No right or interest of
a Participant in any Performance Shares shall be liable for, or subject to, any lien, obligation,
or liability of such Participant.

9.06. Transferable Performance Shares

     Section 9.05 to the contrary notwithstanding, if the Agreement provides, an award of
Performance Shares may be transferred by a Participant to the Participant’s children,
grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership
in which such family members are the only partners, on such terms and conditions as may be
permitted under Rule 16b-3 under the Exchange Act as in effect from time to time. The holder of
Performance Shares transferred pursuant to this Section shall be bound by the same terms and
conditions that governed the Performance Shares during the period that they were held by the
Participant; provided, however that such transferee may not transfer Performance Shares except by
will or the laws of descent and distribution.

9.07. Employee Status

     In the event that the terms of any Performance Share award provide that no payment will be
made unless the Participant completes a stated period of employment or continued service, the
Committee may decide to what extent leaves of absence for government or military service, illness,
temporary disability, or other reasons shall not be deemed interruptions of continuous employment
or service.

9.08. Change in Control

     Section 9.02 to the contrary notwithstanding, on and after a Control Change Date, the
Committee shall have the authority to cause any or all of the Stock Awards outstanding as of any
Control Change Date to become nonforfeitable on such Control Change Date and settled with
nonforfeitable and transferable shares of Common Stock.

 

 

9.09. Performance Measures.

     The Committee may make the vesting of awards, including Performance Share Awards, subject to
performance goals. The committee, in its discretion, may base performance goals on one or more of
the following such measures with respect to the Company or any business unit of the Company: gross
margin, operating margin, operating income, pre-tax profit, earnings before stock-based
compensation expense, interest, taxes, depreciation and amortization, net income, funds from
operations, expenses, the market price of our common stock, earnings per share, return on
stockholder equity, return on capital, return on net assets, economic value added, market share,
customer service, customer satisfaction, total stockholder return, free cash flow, net operating
income, operating cash flow, return on investment, employee satisfaction, employee retention,
balance of cash, cash equivalents and marketable securities, completion of an identified
development or redevelopment project, completion of a joint venture or other corporate transaction,
or other measures as determined by the Committee. The target levels with respect to these
performance measures may be expressed on an absolute basis or relative to a standard specified by
the Committee. The degree of attainment of performance measures will be calculated in accordance
with generally accepted accounting principles, but prior to the accrual or payment of any
performance award for the same performance period, and, according to criteria established by the
Committee, excluding the effect (whether positive or negative) of changes in accounting standards
or any extraordinary, unusual or nonrecurring item occurring after the establishment of the
performance goals applicable to a performance award.

ARTICLE X

 OTHER EQUITY–BASED AWARDS

10.01. Award

     In accordance with the provisions of Article IV, the Committee will designate each individual
to whom an Other Equity-Based Award is to be made and will specify the number of shares of Common
Stock or other equity interests covered by such awards.

10.02. Terms and Conditions

     The Committee, at the time an Other Equity-Based Award is made, shall specify the terms and
conditions which govern the award; provided, however, that the terms and conditions of an Other
Equity-Based Award that is an SAR shall be consistent with the terms and conditions set forth in
Article VII. The terms and conditions of an Other Equity-Based Award may prescribe that a
Participant’s rights in the Other Equity-Based Award shall be forfeitable, nontransferable or
otherwise restricted for a period of time or subject to such other conditions as may be determined
by the Committee, in its discretion and set forth in the Agreement. Other Equity-Based Awards may
be granted to Participants, either alone or in addition to other awards granted under the Plan, and
Other

 

 

Stock-Based Awards may be granted in the settlement of other Awards granted under the Plan.

10.03. Payment or Settlement

     Other Equity-Based Awards valued in whole or in part by reference to, or otherwise based on,
shares of Common Stock, shall be payable or settled in shares of Common Stock, cash or a
combination of Common Stock and cash, as determined by the Committee in its discretion. Other
Equity-Based Awards denominated as equity interests other than shares of Common Stock may be paid
or settled in shares or units of such equity interests or cash or a combination of both as
determined by the Committee in its discretion.

10.04. Change in Control

     Section 10.02 to the contrary notwithstanding, the Committee shall have the authority to cause
any or all of the Other Equity-Based Awards outstanding as of any Control Change Date to be earned
in full, nonforfeitable and transferable on and after such Control Change Date.

10.05. Employee Status

     If the terms of any Other Equity-Based Award provides that it may be earned or exercised only
during employment or continued service or within a specified period of time after termination of
employment or continued service, the Committee may decide to what extent leaves of absence for
governmental or military service, illness, temporary disability or other reasons shall not be
deemed interruptions of continuous employment or service.

10.06. Stockholder Rights

     A Participant, as a result of receiving an Other Equity-Based Award, shall not have any rights
as a stockholder until, and then only to the extent that, the Other Equity-Based Award is earned
and settled in shares of Common Stock.

ARTICLE XI

ADJUSTMENT UPON CHANGE IN COMMON STOCK

     The maximum number of shares as to which Options, SARs, Performance Shares, Stock Awards and
Other Equity-Based Awards may be granted and the terms, including the exercise price per share, of
outstanding Stock Awards, Options, SARs, Performance Shares and Other Equity-Based Awards; shall be
adjusted as the Board shall determine to be equitably required in the event that (i) the Company
(a) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares
or (b) engages in a transaction to which Section 424 of the Code applies or (ii) there occurs any
other event

 

 

which, in the judgment of the Board necessitates such action. Any determination made under this
Article XI by the Board shall be final and conclusive.

     The issuance by the Company of stock of any class, or securities convertible into stock of any
class, for cash or property, or for labor or services, either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, or upon conversion of stock or obligations of the
Company convertible into such stock or other securities, shall not affect, and no adjustment by
reason thereof shall be made with respect to, the maximum number of shares as to which Options,
SARs, Performance Shares, Stock Awards and Other Equity-Based Awards may be granted or the terms of
outstanding Stock Awards, Options, SARs, Performance Shares or Other Equity-Based Awards.

     The Committee may make Stock Awards and may grant Options, SARs, Performance Shares or Other
Equity-Based Awards in substitution for performance shares, phantom shares, stock awards, stock
options, stock appreciation rights, or similar awards held by an individual who becomes an employee
of the Company or an Affiliate in connection with a transaction described in the first paragraph of
this Article XI. Notwithstanding any provision of the Plan (other than the limitation of Section
5.02), the terms of such substituted Stock Awards, SARs, Other Equity-Based Awards, Options or
Performance Shares shall be as the Committee, in its discretion, determines is appropriate.

ARTICLE XII

COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES

     No Option or SAR shall be exercisable, no shares of Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall be made under this
Plan except in compliance with all applicable federal and state laws and regulations (including,
without limitation, withholding tax requirements), any listing agreement to which the Company is a
party, and the rules of all domestic stock exchanges on which the Company’s shares may be listed.
The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any
stock certificate issued to evidence shares of Common Stock when a Stock Award is granted, a
Performance Share or Other Equity-Based Award is settled or for which an Option or SAR is exercised
may bear such legends and statements as the Committee may deem advisable to assure compliance with
federal and state laws and regulations. No Option or SAR shall be exercisable, no Stock Award or
Performance Share shall be granted, no shares of Common Stock shall be issued, no certificate for
shares of Common Stock shall be delivered, and no payment shall be made under this Plan until the
Company has obtained such consent or approval as the Committee may deem advisable from regulatory
bodies having jurisdiction over such matters.

