Document:

Exhibit 10.86

NEITHER THIS WARRANT NOR
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
(A) AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THIS SECURITY,
FILED AND MADE EFFECTIVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH
APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL ADDRESSED
AND SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION UNDER SUCH ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

July 21, 2006

WARRANT TO PURCHASE SHARES OF COMMON STOCK

- of -

EARTH BIOFUELS, INC.

For value received, EARTH
BIOFUELS, INC., a Delaware corporation (the “Company”)
pursuant to the 2006 Stock Option and Award Plan of the Company, hereby grants
to LANCE A. BAKROW, or his registered
successor or assigns (the “Holder”) the right to purchase from the Company
shares of the Common Stock of the Company (the “Common Stock”), at the option
of the Holder, upon surrender hereof at the principal office of the Company,
with the subscription form attached hereto duly executed, and simultaneous
payment therefor as hereinafter provided of the Warrant Exercise Price
multiplied by the number of shares of Common Stock for which the Warrant is
exercised. The number and Warrant Exercise Price of such shares of Common Stock
are subject to adjustment as provided below.

This Warrant (the “Warrant”) is duly authorized and
issued by the Company. In furtherance thereof, and in consideration of the
premises, covenants, promises, representations and warranties hereinafter set
forth, the Company hereby agrees as follows:

1.      Term
of Warrant. Subject to the terms and conditions set forth herein, this
Warrant shall be exercisable, in whole or in part, during the term commencing
on the date hereof and ending on May 31, 2011.

2.      Number
of Shares and Warrant Exercise Price. The Holder shall be entitled to
subscribe for and purchase from the Company 4,000,000 validly issued, fully
paid and non

 

assessable
shares (the “Warrant Shares”) of the Company’s Common Stock, par value $0.001
per share, at a purchase price equal to the Warrant Exercise Price. The “Warrant
Exercise Price” is $0.25 per share. Contemporaneously with the issuance to
Holder of this Warrant, Holder has paid to the Company the amount of $l00,000,
which amount shall not constitute a pre-payment of the Warrant Exercise Price.

3.      Exercise
of Warrant.

3.1.       Duration
and Exercise of Warrant. The purchase rights represented by this Warrant
may be exercised by the Holder, in whole or in part, at anytime after the
date hereof and prior to the expiration of the term of this Warrant, by the
surrender of this Warrant and the Notice of Exercise attached hereto as Exhibit A
duly executed, at the principal office of the Company (or such other office of
the Company as it may designate by notice in writing to the Holder at the
address of the Holder), upon payment (i) in cash, by check or by wire
transfer, (ii) by cancellation by the Holder of indebtedness of the
Company, to the Holder, or (iii) by a combination of (i) and (ii), of
the Warrant Exercise Price multiplied by the number of shares of Common Stock
to be purchased. Any notice of exercise of this Warrant may, at the election of
the Holder, be stated to be effective upon the future effectiveness of a
registration statement with respect to the Warrant Shares.

3.2.       Net
Issue Election (Cashless Exercise). The Holder may elect to receive, without
the payment by the Holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by surrender of this Warrant or
such portion to the Company with the net issue election notice annexed hereto
duly executed, at the office of the Company. Thereupon, the Company shall issue
to the Holder such number of fully paid and nonassessable shares of Common
Stock as is computed using the following formula:

	
  

  	
  X=

  	
  Y(A-B)

  	
   

  
	
   

  	
  A

  	
   

  

 

	
  Where

  	
  X =

  	
  the number of shares to be issued to the Holder
  pursuant to this Section 3.2.

  
	
   

  	
  Y =

  	
  the number of shares covered by this Warrant in
  respect of which the net issue election is made pursuant to this
  Section 3.2.

  
	
   

  	
  A =

  	
  the fair market value of one share of Common Stock,
  as determined in accordance with the provisions of this Section 3.2.

  
	
   

  	
  B =

  	
  the Purchase Price in effect under this Warrant at
  the time the net issue election is made pursuant to this Section 3.2.

  

 

For
purposes of this Section 3.2, the “fair market value” per share of the
Company’s Common Stock shall mean the last reported sale price of the Common
Stock on the effective date of exercise of the net issue election, or if the
last reported sale price information is not available for such day, the average
of the mean of the closing bid and asked prices for such day.

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3.3.       Delivery of Warrant;
Fractional Shares

(a)           This Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date of its surrender for exercise as provided above, and the person entitled
to receive the shares of Common Stock issuable upon such exercise shall be
treated for all purposes as the holder of record of such shares as of the close
of business on such date (the “Exercise Date”). Not later than three business
days after any Exercise Date, the Company will deliver or cause to be delivered
to the Holder a certificate or certificates representing the Warrant Shares.
The Company shall, if available and if allowed under applicable securities
laws, use its best efforts to deliver any certificate or certificates required
to be delivered by the Company under this paragraph electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If such certificate or certificates are not
delivered to or as directed by the Holder by the third business day after a
Exercise Date, The Holder shall be entitled by written notice to the Company at
any time on or before its receipt of such certificate or certificates
thereafter, to rescind such exercise, in which event the Company shall
immediately return this Warrant. Moreover, if the Company fails for any reason
to deliver to the Holder such certificate or certificates by the third business
day after the Exercise Date, the Company shall pay to the Holder, in cash, as
liquidated damages and not as a penalty, 1% per business day of the fair market
value of the Warrant Shares (increasing to 2% per business day after ten
business days after such damages begin to accrue) for each business day until
such certificates are delivered. Such liquidated damages are intended solely to
compensate the Holder for the delay in issuing such certificates and in no way
shall be construed to relieve the Company of its obligation to issue and
deliver such certificates or in lieu of any other remedies to compel delivery
of such certificates. The Company’s obligations to issue and deliver the
Warrant Shares upon exercise of this Warrant in accordance with the terms hereof
are absolute and unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company or any violation or alleged violation of law
by the Holder or any other person, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with the issuance of such Warrant Shares. In the event that the
Holder shall elect exercise this Warrant in whole or in any part, the Company
may not refuse exercise based on any claim that the Holder or anyone associated
or affiliated with the Holder has been engaged in any violation of law,
agreement or for any other reason, unless an injunction from a court, on
notice, restraining and or enjoining exercise of all or part of this Warrant
shall have been sought and obtained and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the fair market value of the
Warrant Shares, which is subject to the injunction, which bond shall remain in
effect until the completion of litigation of the dispute and the proceeds of
which shall be payable to the Holder to the extent it obtains judgment. In the
absence of an injunction precluding the same, the Company shall issue Warrant
Shares upon a properly noticed exercise.