 

 

ARTICLE XIII

GENERAL PROVISIONS

13.01. Effect on Employment and Service

     Neither the adoption of this Plan, its operation, nor any documents describing or referring to
this Plan (or any part thereof), shall confer upon any individual or entity any right to continue
in the employ or service of the Company or an Affiliate or in any way affect any right and power of
the Company or an Affiliate to terminate the employment or service of any individual or entity at
any time with or without assigning a reason therefor.

13.02. Unfunded Plan

     This Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be
required to segregate any assets that may at any time be represented by grants under this Plan. Any
liability of the Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on,
any property of the Company.

13.03. Rules of Construction

     Headings are given to the articles and sections of this Plan solely as a convenience to
facilitate reference. The reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.

13.04. Withholding Taxes

     Each Participant shall be responsible for satisfying any income and employment tax withholding
obligations attributable to participation in the Plan. Unless otherwise provided by the Agreement,
any such withholding tax obligations may be satisfied in cash (including from any cash payable in
settlement of an award of Performance Shares, SARs or Other Equity-Based Award) or a cash
equivalent acceptable to the Committee. Any withholding tax obligations also may be satisfied (a)
by surrendering to the Company shares of Common Stock previously acquired by the Participant; (b)
by authorizing the Company to withhold or reduce the number of shares of Common Stock otherwise
issuable to the Participant upon the exercise of an Option or SAR, the settlement of a Performance
Share award or an Other Equity-Based Award (if applicable) or the grant or vesting of a Stock
Award; or (c) by any other method as may be approved by the Committee. If shares of Common Stock
are used to pay all or part of such withholding tax obligation, the Fair Market Value of the shares
surrendered, withheld or reduced shall be determined as of the day the tax liability arises.

 

 

13.05. Dividends and Dividend Equivalents

     At the discretion of the Committee, a grant of an Option, SAR or Performance Shares may
include Dividend Equivalent rights, payable in cash or shares of Common Stock on a current or
deferred basis. All Dividend Equivalents which are not paid currently may, at the Committee’s
discretion, accrue interest, be reinvested in additional shares of Common Stock and paid if, when,
and to the extent that the underlying awards are earned and paid. The total number of shares of
Common Stock available for grant under the Plan shall not be reduced on account of any Dividend
Equivalents that are reinvested and credited as additional Stock Awards, Performance Share awards,
SARs or Other Equity-Based Awards, as applicable.

ARTICLE XIV

LIMITATION ON BENEFITS

14.01. Impact of Change in Control.

     Upon a Change in Control, the Committee may, in its discretion, cause (i) outstanding Options
and SARs to become fully exercisable thereafter, (ii) outstanding Stock Awards to become
transferable and nonforfeitable thereafter and (iii) outstanding Other Equity-Based Awards to
become earned in their entirety.

14.02. Assumption Upon Change in Control.

     In the event of a Change in Control the Committee, in its discretion and without the need for
a Participant’s consent, may provide that an outstanding Option, SAR, Stock Award, Performance Unit
or Other Equity-Based Award shall be assumed or continued by, or a substitute award granted by,
the surviving entity in the Change in Control. Such assumed or substituted award shall be of the
same type of award as the original Option, SAR, Stock Award, Performance Share or Other
Equity-Based Award being assumed or substituted. The assumed or substituted award shall have a
value, as of the Control Change Date, that is substantially equal to the value of the original
award (or the difference between the Fair Market Value and the option price or Initial Value in the
case of Options and SARs) as the Committee determines is equitably required and such other terms
and conditions as may be prescribed by the Committee. To the extent an award is not assumed,
continued or substituted for, such award will terminate immediately prior to the Change in Control.

14.03. Cash-Out Upon Change in Control.

     In the event of a Change in Control the Committee, in its discretion and without the need of a
Participant’s consent, may provide that each Option, SAR, Stock Award and Performance Share award
and Other Equity-Based Award shall be cancelled in exchange for a payment. The payment may be in
cash, shares of Common Stock or other securities or consideration received by stockholders in the
Change in Control transaction.

 

 

The amount of the payment shall be an amount that is substantially equal to (i) the amount by which
the price per share received by stockholders in the Change in Control exceeds the Option price or
Initial Value in the case of an Option and SAR, or (ii) the price per share received by
stockholders for each share of Common Stock subject to a Stock Award, Performance Share award or
Other Equity-Based Award or (iii) the value of the other securities or property in which the
Performance Share or Other Equity-Based award is denominated.

14.04. Limitation of Benefits

     The benefits that a Participant may be entitled to receive under this Plan and other benefits
that a Participant is entitled to receive under other plans, agreements and arrangements (which,
together with the benefits provided under this Plan, are referred to as “Payments”), may constitute
Parachute Payments that are subject to Code Sections 280G and 4999. As provided in this Article XI,
the Parachute Payments will be reduced if, and only to the extent that, a reduction will allow a
Participant to receive a greater Net After Tax Amount than a Participant would receive absent a
reduction.

     The Accounting Firm (as defined below) will first determine the amount of any Parachute
Payments that are payable to a Participant. The Accounting Firm also will determine the Net After
Tax Amount attributable to the Participant’s total Parachute Payments.

     The Accounting Firm will next determine the largest amount of Payments that may be made to the
Participant without subjecting the Participant to tax under Code Section 4999 (the “Capped
Payments”). Thereafter, the Accounting Firm will determine the Net After Tax Amount attributable to
the Capped Payments.

     The Participant will receive the total Parachute Payments or the Capped Payments, whichever
provides the Participant with the higher Net After Tax Amount. If the Participant will receive the
Capped Payments, the total Parachute Payments will be adjusted by first reducing the amount of any
noncash benefits under this Plan or any other plan, agreement or arrangement (with the source of
the reduction to be directed by the Participant) and then by reducing the amount of any cash
benefits under this Plan or any other plan, agreement or arrangement (with the source of the
reduction to be directed by the Participant). The Accounting Firm will notify the Participant and
the Company if it determines that the Parachute Payments must be reduced to the Capped Payments and
will send the Participant and the Company a copy of its detailed calculations supporting that
determination.

     As a result of the uncertainty in the application of Code Sections 280G and 4999 at the time
that the Accounting Firm makes its determinations under this Article XIV, it is possible that
amounts will have been paid or distributed to the Participant that should not have been paid or
distributed under this Article XIV (“Overpayments”), or that additional amounts should be paid or
distributed to the Participant under this Article XIV (“Underpayments”). If the Accounting Firm
determines, based on either the assertion of a

 

 

deficiency by the Internal Revenue Service against the Company or the Participant, which assertion
the Accounting Firm believes has a high probability of success or controlling precedent or
substantial authority, that an Overpayment has been made, the Participant must repay to the
Company, without interest; provided, however, that no loan will be deemed to have been made and no
amount will be payable by the Participant to the Company unless, and then only to the extent that,
the deemed loan and payment would either reduce the amount on which the Participant is subject to
tax under Code Section 4999 or generate a refund of tax imposed under Code Section 4999. If the
Accounting Firm determines, based upon controlling precedent or substantial authority, that an
Underpayment has occurred, the Accounting Firm will notify the Participant and the Company of that
determination and the amount of that Underpayment will be paid to the Participant promptly by the
Company.