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Nothing herein shall
limit the Holder’s right to other remedies for the Company’s failure to deliver
Warrant Shares within the period specified herein, and the Holder shall have
the right to pursue all remedies available to it at law or in equity including
without limitation a decree of specific performance and/or injunctive relief.
The exercise of any such rights shall not prohibit the Holder from seeking to
enforce damages pursuant to any other provision hereof or under applicable law.
In the alternative and at the Holder’s election, if the Company fails for any
reason to deliver to the Holder such certificate or certificates by the third
business day after the Exercise date, and if after such third business day the
Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of the Warrant Shares which the Holder anticipated receiving upon
such conversion (a “Buy-In”), then the Company shall (i) pay in cash to the
Holder (in addition to any other remedies available to or elected by the
Holder) the amount by which (x) the Holder’s total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y)
the product of (l) the aggregate number of shares of Common Stock that such the
Holder anticipated receiving from the exercise at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale (including
brokerage commissions, if any) giving rise to such purchase obligation and (ii)
at the option of the Holder, either reissue this Warrant in amount equal to the
attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have both issued had the Company timely complied with its
delivery requirements hereunder.

(b)           No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares, the Company shall deliver to
the Holder one whole share.

4.      Replacement
of Warrant. On receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction, or mutilation of this Warrant and, in the case
of loss, theft, or destruction, on delivery of an indemnity agreement
reasonably satisfactory in form and substance to the Company or, in the case of
mutilation, on surrender and cancellation of this Warrant, the Company shall
execute and deliver, in lieu of this Warrant, a new warrant of like tenor and
amount.

5.      Rights
of Stockholders. Until the Warrant shall have been exercised and the shares
of Common Stock purchasable upon the exercise hereof shall have been issued,
nothing contained herein shall be construed to confer upon the Holder, as such,
any of the rights of a stockholder of the Company or any right to vote upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive dividends or subscription rights
or the like, except as may be otherwise provided herein or in the Note and
Warrant Purchase Agreement.

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6.      Divisibility
of Warrant; Transfer of Warrant.

(a)           Subject to the
provisions of this Section 6, this Warrant may be divided into no more than ten
(10) warrants of one thousand (1,000) shares or multiples thereof, upon
surrender at the principal office of the Company, without charge to any
Warrantholder. Upon such division, the Warrants may be transferred of record as
the then Warrantholder may specify without charge to such Warrantholder (other
than any applicable transfer taxes). In addition, subject to the provisions of
this Section 6, the Warrantholder shall also have the right to transfer this
Warrant in its entirety to any person or entity; provided,  however,
that any such transfer is in compliance with any and all applicable securities
laws and is exempt from registration.

(b)           The Company will
maintain a register (the “Warrant Register”) containing the name and address of
the Holder. The Holder may change its address as shown on the Warrant Register
by written notice to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be delivered
or given by mail to such Holder as shown on the Warrant Register and at the
address shown on the Warrant Register. Until this Warrant is transferred on the
Warrant Register, the Company may treat the Holder as shown on the Warrant
Register as the absolute owner of this Warrant for all purposes, notwithstanding
any notice to the contrary.

(c)           The Warrant and the
Common Stock shall not be transferable except upon the conditions specified in
this Section 6, which conditions are intended to ensure compliance with the
provisions of the Act. Each holder of this Warrant or Common Stock issuable
hereunder will cause any proposed transferee of the Warrant and the Common
Stock to agree to take and hold such securities subject to the provisions and
upon the conditions specified in this Section 6.

(d)           Each certificate representing
(i) this Warrant, (ii) the Common Stock and (iii) any other securities issued
in respect to the Common Stock upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall (unless
otherwise permitted by the provisions of this Section 6 or unless such
securities have been registered under the Act) be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to any
legend required under applicable state securities laws):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

 5
 

 

(e)           The Holder of this
Warrant and each person to whom this Warrant is subsequently transferred
represents and warrants to the Company (by acceptance of such transfer) that it
will not transfer the Warrant (or Common Stock issuable upon exercise hereof)
except (i) to an affiliate, (ii) pursuant to an effective registration
statement under the Act, or (iii) upon the Company’s reasonable determination,
upon advice of counsel to the Company, that no applicable securities laws would
be violated as a result of such transfer. The Company may require an opinion of
counsel acceptable to the Company to the effect that such transfer (whether by
sale, encumbrance, assignment or otherwise) may be effected without
registration under the Act.

7.      Registration
Rights. Upon exercise of this Warrant for Common Stock, the Company shall
take whatever action necessary such that the Holder shall be entitled to
exercise, together with all other holders of registrable shares possessing
registration rights under the Registration Rights Agreement between the parties
of even date herewith the rights of registration granted under the Registration
Rights Agreement to the holders of Common Stock, if any.

8.      Shares
to be Fully Paid; Reservation of Shares. The Company covenants and agrees
that all shares of Common Stock which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable and free from all preemptive
rights of any stockholder and free of all taxes, liens and charges with respect
to the issue thereof. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized and reserved, for the purpose of
issue or transfer upon exercise of the purchase rights conveyed by this
Warrant, a sufficient number of shares of authorized but unissued Common Stock,
or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company will take all
action as may be necessary or advisable to assure that such shares of Common
Stock may be issued as provided herein without violation of any applicable law
or regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed.

9.      Amendments.
This Warrant may be amended only with the written consent of the Holder. No
waiver of or exceptions to any term, condition or provision of this Warrant, in
any one or more instances, shall be deemed or construed as a further or
continuing waiver of any such term, condition or provision.

10.    Adjustments;
Anti-Dilution. The number of Warrant Shares purchasable hereunder and the
Warrant Exercise Price are subject to adjustment from time to time as follows:

(a)           Merger, Sale of
Assets, Etc. If at any time, while this Warrant, or any portion thereof, is
outstanding and unexpired there shall be (i) a reorganization (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), (ii) a merger or consolidation of the Company with or
into another corporation in

 6
 

 

which the Company
is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company’s capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company’s properties and assets
as, or substantially as, an entirely to any other person, and if, as a part of
such reorganization, merger, consolidation, sale or transfer, provisions are
made so that the holders of capital stock are thereafter entitled to receive
shares of stock or other securities or property of the successor corporation
resulting from such reorganization, merger, consolidation, sale or transfer, the
Company shall then ensure that the Holder also shall be entitled to shares of
stock or other securities or property of the successor corporation resulting
from such reorganization, consolidation, merger, sale or transfer as if this
Warrant had been exercised in full immediately prior to such reorganization,
merger, consolidation, sale or transfer, all subject to further adjustment as
provided in this Section 10. The obligations of this Section 10 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation which are at
the time receivable upon the exercise of this Warrant. If the per share
consideration payable to the Holder for shares in connection with any such transaction
is in a form other than cash or marketable securities, then the value of such
consideration shall be jointly determined by the Company and the Holder. In all
events, appropriate adjustment shall be made in the application of the
provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.

(b)           Reclassification,
Etc. If the Company, at any time while this Warrant, or any portion
thereof, remains outstanding and unexpired, by reclassification of securities
or otherwise, intends to change any of the securities as to which purchase
rights under this Warrant exist into the same or a different number of
securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities which
were subject to the purchase rights under this Warrant immediately prior to
such reclassification or other change and the number of Warrant Shares
purchasable hereunder shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 10.

(c)           Split, Subdivision
or Combination of Shares. If the Company at any time while this Warrant, or
any portion thereof, remains outstanding and unexpired shall split, subdivide
or combine the securities as to which purchase rights under this Warrant exist,
into a different number of securities of the same class, the Company warrants
that the number of Warrant Shares purchasable hereunder shall be proportionately
adjusted.

(d)           Adjustments for
Dividends in Stock or Other Securities or Property.

(i)            If while this Warrant,
or any portion hereof, remains outstanding and unexpired, holders of Common
Stock shall have received, or, on or after the 

 7
 

 

record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
cash of the Company by way of dividend, then and in each case, the Warrant
Exercise Price shall be reduced by adding the amount of cash of the Company
which such holder would have received had it been the Holder of record of the
security on the date such dividend was paid to the numerator used to calculate
the Warrant Exercise Price as set forth in Section 2 of this Warrant;

(ii)           If while this Warrant,
or any portion hereof, remains outstanding and unexpired, holders of Common
Stock shall have received, or, on or after the record date fixed for the
determination of eligible stockholders, shall have become entitled to receive,
without payment therefor, other or additional stock or other securities or
property (other than cash) of the Company by way of dividend, then and in each
case, this Warrant shall represent the right to acquire, in addition to the
number of shares of the security receivable upon exercise of this Warrant, and
without payment of any additional consideration therefor, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company which such holder would hold on the date of such exercise of this
Warrant on the date thereof and had thereafter, during the period from the date
hereof to and including the date of such exercise, retained such shares and/or
all other additional stock available by it as aforesaid during such period,
giving effect to all appropriate adjustments provided by this Section 10.

(e)           Certificate as to
Adjustments; No Impairment. Upon the occurrence of each adjustment or
readjustment pursuant to this Section 10, the Company shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and furnish
to the Holder a certificate setting forth such adjustment or readjustment and
the facts upon which such adjustment or readjustment is based. At any time upon
written request of the Holder, the Company shall furnish to the Holder a like
certificate setting forth: (a) a description of all such adjustments and
readjustments; (b) the Warrant Exercise Price at the time in effect; and (c)
the number of shares which at the time would be received upon the exercise of
the Warrant. The Company will not, by any voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder, but will at all times in good faith assist in the carrying
out of all the provisions of this Section 10 and in the taking of all such
action as may be necessary or advisable to protect the rights of the Holder
against impairment.

11.    Representations
and Warranties of the Company. The Company hereby represents and warrants
to the Holder as follows:

(a)           Corporate Power and
Authorization. The Company has all requisite corporate power and authority
to issue this Warrant and to perform each of its obligations hereunder. All
corporate action on the part of the Company, its directors and stockholders
necessary or advisable for the authorization, execution, delivery and
performance by the

 8
 

 

Company of this Warrant
has been taken. This Warrant is a valid and binding obligation of the Company,
enforceable in accordance with its terms.

(b)           Offering.  The
offer, issuance and sale of the Warrant is, and the issuance of shares of
Common Stock upon exercise of the Warrant will be, exempt from the registration
requirements of the Act, and are exempt from the qualification requirements of
any applicable state securities laws; and neither the Company nor anyone acting
on its behalf will take any action hereafter that would cause the loss of such
exemptions.

(c)           Binding Effect.  This
Warrant shall be binding upon any corporation succeeding the Company by merger,
consolidation or acquisition of all or substantially all of the Company’s
assets. All of the obligations of the Company relating to the shares of Common
Stock issuable upon the exercise of this warrant shall survive the exercise and
termination of this Warrant. All of the agreements of the Company shall inure
to the benefit of the successors and assigns of the Holder hereof. The Company
will, at the time of exercise of this Warrant whether in whole or in part,
acknowledge in writing its continuing obligation to the Holder hereof in
respect of any rights (including, without limitation, any right to registration
of the shares of Common Stock) to which the Holder hereof shall continue to be
entitled after such exercise in accordance with this Warrant; provided, that
the failure of the Company to make any such acknowledgement shall not affect
the continuing obligation of the Company to the Holder hereof in respect of
such rights.

12.    Miscellaneous.

(a)           Failure to Act and
Waiver. No failure or delay by the Holder to requite the performance of any
term or terms of this Warrant or to exercise any right or remedy shall
constitute a waiver of any such term or of any right, nor shall such delay or
failure preclude the Holder from exercising any such right or remedy at any
later time or times.