     For purposes of this Article XIV, the term “Accounting Firm” means the independent accounting
firm engaged by the Company immediately before the Control Change Date. For purposes of this
Article XIV, the term “Net After Tax Amount” means the amount of any Parachute Payments or Capped
Payments, as applicable, net of taxes imposed under Code Sections 1, 3101(b) and 4999 and any State
or local income taxes applicable to the Participant on the date of payment. The determination of
the Net After Tax Amount shall be made using the highest combined effective rate imposed by the
foregoing taxes on income of the same character as the Parachute Payments or Capped Payments, as
applicable, in effect on the date of payment. For purposes of this Article XIV, the term “Parachute
Payment” means a payment that is described in Code Section 280G(b)(2), determined in accordance
with Code Section 280G and the regulations promulgated or proposed thereunder.

     Notwithstanding any other provision of this Article XIV, the limitations and provisions of
this Article XIV shall not apply to any Participant who, pursuant to an agreement with the Company
or the terms of another plan maintained by the Company, is entitled to indemnification for any
liability that the Participant may incur under Code Section 4999.

ARTICLE XV

 AMENDMENT

     The Board may amend or terminate this Plan at any time; provided, however, that no amendment
may adversely impair the rights of Participants with respect to outstanding awards. In addition, an
amendment will be contingent on approval of the Company’s stockholders, to the extent that the
absence of such approval would cause the Plan to fail to comply with any applicable legal
requirement or the rules of any exchange on which the Common Stock is listed.

 

 

ARTICLE XVI

DURATION OF PLAN

     No Stock Award, Performance Share Award, Option, SAR or Other Equity-Based Award may be
granted under this Plan after the tenth anniversary of the date that the Plan is adopted by the
Board of Directors. Stock Awards, Performance Share awards, Options, SARs and Other Equity-Based
Awards granted before such date shall remain valid in accordance with their terms.

ARTICLE XVII

EFFECTIVE DATE OF PLAN

     Options, Stock Awards, Performance Shares and Other Equity-Based Awards may be granted under
this Plan on and after the Effective Date, provided that, this Plan shall not be effective unless
approved by a majority of the stockholders of Common Stock entitled to vote and present or
represented by properly executed and delivered proxies at a duly held stockholders’ meeting at
which a quorum is present or by consent of the stockholders, within twelve months of the Effective
Date. The Effective Date is                      ___, 2007.EX-10.1 Securities Purchase Agreement

 

EXHIBIT 10.1

SECURITIES PURCHASE AGREEMENT

     THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of July 24, 2007, by
and among ADVANCED VIRAL RESEARCH CORP., a Delaware corporation (the “Company”), and the
Buyer listed on Schedule I attached hereto (individually, a “Buyer”).

WITNESSETH

     WHEREAS, the Company and the Buyer is executing and delivering this Agreement in reliance upon
an exemption from securities registration pursuant to Section 4(2) and/or Rule 506 of Regulation D
(“Regulation D”) as promulgated by the U.S. Securities and Exchange Commission (the
“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”);

     WHEREAS, the parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer, as provided herein, and the Buyer shall
purchase up to Seven Hundred Fifty Thousand Dollars ($750,000) of series A secured convertible
debentures in the form attached hereto as Exhibit A-1 (the “Series A Convertible
Debentures”) and Two Million Dollars ($2,000,000) of series B secured convertible debentures in
the form attached hereto as Exhibit A-2 (the “Series B Convertible Debentures” and
collectively along with the Series A Convertible Debentures, the “Convertible Debentures”),
each which shall be convertible into shares of the Company’s common stock, par value $0.00001 (the
“Common Stock”) (as converted, the “Conversion Shares”) of which Seven Hundred
Fifty Thousand Dollars ($750,000) of Series A Convertible Debentures and Seven Hundred Fifty
Thousand Dollars ($750,000) of Series B Convertible Debentures shall be purchased within two (2)
business days following the date hereof (the “First Closing”), Six Hundred Twenty Five
Thousand Dollars ($625,000) of Series B Convertible Debentures shall be purchased on the date the
registration statement (the “Registration Statement”) is filed, pursuant to the
Registration Rights Agreement dated the date hereof, with the United States Securities and Exchange
Commission (the “SEC”) (the “Second Closing”) and Six Hundred Twenty Five Thousand
Dollars ($625,000) of Series B Convertible Debentures shall be purchased on the date the
Registration Statement is declared effective by the SEC (the “Third Closing”)
(individually referred to as a “Closing” collectively referred to as the
“Closings”), for a total purchase price of Two Million Seven Hundred Fifty Thousand Dollars
($2,750,000), (the “Purchase Price”) in the respective amounts set forth opposite each
Buyer(s) name on Schedule I (the “Subscription Amount”); and

     WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering a Registration Rights Agreement (the “Registration Rights
Agreement”) pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated there under, and applicable
state securities laws; and

     WHEREAS, the Convertible Debentures are secured by a security interest in all of the assets of
the Company and of each of the Company’s subsidiaries as pursuant to the Security Agreement dated
January 1, 2007 (the “Security Agreement”) and the corresponding financing statement on
Form UCC-1 Filing No. 2007 0063452 filed with the Delaware Department of State UCC Filing Section
on January 5, 2007; and

 

 

     WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering Irrevocable Transfer Agent Instructions (the “Irrevocable
Transfer Agent Instructions”).

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

          1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.

               (a) Purchase of Convertible Debentures. Subject to the satisfaction (or waiver) of
the terms and conditions of this Agreement, the Buyer agrees to purchase at each Closing and the
Company agrees to sell and issue to the Buyer at each Closing, Convertible Debentures as set forth
opposite the Buyer’s name on Schedule I hereto.

               (b) Closing Date. The First Closing of the purchase and sale of the Convertible
Debentures shall take place at 10:00 a.m. Eastern Standard Time on the second (2nd)
business day following the date hereof, subject to notification of satisfaction of the conditions
to the First Closing set forth herein and in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and the Buyer) (the “First Closing Date”), the Second
Closing of the purchase and sale of the Convertible Debentures shall take place at 4:00 p.m.
Eastern Standard Time on the date the Registration Statement is filed with the SEC, subject to
notification of satisfaction of the conditions to the Second Closing set forth herein and in
Sections 6 and 7 below (or such later date as is mutually agreed to by the Company and the Buyer)
(the “Second Closing Date”), and the Third Closing of the purchase and sale of the
Convertible Debentures shall take place at 4:00 p.m. Eastern Standard Time on the date the
Registration Statement is declared effective by the SEC, subject to notification of satisfaction of
the conditions to the Third Closing set forth herein and in Sections 6 and 7 below (or such later
date as is mutually agreed to by the Company and the Buyer) (the “Third Closing Date”)
(collectively referred to a the “Closing Dates”). The Closing shall occur on the
respective Closing Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson Street, Suite 3700,
Jersey City, New Jersey 07302 (or such other place as is mutually agreed to by the Company and the
Buyer).

               (c) Form of Payment. Subject to the satisfaction of the terms and conditions of this
Agreement, on the Closing Dates, (i) the Buyers shall deliver to the Company such aggregate
proceeds for the Convertible Debentures to be issued and sold to such Buyer(s), minus the fees to
be paid directly from the proceeds of the Closings as set forth herein, and (ii) the Company shall
deliver to each Buyer, Convertible Debentures which such Buyer(s) is purchasing in amounts
indicated opposite such Buyer’s name on Schedule I, duly executed on behalf of the Company.