(b)           Consent to
Jurisdiction. The Company hereby agrees and consents that any action,
suit or proceeding arising out of this Warrant shall be brought exclusively in
any appropriate state or federal court in the New York County, New York, at the
sole election of the Holder hereof, and by the issuance and execution of this
Warrant the Company irrevocably consents to the jurisdiction of each such
court. Trial by jury in any action, proceeding or counterclaim with respect
hereto is hereby waived.

(c)           Governing Law.
IN ALL RESPECTS, INCLUDING ALL MATTERS OR CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS WARRANT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA.

 9
 

 

IN WITNESS
WHEREOF, the Company has caused this Warrant to be executed by its duly
authorized officer as of the date first above written.

	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BY:

  	
  /s/ Dennis G. McLaughlin, III

  	
   

  
	
   

  	
   

  	
  Dennis G.
  McLaughlin, III

  	
   

  
	
   

  	
   

  	
  President

  	
   

  

 

 10

 

EXHIBIT A

NOTICE OF EXERCISE

To:  Earth Biofuels, Inc.

(A)          The
undersigned hereby elects to purchase                  shares
of the Common Stock of Earth Biofuels, Inc. (“Common Stock”) pursuant to
the terms of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.

(B)           In
exercising this Warrant, the undersigned hereby confirms and acknowledges that
the shares of Common Stock are being acquired solely for the account of the
undersigned and not as a nominee for any other party, and for investment, and
that the undersigned will not offer, sell, or otherwise dispose of any such
shares of Common Stock except under circumstances that will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws.

(C)           Please
issue a certificate or certificates representing the purchased shares of Common
Stock in the name of the undersigned or in such other name as is specified
below:

	
  

  	
   

  	
   

  
	
  Name

  

 

(D)          Please
issue a new Warrant for the unexercised portion of the attached Warrant in the
name of the undersigned or in such other name as is specified below:

	
  Date

  	
   

  	
   

  
	
   

  	
  Name

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature

  	
   

  

 

 

FORM OF NET ISSUE
ELECTION

(To be signed only on net issue exercise of the Warrant)

The undersigned,
the holder of the within Warrant, hereby irrevocably elects to exercise this
Warrant with respect to                      shares
of Common Stock of Earth Biofuels, Inc., pursuant to the net issuance
provisions set forth in this Warrant, and requests that the certificates for
the number of shares of Common Stock issuable pursuant this Warrant after
application of the net issuance formula to such                       shares
to be issued in the name of, and delivered to                ,
Federal Taxpayer Identification Number                                  ,
whose address is                                           .

	
  Dated

  	
   

  	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Address)

  
					

 

 

REGISTRATION RIGHTS AGREEMENT

THIS
REGISTRATION RIGHTS AGREEMENT (“Agreement”) is made and entered into as of the
21st day of July, 2006, by and between EARTH BIOFUELS, INC.,
a Delaware corporation having its principal place of business at 3001 Knox
Street — Suit 403, Dallas, Texas 75205-7305 (the “Company”), and LANCE A. BAKROW, whose office
address is 537 Steamboat Road, Greenwich, Connecticut 06830-7153 (the “Holder”).

RECITALS:

A.
Contemporaneously with the execution hereof, the Holder is purchasing from the
Company (i) a warrant to purchase 4,000,000 (subject to adjustment) shares of
the Company’s common stock, $0.001 par value (the “Common Stock”) as therein
provided (the shares of Common Stock issuable upon exercise of the said warrant
are hereinafter referred to as the “Shares”).

B. The
Holder has requested, and the Company has agreed, as a condition to the Holder’s
obligation to acquire the said warrant, to register the Shares under the
Securities Act, upon the terms, and subject to the conditions, hereinafter set
forth.

NOW,
THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein and other good, valuable and sufficient
consideration, the receipt and adequacy of which are hereby acknowledge, the
parties hereto, intending to be legally bound, hereby agree as follows:

1.
Demand Registration. The Company agrees that the Company will, not later
than sixty (60) days following the date on which it receives a request therefor
by the Holder, file a registration statement (the “Registration Statement”)
with the Securities and Exchange Commission (“Commission”) relating to the
Shares. Such Registration Statement may, at the election of the Holder, be in
connection with an underwritten public offering of the Shares and in
appropriate form therefor. The company shall use its best efforts to cause such
Registration Statement promptly to become effective under the Securities Act
and to qualify the same under the blue sky laws of such states as maybe
requested. Provided that such registration enables the Holder to dispose of
substantially all of the Shares, the company shall be obligated to effect
registration and qualification pursuant to a request of the Holder no more than
once; in the event that such registration does not enable the Holder to dispose
of substantially all of the Shares, the Company shall cause Earth to effectuate
not less than one additional such registration upon like request by the Holder.

2.
Incidental Registration. If at any time the Company proposes to register
any equity securities under the Securities Act for its own account or for the
account of any of its stock-holders, the Company shall, each such time, give
the Purchaser not less than twenty (20) days’ written notice of such proposed
registration. Upon the written request of the Holder, given within twenty (20)
days after receipt of any such notice from the Company, the Company shall cause
to be included in such registration all of the Shares the Holder requests be

 

registered in such
registration. There shall be no restriction with respect to the number of times
the Holder may request such incidental registration.

3.
Expenses. All of its costs and expenses of the registration and
qualifications pursuant to this Agreement shall be borne by the Company. Such
costs and expenses shall include, without limitation, the fees and expenses of
counsel for the Company and of its accountants, one counsel for the Holder and
all other costs, fees and expenses of the Company incident to the preparation,
printing and filing under the Securities Act of the registration statement and
all amendments and supplements thereto, the cost of furnishing copies of each
preliminary prospectus, each final prospectus and each amendment or supplement
thereto to underwriters, dealers and other purchasers of the Shares and the
costs and expenses (including fees and disbursements of counsel) incurred in
connection with the qualification of the Shares under the blue sky laws of
various jurisdictions. The Company shall not, however, pay any underwriting
discount or commissions to the extent related to the sale of Shares sold in any
registration and qualification.

4.
Procedures.

(a)
The Company will keep the Holder advised in writing as to the initiation of
proceedings for such registration and qualification and as to the completion
thereof, and will advise the Holder, upon request, of the progress of such
proceedings.

(b)
The Company will keep the registration and qualifications under this Agreement
effective (and in compliance with the Securities Act) by such action as may be
necessary or appropriate until such time, if any as the Shares shall have been
sold. The Company’s obligations under this Section 4(b) shall include, without
limitation, the filing of post-effective amendments and supplements to any
registration statement or prospectus necessary to keep the Registration
Statement current and the further qualification under any applicable blue sky
or other state securities laws to permit such sale or distribution, all as
requested by the Holder. The Company will immediately notify the Holder at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing.

(c)
Without limiting any other provision hereof, in connection with any
registration of Shares under this Agreement, the Company will use its best
efforts to comply with the securities Act, the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and all applicable rules and regulations of
the Commission.

(d) In
connection with any registration of Shares under this Agreement, the Company
will provide, if appropriate, a transfer agent and registrar for the Shares not
later than the effective date of such Registration Statement.

(e) In
connection with any registration of Shares under this Agreement, the Company
will, if requested by the underwriters for any Shares included in such
registration, enter into

 2
 

 

an underwriting agreement
with such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, provisions relating
to indemnification and contribution.

5.
Indemnification. The Company will indemnify and hold harmless the Holder
and each person, if any, who controls the Holder within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, and expenses (including reasonable attorneys’ fees and expenses and
reasonable costs of investigation) to which the Holder or such controlling
person may be subject, under the Securities Act or otherwise, insofar as any
thereof arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in (A) the Registration Statement
under which the Holder’s Shares were registered under the Securities Act
pursuant to this Agreement, any prospectus or preliminary prospectus contained
therein, or any amendment or supplement thereto or (B) any other document
incident to the registration of the Shares under the Securities Act or the
qualification of the Shares under any state securities laws applicable to the
Company, (ii) the omission or alleged omission to state in any item referred to
in the preceding clause (i) a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act or
any other federal or state securities law, rule or regulation applicable to the
Company and relating to action or inaction by the Company in connection with
any such registration or qualification, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission based
upon information furnished to the Company in writing by the Holder expressly
for use therein (with respect to which information the Holder shall so
indemnify and hold harmless the Company, any underwriter for the Company end
each person, if any, who controls the Company or such underwriter within the
meaning of the Securities Act).

6.
Notices. Any notice or demand required or permitted to be made or given
hereunder shall be deemed sufficiently made and given if given by personal
service or by the mailing of such notice or demand by certified or registered
mail, return receipt requested, or by overnight courier service providing for
proof of delivery, addressed, if to the Company, at the Company’s address first
above written, with a copy to Roger A. Crabb, Esq., Scheef & Stone, L.L.P.,
5956 Sherry Lane — Suite 1400, Dallas, Texas 75225-8031; or if to the Holder,
at the Holder’s address first above written, with a copy in like manner to
Hillary B. Miller, Esq. 112 Parsonage Road, Greenwich, Connecticut 06830-3942.
Either party may change its address by like notice to the other party.

7.
Governing Law: Forum. This Agreement shall be construed end enforced in
accordance with the substantive laws of the State of New York without regard to
conflict of law principles. Each party hereby consents and submits to the
exclusive personal and subject matter jurisdiction of the state and federal
courts located in New York County, New York for

 3
 

 

purposes of stay action
or proceeding related to this Agreement Trial by jury in any action arising,
proceeding or counterclaim arising hereunder is hereby waived.

8.
Binding Effect; Assignment: Third Party Beneficiaries. This Agreement
shall be binding upon the parties and their respective successors and assigns
and shall inure to the benefit of the parties and their respective successors
and assigns. No person (including, without limitation, any employee of a party)
shall be, or be deemed to be, a third party beneficiary of this Agreement.

9.
Miscellaneous. This Agreement constitutes the entire contract between
the parties with respect to the subject matter hereof and cancels and
supersedes all of the previous contracts, commitments, representations,
warranties and understandings (whether oral or written) by, between or among
the parties with respect to the subject matter hereof. No addition to, and no
cancellation, renewal, extension, modification or amendment of, this Agreement
shall be binding upon a party unless such addition, cancellation, renewal,
extension, modification or amendment is set forth in a written instrument which
states that it adds to, amends, cancels, renews, extends or modifies this
Agreement and has been approved by all of the parties hereto. No waiver of any
provision of this Agreement shall be binding upon a party unless such waiver is
expressly set forth in a written instrument which is executed and delivered by
such party or on behalf of such party by an officer of, or attorney-in-fact
for, such party. Such waiver shall be effective only to the extent specifically
set forth in such written instrument. Neither the exercise (from time to time
and at any time) by a party of, nor the delay or failure (at any time or for
any period of time) to exercise, any right, power or remedy shall constitute a
waiver of the right to exercise, or impair, limit or restrict the exercise of,
such right, power or remedy or any other right, power or remedy at any time and
from time to time thereafter. No waiver of any right, power or remedy of a
party shall be deemed to be a waiver of any other right, power or remedy of
such party or shall, except to the extent so waived, impair, limit or restrict
the exercise of such right, power or remedy. If any provision of this Agreement
shall hereafter be held to be invalid, unenforceable or illegal, in whole or in
part, in any jurisdiction under any circumstances for any reason, (i) such
provision shall be reformed to the minimum extent necessary to cause such
provision to be valid enforceable and legal while preserving the intent of the
parties as expressed in, and the benefits to the parties provided by, this
Agreement or (ii) if such provision cannot be so reformed, such provision shall
be severed from this Agreement and an equitable adjustment shall be made to
this Agreement (including, without limitation, addition of necessary further
provisions to this Agreement) so as to give effect, to the intent as so
expressed and the benefits so provided. Such holding shall not affect or impair
the validity, enforceability or legality of such provision in any other
jurisdiction or under any other circumstances. Neither such holding nor such
reformation or severance shall affect or impair the legality, validity or
enforceability of any other provision of this Agreement.

10.
Remedies. The rights, powers and remedies of the parties set forth
herein for a breach of or default under this Agreement are cumulative and in
addition to, and not in lieu of, any rights or remedies that any party may
otherwise have under this Agreement, at law or in equity. The parties
acknowledge that the Shares are unique, and that any violation of this

 4
 

 

Agreement cannot be
compensated for by damages alone. Accordingly, in addition to all of the other
remedies which may be available hereunder or under applicable law, any party
shall have the right to any equitable relief which may be appropriate to remedy
a breach or threatened breach by any other party hereunder, including, without
limitation, the right to enforce specifically the terms of this Agreement by
obtaining injunctive relief in respect of any violation or non-performance
hereof, and any party shall have the right to seek recovery of and be awarded
attorneys’ fees and expenses in any proceeding with respect to this Agreement
as reasonably determined by the court in which such proceeding is brought.