          2. BUYER’S REPRESENTATIONS AND WARRANTIES.

     Buyer represents and warrants that:

               (a) Investment Purpose. Buyer is acquiring the Convertible Debentures and, upon
conversion of Convertible Debentures, the Buyer will acquire the Conversion Shares then issuable,
for its own account for investment only 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, the Buyer
reserves the right to dispose of the Conversion Shares at any time in accordance with or pursuant
to an effective registration statement covering such Conversion Shares or an available exemption
under the Securities Act.

2

 

               (b) Accredited Investor Status. Buyer is an “Accredited Investor” as that term is
defined in Rule 501(a)(3) of Regulation D.

               (c) Reliance on Exemptions. Buyer understands that the Convertible Debentures 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 such securities.

               (d) Information. Buyer and its advisors (and his or, its counsel), if any, have been
furnished with all materials relating to the business, finances and operations of the Company and
information he deemed material to making an informed investment decision regarding his purchase of
the Convertible Debentures and the Conversion Shares, which have been requested by Buyer. Buyer
and its advisors, if any, have been afforded the opportunity to ask questions of the Company and
its management. 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 in Section 3 below. Buyer
understands that its investment in the Convertible Debentures and the Conversion Shares involves a
high degree of risk. Buyer is in a position regarding the Company, which, based upon economic
bargaining power, enabled and enables Buyer to obtain information from the Company in order to
evaluate the merits and risks of this 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 Convertible Debentures and the Conversion Shares.

               (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 Convertible Debentures or the Conversion Shares, or the fairness or suitability
of the investment in the Convertible Debentures or the Conversion Shares, nor have such authorities
passed upon or endorsed the merits of the offering of the Convertible Debentures or the Conversion
Shares.

               (f) Transfer or Resale. Buyer understands that except as provided in the Registration
Rights Agreement: (i) the Convertible Debentures 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, or (B) Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect that such securities
to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption
from such registration requirements; (ii) any sale of such securities made in reliance on Rule 144
under the Securities Act (or a successor rule thereto) (“Rule 144”) may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
such 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 such securities under the Securities Act or any state securities laws or to comply with
the terms and conditions of any exemption thereunder. The Company reserves the right to place stop
transfer instructions against the shares and certificates for the Conversion Shares.

3

 

               (g) Legends. Buyer understands that the certificates or other instruments
representing the Convertible Debentures and or the Conversion Shares shall bear a restrictive
legend in
substantially the following form (and a stop transfer order may be placed against transfer of
such stock certificates):

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES 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 IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS.

The legend set forth above shall be removed and the Company within four (4) business days shall
issue a certificate without such legend to the holder of the Conversion Shares upon which it is
stamped, if, unless otherwise required by state securities laws, (i) in connection with a sale
transaction, provided the Conversion Shares are registered under the Securities Act or (ii) in
connection with a sale transaction, after such holder provides the Company with an opinion of
counsel, which opinion shall be in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale, assignment or transfer of the Conversion
Shares may be made without registration under the Securities Act.

               (h) Authorization, Enforcement. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding agreement of Buyer
enforceable in accordance with its terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

               (i) Receipt of Documents. Buyer and his or its counsel has received and read in their
entirety: (i) this Agreement and each representation, warranty and covenant set forth herein and
the Transaction Documents (as defined herein); (ii) all due diligence and other information
necessary to verify the accuracy and completeness of such representations, warranties and
covenants; (iii) the Company’s Form 10-K for the fiscal year ended December 31, 2006; (iv) the
Company’s Form 10-Q for the fiscal quarter ended March 31, 2007 and (v) answers to all questions
Buyer submitted to the Company regarding an investment in the Company; and Buyer has relied on the
information contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.

               (j) Due Formation of Corporate and Other Buyers. If the Buyer(s) is a corporation,
trust, partnership or other entity that is not an individual person, it has been formed and validly
exists and has not been organized for the specific purpose of purchasing the Convertible Debentures
and is not prohibited from doing so.

               (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 transactions
contemplated by this Agreement or the securities laws of any jurisdiction.

4

 

               (l) Buyer represents and warrants that at no time prior to the date of this Agreement has any
of the Buyer, its agents, representatives or affiliates engaged in or effected, in any manner
whatsoever, directly or indirectly, any (i) “short sale” (as such term is defined in Section
242.200 of Regulation SHO of the Securities Exchange Act of 1934, as amended (the “1934 Act”)) of
the Common Stock of the Company; or (ii) hedging transaction, which establishes a net short
position with respect to the Common Stock of the Company.

          3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

     The Company represents and warrants as of the date hereof to the Buyer that, except as set
forth in the SEC Documents (as defined herein) or in the Disclosure Schedule attached hereto (the
“Disclosure Schedule”):

               (a) Organization and Qualification. The Company and its subsidiaries are corporations
duly organized and validly existing in good standing under the laws of the jurisdiction in which
they are incorporated, and have the requisite corporate power 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 corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries taken as a whole.

               (b) Authorization, Enforcement, Compliance with Other Instruments. (i) The Company
has the requisite corporate power and authority to enter into and perform this Agreement, the
Security Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent Agreement,
and any related agreements (collectively the “Transaction Documents”) and to issue the Convertible
Debentures and the Conversion Shares in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the consummation by it of
the transactions contemplated hereby and thereby, including, without limitation, the issuance of
the Convertible Debentures the Conversion Shares and the reservation for issuance and the issuance
of the Conversion Shares issuable upon conversion or exercise thereof, have been duly authorized by
the Company’s Board of Directors and no further consent or authorization is required by the
Company, its Board of Directors or its stockholders, (iii) the Transaction Documents have been duly
executed and delivered by the Company, (iv) the Transaction Documents constitute the valid and
binding obligations of the Company enforceable against the Company in accordance with their 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 creditors’ rights and remedies. The authorized officer of
the Company executing the Transaction Documents knows of no reason why the Company cannot file the
registration statement as required under the Registration Rights Agreement or perform any of the
Company’s other obligations under such documents.

               (c) Capitalization. The authorized capital stock of the Company consists of two
billion (2,000,000,000) shares of Common Stock, of which seven hundred thirty-nine million seven
hundred five thousand one hundred fifty-eight (739,705,158) shares of Common Stock are issued and
outstanding. The Company is considering requesting its stockholders to approve an amendment to its
Certificate of Incorporation authorizing additional shares of capital stock and/or a reverse stock
split of its outstanding shares of capital stock. All of such outstanding shares have been validly
issued and are fully

5

 

paid and nonassessable. No shares of Common Stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the Company. As of the
date of this Agreement, (i) 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, any shares of capital stock of the Company or any of its subsidiaries, or
contracts, commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock of the Company or
any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments
of any character whatsoever relating to, or securities or rights convertible into, any shares of
capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt
securities and (iii) there are no agreements or arrangements under which the Company or any of its
subsidiaries is obligated to register the sale of any of their securities under the Securities Act
(except pursuant to the Registration Rights Agreement) and (iv) there are no outstanding
registration statements and there are no outstanding comment letters from the SEC or any other
regulatory agency. There are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Convertible Debentures as described in
this Agreement. The Company has furnished to the Buyer true and correct copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate
of Incorporation”), and the Company’s By-laws, as in effect on the date hereof (the
“By-laws”), and the terms of all securities convertible into or exercisable for Common
Stock and the material rights of the holders thereof in respect thereto other than stock options
issued to employees and consultants and as disclosed in the attached Disclosure Schedule 3(c).