11. Headings;
Counterparts. The headings set forth in this Agreement have been inserted
for convenience of reference only, shall not be considered a part of this
Agreement and shall not limit, modify or affect in any way the meaning or
interpretation of this Agreement. This Agreement may be signed in any number of
counterparts, each of which (when executed and delivered) shall constitute an
original instrument, but all of which together shall constitute one and the
same instrument. It shall not be necessary when making proof of this Agreement
to account for any counterparts other than a sufficient number of counterparts
which, when taken together, contain signatures of all of the parties. A
photocopy or electronic facsimile of this Agreement or any signature hereon
shall be valid as an original.

IN WITNESS
WHEREOF, the parties have duly executed and delivered this Agreement as of the
date first above written.

	
  EARTH BIOFUELS, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Dennis G.
  McLaughlin, III

  	
   

  	
   

  	
   

  
	
   

  	
  Dennis G.
  McLaughlin, III

  	
   

  	
  Lance A. Bakrow

  
	
   

  	
  Its President

  	
   

  	
   

  

 

 5

 

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the “Agreement”), made and entered into this
21st day of July, 2006, by and between EARTH
BIOFUELS, INC., a Delaware
corporation having its principal place of business at 3001 Knox Street — Suite
403, Dallas, Texas 75205-7305 (the “Company”), and LANCE A.
BAKROW, whose office address is 537 Steamboat Road, Greenwich,
Connecticut 06830-7153 (“Consultant”),

W i  t  n  e  s  s  e  t
h  :

WHEREAS, Consultant desires
to provide professional services to the Company in connection with its business
strategy and operations, and the Company desires to engage Consultant to
perform such services.

NOW, THEREFORE, in
consideration of the premises and covenants contained herein and intending to
be legally bound, the parties hereby agree as follows:

Article
I — SERVICES

Section
1.01 — Appointment
of Consultant.
Subject to the terms and conditions of this Agreement, the Company hereby hires
and employs Consultant as a non-exclusive provider of professional services
with respect to the Company’s business strategy and operations, and Consultant
hereby accepts such employment. Consultant shall devote so much of his
occupational time and efforts to the business of the Company as Consultant
shall determine in his sole discretion.

Section
1.02 — Non-Exclusivity. Nothing in this Agreement shall preclude
the Company from engaging other consultants to perform similar services, nor
shall it preclude Consultant from performing similar services for others.
Consultant may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as a consultant or investor in other businesses with
activities similar to those of the Company. The Company shall not have any
rights in or to such ventures or opportunities or the income or profits
therefrom.

Section
1.03 — Indemnification. Consultant shall be entitled to indemnity
from the Company for any liability incurred and/or for any act performed by him
within the scope of his engagement under this Agreement, and/or for any act
omitted to be performed, except for his gross negligence or willful misconduct,
which indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses. To the fullest
extent permitted by applicable law, expenses (including, without limitation,
reasonable attorneys’ fees, disbursements, fines and amounts paid in
settlement) incurred by Consultant in defending any claim, demand, action, suit
or proceeding relating to or arising out of their performance of his duties
shall, from time to time, be advanced by the Company prior to the final disposition
of such claim, demand, action, suit or proceeding upon receipt by the Company
of an undertaking by or on behalf of Consultant to repay such amount if it
shall ultimately be determined by a court of competent jurisdiction that
Consultant is not entitled to be indemnified as authorized herein. Consultant’s
duty of care in the discharge of

 1
 

 

his duties to the Company is limited to refraining
from engaging in grossly negligent conduct, intentional misconduct, or a
knowing violation of law.

Section
1.04 — Independent
Contractors.  The relationship between the parties established
by this Agreement is that of independent contractors, and nothing contained in
this Agreement shall be construed to: (a) give either party the power to direct
or control the day-to-day activities of the other; (b) constitute the parties
as partners, joint ventures, co-owners or otherwise as participants in a joint
or common undertaking; or (c) allow Consultant to create or assume any
obligation on behalf of the Company for any purpose whatsoever.

Article
II — PAYMENT

Section
2.01 — Compensation.  In
consideration of Consultant’s professional services under this Agreement, the
Company shall pay Consultant a professional services fee at the rate of $1 per
year.

Section
2.02 — Reimbursement
of Expenses. The
Company will reimburse Consultant for all reas­onable, ordinary and neces­sary
travel, subsistence and lodging expenses incurred by Consultant in carrying out
his duties under this Agreement. Consultant shall present the Company from
time to time with an itemized statement of such expens­es in such form as the
Company may request.

Section
2.03 — Terms
of Payment.  Payment of the fees and expenses set forth in
this Article shall be due and payable to Consultant by the Company not later
than thirty (30) days following receipt by the Company of Consultant’s invoice
therefor.

Article
III — TERM AND TERMINATION

Section
3.01 — Term. This Agreement shall last for five (5)
years from the date hereof. No compensation of any kind shall be payable to the
Company or Consultant upon the expiration of this Agreement except as
specifically provided herein.

Section
3.02 — Termination. Should either party fail to comply with the
material terms and conditions of this Agreement the other party may terminate
this Agreement upon thirty (30) days written notice of the failure, provided
that the failure to comply is not cured within that period. This Agreement
shall also terminate upon the bankruptcy or insolvency of either party.  The rights and remedies provided in this
Section shall be in addition to any other rights and remedies available at law,
in equity, or provided by this Agreement.

Article
IV — GENERAL

Section
4.01 — No
Insider Information. The
Company shall not, and shall cause each of its subsidiaries and each of their
respective officers, directors, employees and agents, not to, provide Consultant
with any material, nonpublic information regarding the Company or any of its
subsidiaries without the express written consent of Consultant. In the event of
a breach of the foregoing covenant by the Company, and provided that the
Company shall have failed (following proper written request therefor) to make
an appropriate public disclosure consistent with the requirements of Regulation
FD, Consultant shall have the right to make a public disclosure, in the form of
a press release, public advertisement or otherwise, of such

 2
 

 

material, nonpublic information without the prior
approval by the Company. Consultant shall not have any liability to the Company
for any such disclosure.