               (d) Issuance of Securities. The Convertible Debentures are duly authorized and, upon
issuance in accordance with the terms hereof, shall be duly issued, fully paid and nonassessable,
are free from all taxes, liens and charges with respect to the issue thereof. The Conversion
Shares issuable upon conversion of the Convertible Debentures have been duly authorized and
reserved for issuance. Upon conversion or exercise in accordance with the Convertible Debentures
the Conversion Shares will be duly issued, fully paid and nonassessable.

               (e) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of
designations of any outstanding series of preferred stock of the Company or the By-laws or (ii)
conflict with or constitute a default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations and the rules and regulations
of The National Association of Securities Dealers Inc.’s OTC Bulletin Board on which the Common
Stock is quoted) 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. Neither the Company nor its
subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or
By-laws or their organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted in violation of any material
law, ordinance, or regulation of any governmental entity. Except as specifically contemplated by
this Agreement and as required under the Securities Act and any applicable state securities laws,
the Company is not required to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement
in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or
prior to the date hereof. The Company and its subsidiaries are unaware of any facts or
circumstance, which might give rise to any of the foregoing.

6

 

               (f) SEC Documents: Financial Statements. Since January 1, 2003, the Company has filed
all reports, schedules, forms, statements and other documents required to be filed by it with the
SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (all of the
foregoing filed prior to the date hereof or amended after the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents incorporated by reference
therein, being hereinafter referred to as the “SEC Documents”). The Company has delivered
to the Buyers or their representatives, or made available through the SEC’s website at
http://www.sec.gov., true and complete copies of the SEC Documents. As of their respective dates,
the financial statements of the Company disclosed in the SEC Documents (the “Financial
Statements”) 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 this Agreement, contains any
untrue statement of a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were made, not
misleading.

               (g) 10(b)-5. The SEC Documents do not include any untrue statements of material fact,
nor do they omit to state any material fact required to be stated therein necessary to make the
statements made, in light of the circumstances under which they were made, not misleading.

               (h) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-regulatory organization
or body pending against or affecting the Company, the Common Stock or any of the Company’s
subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a material adverse
effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability
of, or the authority or ability of the Company to perform its obligations under, this Agreement or
any of the documents contemplated herein, or (iii) have a material adverse effect on the business,
operations, properties, financial condition or results of operations of the Company and its
subsidiaries taken as a whole.

               (i) Acknowledgment Regarding Buyer’s Purchase of the Convertible Debentures. The
Company acknowledges and agrees that the Buyer(s) is acting solely in the capacity of an arm’s
length purchaser with respect to this Agreement and the transactions contemplated hereby. The
Company further acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by the Buyer(s) or any of their respective representatives
or agents in connection with this Agreement and the transactions contemplated hereby is merely
incidental to such Buyer’s purchase of the Convertible Debentures or the Conversion Shares. The
Company further represents to the Buyer that the Company’s decision to enter into this Agreement
has been based solely on the independent evaluation by the Company and its representatives.

7

 

               (j) No General Solicitation. Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in connection with the
offer or sale of the Convertible Debentures or the Conversion Shares.

               (k) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that would require
registration of the Convertible Debentures or the Conversion Shares under the Securities Act or
cause this offering of the Convertible Debentures or the Conversion Shares to be integrated with
prior offerings by the Company for purposes of the Securities Act.

               (l) Employee Relations. Neither the Company nor any of its subsidiaries is involved
in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such
dispute threatened. None of the Company’s or its subsidiaries’ employees is a member of a union
and the Company and its subsidiaries believe that their relations with their employees are good.

               (m) Intellectual Property Rights. The Company and its subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any
infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service mark registrations,
trade secret or other similar rights of others, and, to the knowledge of the Company there is no
claim, action or proceeding being made or brought against, or to the Company’s knowledge, being
threatened against, the Company or its subsidiaries regarding trademark, trade name, patents,
patent rights, invention, copyright, license, service names, service marks, service mark
registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware
of any facts or circumstances which might give rise to any of the foregoing.

               (n) Environmental Laws. The Company and its subsidiaries are (i) in compliance with
any and all applicable foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or
approval.

               (o) Title. Any real property and facilities held under lease by the Company and 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.

               (p) Insurance. The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue
its business at a cost that would not materially and adversely affect the condition, financial
or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as
a whole.

8

 

               (q) Regulatory Permits. The Company and its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and neither the Company
nor any such subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.

               (r) Internal Accounting Controls. The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset accountability, and (iii) the
recorded amounts for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.

               (s) No Material Adverse Breaches, etc. Neither the Company nor any of its
subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment,
decree, order, rule or regulation which in the judgment of the Company’s officers has or is
expected in the future to have a material adverse effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its subsidiaries.
Neither the Company nor any of its subsidiaries is in breach of any contract or agreement which
breach, in the judgment of the Company’s officers, has or is expected to have a material adverse
effect on the business, properties, operations, financial condition, results of operations or
prospects of the Company or its subsidiaries.

               (t) Tax Status. The Company and each of its subsidiaries has made and filed all
federal and state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that the Company and each of
its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) 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 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.

               (u) Certain Transactions. Except for arm’s length transactions pursuant to which the
Company makes payments in the ordinary course of business upon terms no less favorable than the
Company could obtain from third parties and other than the grant of stock options disclosed in the
SEC Documents, none of the officers, directors, or employees of the Company is presently a party to
any transaction with the Company (other than for services as employees, officers and 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 officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or partner.

               (v) Fees and Rights of First Refusal. The Company is not obligated to offer the
securities offered hereunder on a right of first refusal basis or otherwise to any third parties
including,
but not limited to, current or former shareholders of the Company, underwriters, brokers,
agents or other third parties.

9

 

          4. COVENANTS.

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

               (b) Form D. The Company agrees to file a Form D with respect to the Conversion Shares
as required under Regulation D and to provide a copy thereof to Buyer within five (5) days of
closing. The Company shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Conversion Shares, or obtain an exemption for the
Conversion Shares for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States, specifically those of New York
and New Jersey, and shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date.

               (c) Reporting Status. Until the earlier of (i) the date as of which the Buyer(s) may
sell all of the Conversion Shares without restriction pursuant to Rule 144(k) promulgated under the
Securities Act (or successor thereto), or (ii) the date on which (A) the Buyer(s) shall have sold
all the Conversion Shares and (B) none of the Convertible Debentures are outstanding (the
“Registration 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 regulations of the SEC thereunder, and
the Company shall not terminate its status as an issuer required to file reports under the Exchange
Act even if the Exchange Act or the rules and regulations thereunder would otherwise permit such
termination.

               (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Convertible Debentures for general corporate and working capital purposes.

               (e) Reservation of Shares. On the date hereof, the Company shall reserve for issuance
to the Buyers 190,000,000 shares for issuance upon conversions of the Convertible Debentures and
upon exercise of the Warrants (collectively, the “Share Reserve”). The Company represents
that it has sufficient authorized and unissued shares of Common Stock available to create the Share
Reserve after considering all other commitments that may require the issuance of Common Stock. The
Company shall take all action reasonably necessary to at all times have authorized, and reserved
for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect
the full conversion of the Convertible Debentures and the full exercise of the Warrants. If at any
time the Share Reserve is insufficient to effect the full conversion of the Convertible Debentures
or the full exercise of the Warrants, the Company shall increase the Share Reserve accordingly. If
the Company does not have sufficient authorized and unissued shares of Common Stock available to
increase the Share Reserve, the Company shall call and hold a special meeting of the shareholders
within thirty (30) days of such occurrence, for the sole purpose of increasing the number of shares
authorized. The Company’s management shall recommend to the shareholders to vote in favor of
increasing the number of shares of Common Stock authorized. Management shall also vote all of its
shares in favor of increasing the number of authorized shares of Common Stock.

               (f) Listings or Quotation. The Company’s Common Stock shall be listed or quoted for
trading on any of (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
Global Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin Board (“OTC”) (each, a
“Primary Market”) and the Company shall promptly secure the listing or quotation of the
Conversion Shares and Warrant Shares for trading on the same Primary Market upon which the
shares of Common Stock are then listed or quoted.

10

 

               (g) Fees and Expenses.

                    (i) Each of the Company and the Buyer(s) shall pay all costs and expenses incurred by such
party in connection with the negotiation, investigation, preparation, execution and delivery of the
Transaction Documents. The Company shall pay Yorkville Advisors, LLC a fee equal to ten percent
(10%) of the Purchase Price which shall be paid pro rata directly from the gross proceeds of each
Closing.

                    (ii) The Company shall pay a structuring fee to Yorkville Advisors, LLC of Fifteen Thousand
Dollars ($15,000), which shall be paid directly from the proceeds of the First Closing.

                    (iii) The Company shall pay Yorkville Advisors, LLC a non-refundable due diligence fee of Five
Thousand Dollars ($5,000) which shall be paid directly from the proceeds of the First Closing.

                    (iv) On the date hereof, the Company shall issue to the Buyer a warrant to purchase 24,038,462
shares of the Company’s Common Stock for a period of five (5) years at an exercise price of $0.0312
per share and a warrant to purchase 76,335,878 shares of the Company’s Common Stock for a period of
five (5) years at an exercise price of $0.0262 per share (individually referred to as the
“Warrant” collectively referred to as the “Warrants”). The shares of Common Stock
issuable under the Warrants shall collectively be referred to as the “Warrant Shares”.

               (h) Corporate Existence. So long as any of the Convertible Debentures remain
outstanding, the Company shall not directly or indirectly consummate any merger, reorganization,
restructuring, reverse stock split consolidation, sale of all or substantially all of the Company’s
assets or any similar transaction or related transactions (each such transaction, an
“Organizational Change”) unless, prior to the consummation an Organizational Change, the Company
obtains the written consent of each Buyer. In any such case, the Company will make appropriate
provision with respect to such holders’ rights and interests to insure that the provisions of this
Section 4(h) will thereafter be applicable to the Convertible Debentures.

               (i) Transactions With Affiliates. So long as any Convertible Debentures are
outstanding, the Company shall not, and shall cause each of its subsidiaries not to, enter into,
amend, modify or supplement, or permit any subsidiary to enter into, amend, modify or supplement
any agreement, transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at 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 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 (each a “Related Party”), except for (a) customary employment
arrangements and benefit programs on reasonable terms, (b) any investment in an Affiliate of the
Company, (c) any agreement, transaction, commitment, or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a person other than such
Related Party, (d) any agreement, transaction, commitment, or arrangement which is approved by a
majority of the disinterested directors of the Company; for purposes hereof, any director who is
also an officer of the Company or any subsidiary of the Company shall not be a disinterested
director with respect to any such agreement, transaction, commitment, or arrangement. “Affiliate”
for purposes hereof means, with respect to any person or entity,

11

 

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.

               (j) Transfer Agent. The Company covenants and agrees that, in the event that the
Company’s agency relationship with the transfer agent should be terminated for any reason prior to
a date which is two (2) years after the Closing Date, the Company shall immediately appoint a new
transfer agent and shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined herein).

               (k) Restriction on Issuance of the Capital Stock. So long as any Convertible
Debentures are outstanding, the Company shall not, without the prior written consent of the
Buyer(s), (i) issue or sell shares of Common Stock or Preferred Stock without consideration or for
a consideration per share less than the Fixed Price, as defined in the Convertible Debentures, (ii)
issue any preferred stock, warrant, option, right, contract, call, or other security or instrument
granting the holder thereof the right to acquire Common Stock without consideration or for a
consideration less than the Fixed Price, as defined in the Convertible Debentures,, (iii) enter
into any security instrument granting the holder a security interest in any and all assets of the
Company, or (iv) file any registration statement on Form S-8.

               (l) No Short Sales. Neither the Buyer(s) nor any of its affiliates have an open short
position in the Common Stock of the Company, and the Buyer agrees that beginning on the date of
this Agreement and ending on the later to occur of Buyer or Buyer’s affiliates no longer having
any beneficial ownership of any of the securities sold hereunder, including shares issuable upon
exercise or conversion of the securities sold, it shall not, and that it will cause its affiliates
not to, in any manner whatsoever, effect, directly or indirectly, any (i) “short sale” (as such
term is defined in Section 242.200 of Regulation SHO of the 1934 Act) of the Common Stock, or (ii)
hedging transaction, which enables a net short position with respect to the Common Stock.

               (m) Lock Up Agreements. On the date hereof, the Company shall obtain from each
officer and director a lock up agreement in the form attached hereto as Exhibit B.

               (n) Rights of First Refusal. For a period of twelve (12) months from the date
hereof, if the Company intends to raise additional capital by the issuance or sale of capital stock
of the Company, including without limitation shares of any class of common stock, any class of
preferred stock, options, warrants or any other securities convertible or exercisable into shares
of common stock (whether the offering is conducted by the Company, underwriter, placement agent or
any third party) the Company shall be obligated to offer to the Buyer such issuance or sale of
capital stock, by providing in writing the principal amount of capital it intends to raise and
outline of the material terms of such capital raise, prior to the offering such issuance or sale of
capital stock to any third parties including, but not limited to, current or former officers or
directors, current or former shareholders and/or investors of the obligor, underwriters, brokers,
agents or other third parties. The Buyer shall have five (5) business days from receipt of such
notice of the sale or issuance of capital stock to accept or reject all or a portion of such
capital raising offer. If the Buyer does not respond within the five (5) business days of its
receipt of the notice provided for herein, or rejects the capital raising offer, the Company shall
be free to proceed with such capital raise notwithstanding this Section 4(n).

               (o) Review of Public Disclosures. All SEC filings (including, without limitation, all
filings required under the Exchange Act, which include Forms 10-Q and 10-QSB, 10-K and 10K-SB, 8-K,
etc) and other public disclosures made by the Company, including, without limitation, all

12

 

press releases, investor relations materials, and scripts of analysts meetings and calls,
shall be reviewed and approved for release by the Company’s attorneys and, if containing financial
information, the Company’s independent certified public accountants.