Section
4.02 — Notices.  Any
notice or demand required or permitted to be made or given hereunder shall be
deemed sufficiently made and given if given by personal service or by the
mailing of such notice or demand by certified or registered mail, return
receipt requested, or by overnight courier service providing for proof of delivery,
addressed, if to the Company, at the Company’s address first above written,
with a copy to Roger A. Crabb, Esq., Scheef & Stone, L.L.P., 5956 Sherry
Lane — Suite 1400, Dallas, Texas 75225-8031; or if to Consultant, at
Consultant’s address first above written, with a copy in like manner to Hilary
B. Miller, Esq., 112 Parsonage Road, Greenwich, Connecticut 06830-3942. Either
party may change its address by like notice to the other party..

Section
4.03 — Governing
Law.  This Agreement shall be governed by, interpreted
under, and construed and enforced in accordance with the internal laws of the
State of New York without regard to conflict of laws principles.  The sole forums for resolving disputes
arising under or relating to this Agreement shall be the State and Federal
Courts located in of the State of New York, and the parties hereby consent and
submit to the exclusive jurisdiction of such courts and agree that venue shall
be in New York County, New York. Trial by jury in any action, proceeding or counterclaim
arising hereunder or related hereto is hereby waived.

Section
4.04 — Assignment. 
Except as otherwise provided herein, this Agreement together with all
exhibits or modification now and hereafter made a part hereof shall be binding
on the respective parties and their respective heirs, executors, administrators,
legal representatives, successors and assigns. 
Consultant shall not have the right to assign or delegate this Agreement
or any of Consultant’s rights or obligations hereunder to any third party, without
the Company’s prior written consent in each instance, which consent the Company
may withhold at its sole discretion.

Section
4.05 — Titles
and Headings.  Titles and headings of sections of this
Agreement are for convenience of reference only and shall not affect the
construction of any provision of this Agreement.

Section
4.06 — Waiver
and Invalidity.  No waiver of any breach of this Agreement
shall be effective unless made in writing. 
If any term or provision of this Agreement is found to be invalid or unenforceable
under any applicable statute or rule of law, then that provision notwithstanding,
this Agreement shall remain in full force and effect and such provision shall
be deleted.  Without limiting the foregoing,
in the event any remedy hereunder is determined to have failed of its essential
purpose, the parties intend that all limitations of liability and remedies and
all exclusions of damages provided for in this agreement shall remain in full
force and effect.

Section
4.07 — Force
Majeure.  Neither party shall be liable for failure or
delay in performance of any obligation under this Agreement, except the making
of payments hereunder, if such failure or delay is caused by circumstances
beyond the control of the party

 3
 

 

concerned, including, without limitations, failures
resulting from fires, accidents, labor stoppages, war, inability to secure
materials or labor, government acts or acts of God.

Section
4.08 — Entire
Agreement.  This Agreement constitutes the exclusive statement
of the agreement between the parties concerning the subject matter hereof.  No addition to or modification of any
provisions of this Agreement shall be binding unless made in writing and signed
by duly authorized representatives of the parties.

Section
4.09 — Counterparts.  This
Agreement may be executed in multiple counterparts, each of which shall be
deemed an original and all of which together shall constitute one instrument.
An electronic facsimile or photocopy of this Agreement or any signature hereon
shall be deemed an original for all purposes.

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives.

	
  EARTH BIOFUELS, INC.

  	
  CONSULTANT:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Dennis G.
  McLaughlin

  	
   

  	
   

  	
   

  
	
  Dennis G. McLaughlin, III

  	
   

  	
  LANCE A. BAKROW

  	
   

  
	
  Chairman and
  Chief Executive Officer

  	
   

  

 

 4EXHIBIT 10.1

FOCUS ENHANCEMENTS, INC.

AMENDED 2004 STOCK INCENTIVE PLAN

1.     Purpose.  This Stock Incentive Plan, to be known as the
2004 Stock Incentive Plan (hereinafter, this “Plan”), is intended to promote
the interests of Focus Enhancements, Inc. (hereinafter, the “Company”) by
providing an inducement to obtain and retain the services of qualified persons
to serve as employees of the Company or members of its Board of Directors (the “Board”).

2.             Available Shares.  The total number of shares of common stock,
par value $0.01 per share, of the Company (the “common stock”) for which
options or restricted stock may be granted under this Plan shall not exceed
4,952,000 shares, subject to adjustment in accordance with paragraph 2 of this
Plan.  Shares subject to this Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company.  If any
options or restricted stock granted under this Plan are surrendered or
forfeited before exercise or lapse without exercise, in whole or in part, the
shares reserved therefore shall continue to be available under this Plan.

In the event of any
change in the outstanding shares of common stock or other securities then
subject to the Plan by reason of any stock split, reverse stock split, stock
dividend, recapitalization, merger, consolidation, combination or exchange of
shares or other similar corporate change, or if the outstanding securities of
the class then subject to the Plan are exchanged for or converted into cash,
property or a different kind of security, or if cash, property or securities
are distributed in respect of such outstanding securities (other than a regular
cash dividend), then, unless the terms of such transaction shall provide
otherwise, such equitable adjustments shall be made in the Plan and the awards
thereunder (including, without limitation, appropriate and proportionate
adjustments in (i) the number and type of shares or other securities that
may be acquired pursuant to awards theretofore granted under the Plan;
(ii) the maximum number and type of shares or other securities that may be
issued pursuant to awards thereafter granted under the Plan; (iii) the
number of shares of restricted stock that are outstanding; and (iv) the
maximum number of shares or other securities with respect to which awards may
thereafter be granted to any Participant in any Plan Year) as the Committee
determines are necessary or appropriate, including, if necessary, any
adjustment in the maximum number of shares of common stock available for
distribution under the Plan as set forth in this Section 3. Such
adjustments shall be conclusive and binding for all purposes of the Plan.