          5. TRANSFER AGENT INSTRUCTIONS.

               (a) The Company shall issue the Irrevocable Transfer Agent Instructions to its transfer agent
irrevocably appointing David Gonzalez, Esq. as the Company’s agent for purpose of having
certificates issued, registered in the name of the Buyer(s) or its respective nominee(s), for the
Conversion Shares representing such amounts of Convertible Debentures as specified from time to
time by the Buyer(s) to the Company upon conversion of the Convertible Debentures, for interest
owed pursuant to the Convertible Debenture, and for any and all Liquidated Damages (as this term is
defined in the Registration Rights Agreement). David Gonzalez, Esq. shall be paid a cash fee of
Fifty Dollars ($50) for every occasion they act pursuant to the Irrevocable Transfer Agent
Instructions. The Company shall not change its transfer agent without the express written consent
of the Buyer(s), which may be withheld by the Buyer(s) in its sole discretion. Prior to
registration of the Conversion Shares under the Securities Act, all such certificates shall bear
the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2(g) hereof (in the case of the Conversion
Shares prior to registration of such shares under the Securities Act) will be given by the Company
to its transfer agent and that the Conversion 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
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way the Buyer’s
obligations and agreement to comply with all applicable securities laws upon resale of Conversion
Shares. If the Buyer(s) provides the Company with an opinion of counsel, in form, scope and
substance customary for opinions of counsel in comparable transactions to the effect that
registration of a resale by the Buyer(s) of any of the Conversion Shares is not required under the
Securities Act, the Company shall within two (2) business days instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified by the Buyer. The
Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under
this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyer(s) shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach and requiring immediate
issuance and transfer, without the necessity of showing economic loss and without any bond or other
security being required.

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

     The obligation of the Company hereunder to issue and sell the Convertible Debentures to the
Buyer(s) at the Closings is subject to the satisfaction, at or before the Closing Dates, 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:

               (a) Each Buyer shall have executed the Transaction Documents and delivered them to the
Company.

               (b) The Buyer(s) shall have delivered to the Company the Purchase Price for Convertible
Debentures in respective amounts as set forth next to each Buyer as outlined on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds the Closings as set forth herein, by
wire transfer of immediately available U.S. funds pursuant to the wire instructions provided by the
Company.

13

 

               (c) The representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Closing Dates as though made at that time
(except for representations and warranties that speak as of a specific date), and the Buyer(s)
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
the Buyer(s) at or prior to the Closing Dates.

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

               (a) The obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at the
First Closing is subject to the satisfaction, at or before the First Closing Date, of each of the
following conditions:

                    (i) The Company shall have executed the Transaction Documents and delivered the same to the
Buyer(s).

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

                    (iii) The representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and warranties is already
qualified as to materiality in Section 3 above, in which case, such representations and warranties
shall be true and correct without further qualification) as of the date when made and as of the
First Closing Date as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the First Closing Date

                    (iv) The Company shall have executed and delivered to the Buyer(s) the Convertible Debentures
in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached hereto.

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

                    (vi) The Company shall have delivered to the Buyer(s) a certified copy of the Certificate of
Incorporation as certified by the Secretary of State of the State (or comparable office) of the
Company’s jurisdiction of formation.

                    (vii) The Company shall have delivered to the Buyer(s) a certificate, executed by the
secretary of the Company and dated as of the Closing Date, as to the resolutions consistent with
Section 3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such
Buyer.

14

 

                    (viii) The Buyer(s) shall have received an opinion of counsel from counsel to the Company in a
form satisfactory to the Buyer(s).

                    (ix) In accordance with the terms of the Security Agreement, the Company and its subsidiaries
shall have delivered to the Buyer(s) appropriate amendments to the financing statements on Form
UCC-1 filed in connection therewith, or such other documents to be duly filed in such office or
offices as may be necessary or, if the Buyer deems it desirable to perfect the security interests
purported to be created by each Security Agreement.

                    (x) The Company shall have provided to the Buyer an acknowledgement, to the satisfaction of
the Buyer, from the Company’s independent certified public accountants as to its ability to provide
all consents required in order to file a registration statement in connection with this
transaction.

                    (xi) The Company shall have reserved out of its authorized and unissued Common Stock, solely
for the purpose of effecting the conversion of the Convertible Debentures, shares of Common Stock
to effect the conversion of all of the Conversion Shares then outstanding.

                    (xii) The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to the
Buyer, shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

               (b) The obligation of the Buyer(s) hereunder to accept the Convertible Debentures at the
Second Closing is subject to the satisfaction, at or before the Second Closing Date, of each of the
following conditions:

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

                    (ii) The representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and warranties is already
qualified as to materiality in Section 3 above, in which case, such representations and warranties
shall be true and correct without further qualification) as of the date when made and as of the
Second Closing Date as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Second Closing Date.

                    (iii) The Company shall have executed and delivered to the Buyer(s) the Convertible Debentures
in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached hereto.

                    (iv) The Company have filed the registration statement with the SEC in compliance with the
rules and regulations promulgated by the SEC for filing thereof.

15

 

                    (v) The Company shall have certified, in a certificate executed by two officers of the Company
and dated as of the Second Closing Date, that all conditions to the Second Closing have been
satisfied.

          (c) The obligation of the Buyer(s) hereunder to accept the Convertible Debentures at the Third
Closing is subject to the satisfaction, at or before the Third Closing Date, of each of the
following conditions:

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

                    (ii) The representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and warranties is already
qualified as to materiality in Section 3 above, in which case, such representations and warranties
shall be true and correct without further qualification) as of the date when made and as of the
Third Closing Date as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Third Closing Date.

                    (iii) The Company shall have executed and delivered to the Buyer(s) the Convertible Debentures
in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached hereto.

                    (iv) The Registration Statement shall have been declared effective by the SEC in compliance
with the rules and regulations promulgated by the SEC for the effectiveness thereof.

                    (v) The Company shall have certified, in a certificate executed by two officers of the Company
and dated as of the Third Closing Date, that all conditions to the Third Closing have been
satisfied.

     8. INDEMNIFICATION.

               (a) In consideration of the Buyer’s execution and delivery of this Agreement and acquiring the
Convertible Debentures and the Conversion Shares hereunder, and in addition to all of the Company’s
other obligations under this Agreement, the Company shall defend, protect, indemnify and hold
harmless the Buyer(s) and each other holder of the Convertible Debentures and the Conversion
Shares, and all of their officers, directors, employees and agents (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 any such 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 the Buyer Indemnitees or any of them 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 this Agreement, the Convertible Debentures or the Transaction
Documents or any other certificate, instrument or document contemplated

16

 

hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company
contained in this Agreement, or the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made
against such Indemnitee and arising out of or resulting from the execution, delivery, performance
or enforcement of this Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the parties hereto, any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of the issuance of the Convertible Debentures or
the status of the Buyer or holder of the Convertible Debentures the Conversion Shares, as a Buyer
of Convertible Debentures in the Company. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities, which is permissible under
applicable law.

               (b) In consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Buyer’s other obligations under this Agreement, the Buyer shall defend,
protect, indemnify and hold harmless the Company and all of its officers, directors, employees and
agents (including, without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Company Indemnitees”) from and against any and
all Indemnified Liabilities incurred by the Indemnitees or any of them as a result of, or arising
out of, or relating to (a) any misrepresentation or breach of any representation or warranty made
by the Buyer(s) in this Agreement, instrument or document contemplated hereby or thereby executed
by the Buyer, (b) any breach of any covenant, agreement or obligation of the Buyer(s) contained in
this Agreement, the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby executed by the Buyer, or (c) any cause of action, suit or claim
brought or made against such Company Indemnitee based on material misrepresentations or due to a
material breach and arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement, the Transaction Documents or any other instrument, document or
agreement executed pursuant hereto by any of the parties hereto. To the extent that the foregoing
undertaking by each Buyer may be unenforceable for any reason, each Buyer shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.

     9. GOVERNING LAW: MISCELLANEOUS.

               (a) Governing Law. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New Jersey without regard to the principles of conflict of laws. The
parties further agree that any action between them shall be heard in Hudson County, New Jersey, and
expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County and the United States District Court for the District of New Jersey sitting in
Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph.

               (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. In
the event any signature page is delivered by facsimile transmission, the party using such means of
delivery shall cause four (4) additional original executed signature pages to be physically
delivered to the other party within five (5) days of the execution and delivery hereof.

               (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.

17

 

               (e) Entire Agreement, Amendments. This Agreement supersedes all other prior oral or
written agreements between the Buyer(s), the Company, their affiliates and persons acting on their
behalf with respect to the matters discussed herein, and this Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be waived or amended other than by an instrument
in writing signed by the party to be charged with enforcement.

               (f) Notices. Any notices, consents, waivers, or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered (i) upon receipt, when delivered personally; (ii) upon confirmation of receipt,
when sent by facsimile; (iii) three (3) days after being sent by U.S. certified mail, return
receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:

	 	 	 	 	 
	If to the Company, to:	 	Advanced Viral Research Corp.
	 	 	200 Corporate Boulevard South
	 	 	Yonkers, New York 10701
	 	 	Attention: Stephen Elliston
	 

	 	Telephone:
	 	(914) 376-7383
	 

	 	Facsimile:
	 	(914) 845-8720
	 
	 	 	 	 
	With a copy to:	 	Berman Rennert Vogel and Mandler, P.A.
	 	 	29th Floor — Bank of America Tower at International Place
	 	 	100 S.E. Second Street
	 	 	Miami, Florida 33131
	 	 	Attention: Charles J. Rennert
	 

	 	Telephone:
	 	(305) 577-4171
	 

	 	Facsimile:
	 	(305) 373-6036

     If to the Buyer(s), to its address and facsimile number on Schedule I, with copies to the
Buyer’s counsel as set forth on Schedule I. Each party shall provide five (5) days’ prior written
notice to the other party of any change in address or facsimile number.

               (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns. Neither the Company nor any
Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written
consent of the other party hereto.

               (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.

18

 

               (i) Survival. Unless this Agreement is terminated under Section 9(l), the
representations and warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions
set forth in Section 8, shall survive the Closing for a period of two (2) years following the date
on which the Convertible Debentures are converted in full. The Buyer shall be responsible only for
its own representations, warranties, agreements and covenants hereunder.

               (j) Publicity. The Company and the Buyer(s) shall have the right to approve, before
issuance any press release or any other public statement with respect to the transactions
contemplated hereby made by any party; provided, however, that the Company shall be entitled,
without the prior approval of the Buyer(s), to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other laws or regulations
(the Company shall use its best efforts to consult the Buyer(s) in connection with any such press
release or other public disclosure prior to its release and Buyer(s) shall be provided with a copy
thereof upon release thereof).

               (k) 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 the 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.

               (l) Termination. In the event that the First Closing shall not have occurred with
respect to the Buyers on or before two (2) business days from the date hereof due to the Company’s
or the Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above (and the
non-breaching party’s failure to waive such unsatisfied condition(s)), the non-breaching party
shall have the option to terminate this Agreement with respect to such breaching party at the close
of business on such date without liability of any party to any other party.

               (m) Brokerage. The Company represents that no broker, agent, finder or other party
has been retained by it in connection with the transactions contemplated hereby and that no other
fee or commission has been agreed by the Company to be paid for or on account of the transactions
contemplated hereby.

               (n) 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.

[REMAINDER PAGE INTENTIONALLY LEFT BLANK]

19

 

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

	 	 	 	 	 
	 	COMPANY:

ADVANCED VIRAL RESEARCH CORP.

 	 
	 	By:  	/s/ Stephen Elliston
 	 
	 	 	Name:  	Stephen Elliston 	 
	 	 	Title:  	Chief Executive Officer 	 
	 

20

 

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

	 	 	 	 	 
	 	BUYERS:

CORNELL CAPITAL PARTNERS, L.P.

 	 
	 	By:  	Yorkville Advisors, LLC
 	 
	 	Its:  	Investment Manager 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	 	 
	 	By:  	/s/ Mark Angelo
 	 
	 	 	Name:  	Mark Angelo 	 
	 	 	Its: Portfolio Manager and President 	 
	 

 

 

SCHEDULE I

SCHEDULE OF BUYERS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	(1)	 	(2)	 	(3)	 	(4)	 	(5)	 	(6)
	Buyer	 	 	 	 	 	 	 	 	 	 	 	Legal Representative’s
	Cornell Capital	 	 	 	Subscription Amount	 	 	 	 	 	Address and Facsimile
	Partners, L.P.	 	First Closing	 	Second Closing	 	Third Closing	 	Total	 	Number
	101 Hudson Street, Suite 3700

Jersey City, NJ 07302

Tel: (201) 985-8300

Fax: (201) 985-8266

Residence: Cayman Islands

	 	$750,000 of Series
A Convertible
Debentures and
$750,000 of Series
B Convertible
Debentures
	 	$625,000 of Series
B Convertible
Debentures
	 	$625,000 of Series
B Convertible
Debentures
	 	$	2,750,000	 	 	David Gonzalez, Esq.

101 Hudson Street,

Suite 3700

Jersey City, NJ 07302

Telephone: (201) 985-8300

Facsimile: (201) 985-8266

 

 

EXHIBIT A

FORM OF CONVERTIBLE DEBENTURES

 

 

EXHIBIT B

LOCK UP AGREEMENT

     The undersigned hereby agrees that for a period commencing on July ___, 2007 and expiring on
the date thirty (30) days after the date that all amounts owed to Cornell Capital Partners, L.P.
(the “Buyer”), under the Secured Convertible Debentures issued to the Buyer pursuant to the
Securities Purchase Agreement between Advanced Viral Research Corp. (the “Company”) and the
Buyer dated July ___, 2007 have been paid (the “Lock-up Period”), he, she or it will not,
directly or indirectly, without the prior written consent of the Buyer, issue, offer, agree or
offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute or otherwise encumber or dispose of any securities of the Company,
including common stock or options, rights, warrants or other securities underlying, convertible
into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any

     common stock (whether or not beneficially owned by the undersigned), or any beneficial interest
therein (collectively, the “Securities”) except in accordance with the volume limitations
set forth in Rule 144(e) of the General Rules and Regulations under the Securities Act of 1933, as
amended.

     In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to
the placing of legends and/or stop-transfer orders with the transfer agent of the Company’s
securities with respect to any of the Securities registered in the name of the undersigned or
beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned’s
investment in the Company.

Dated: _______________, 2007

	 	 	 	 	 
	 	Signature

 	 
	 	Name:
 	 
	 	Address: 	 
	 	
City, State, Zip Code: 	 
	 

	 	 	 	 	 
	 	 	 
	 	
 	 
	 	Print Social Security Number 	 
	 	or Taxpayer I.D. Number 	 
	 

2

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