3.             Administration.  This Plan shall be administered by the by the
Compensation Committee, which consists of two or more members of the Board,
each of whom shall be both a “Non-Employee Director,” as that term is defined
in Rule 16b-3(b)(3)(i) of the Exchange Act, and an “outside director”
within the meaning of Section 162(m) of the Code. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of

 1
 

 

this Plan as it may deem desirable. 
No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to this Plan or any option
granted under it.

4.             Grant of Options
or Restricted Shares / Eligibility. 
Subject to the availability of shares under this Plan, the Committee may
make grants of options and/or restricted shares to employees of the Company
and/or members of the Board under this Plan from time to time in accordance
with the terms of the Plan.

5.             Stockholder
Approval.  Anything in this Plan to
the contrary notwithstanding, the effectiveness of this Plan and of the grant
of all options or restricted stock hereunder is in all respect subject to this
Plan and options or restricted stock granted under it shall be of no force and
effect unless and until the approval of this Plan by the vote of the holders of
a majority of the Company’s shares of common stock present in person or by
proxy and entitled to vote at a meeting of stockholders at which this Plan is
presented for approval.

6.             Options.  (a) Option Price.  The purchase price of
the stock covered by an option granted pursuant to this Plan shall be 100% of
the fair market value of such shares on the day the option is granted. 
The option price will be subject to adjustment in accordance with the
provisions of paragraph 2 of this Plan.  For purposes of establishing the
exercise price and for all other valuation purposes under the Plan, the fair
market value of a share of common stock on any relevant date will be
the closing sales price of the common stock in the case where the common
stock is traded on a national securities exchange, the NASDAQ Capital Market or
NASDAQ National Market.  Alternatively, fair market value shall be
determined by the average between the highest and lowest sales price quoted (on
that date) by an established quotation service if the common stock is
quoted on the over-the-counter bulletin board (the “OTCBB”).   If
the common stock is not publicly traded on a national securities
exchange, the Nasdaq Capital Market, Nasdaq National Market or OTCBB, “fair
market value” shall be deemed to be the fair value of the common stock as
determined by the Committee after taking into consideration all factors which
it deems appropriate, including, without limitation, recent sale and offer
prices of the common stock in private transactions negotiated at arm’s length.

(b)           Period
of Option.  Unless sooner terminated
in accordance with the provisions of paragraph 6(e) of this Plan, an option
granted hereunder shall expire on the date that is ten (10) years after the
date of grant of the option.

(c)           Vesting
of Options and Non-Transferability of Options.  Options granted under this Plan shall not be
exercisable until they become vested. 
Options granted under this Plan shall vest in the optionee and thus
become exercisable in accordance with the vesting schedule as determined by the
Committee from time to time in a option grant letter, or upon the occurrence of
a specified event or performance criteria (including certain performance
criteria similar to that set forth in paragraph 7(b)(4)), provided, however,
the optionee has continuously served as a member of the Board, as an employee
of the Company, or in another advisory role to the Company.

The number of shares as to which options may be
exercised shall be cumulative, so that once the option shall become exercisable
as to any shares it shall continue to be exercisable as to

 2
 

 

said shares, until expiration or termination of the
option as provided in this Plan; provided however, any option granted
under this Plan shall in no event be exercised unless and until this Plan has
been approved by the Company’s stockholders, but upon such approval the vesting
shall become effective as of the date of the grant.

(d)           Non-transferability.  Any option granted pursuant to this Plan shall
not be assignable or transferable other than by will or the laws of descent and
distribution or pursuant to a domestic relations order and shall be exercisable
during the optionee’s lifetime only by him or her.

(e)           Termination
of Option Rights.

(1)           Except as otherwise
specified in the agreement relating to an option, in the event an optionee
ceases to be an employee of Company or a member of the Board, as the case may
be, for any reason other than death or permanent disability, any then
unexercised portion of options granted to such optionee shall, to the extent
not then vested, immediately terminate and become void; except as set forth in
paragraphs 6(b) and 6(c), any portion of an option which is then vested but has
not been exercised at the time the optionee so ceases to be a member of the
Board or an employee may be exercised, to the extent it is then vested by the
optionee within ninety days after such event.

(2)           Notwithstanding the
foregoing, in the event any optionee who is a member of the Board of Directors
(i) ceases to be a member of the Board of Directors at the request of the
Company, (ii) is removed without cause, or (iii) otherwise does not stand for
nomination or re-election as a director of the Company at the request of the
Company, then any portion of any Option granted to such optionee may be
exercised, to the extent it is then vested by the optionee within one year
after such event.

(3)           Notwithstanding
anything to the contrary herein, in no event shall any option be exercised if
the optionee is dismissed from employment or removed from the Board of
Directors for any one of the following reasons: 
(i) disloyalty, gross negligence, dishonesty or breach of fiduciary duty
to the Company; or (ii) the commission of an act of embezzlement, fraud or
deliberate disregard of the rules or polices of the Company which results in
loss, damage or injury to the Company, whether directly or indirectly; or (iii)
the unauthorized disclosure of any trade secret or confidential information of
the Company; or (iv) the commission of an act which constitutes unfair
competition with the Company or which induces any customer of the Company to
break a contract with the Company; or (v) the conduct of any activity on behalf
of any organization or entity which is a competitor of the Company (unless such
conduct is approved by a majority of the members of the Board of Directors).

(4)           In the event that an
optionee ceases to be an employee of the Company or a member of the Board, as
the case may be, by reason of his or her death or permanent disability, any
option granted to such optionee shall be

 3
 

 

immediately and
automatically accelerated and become fully vested and all unexercised options
shall be exercisable by the optionee (or by the optionee’s personal
representative, heir or legatee, in the event of death) for a period of one
year thereafter.

(f)            Exercise
of Option.  Subject to the terms and
conditions of this Plan and the option agreements, an option granted hereunder
shall, to the extent then exercisable, be exercisable in whole or in part by
giving written notice to the Secretary of the Company by mail or in person
addressed to FOCUS Enhancements, Inc., 1370 Dell Avenue, Campbell, California
95008, at its principal executive offices, or other such address as optionee
may be informed from time to time, stating the number of shares with respect to
which the option is being exercised, accompanied by payment in full for such
shares.  Payment may be (a) in United
States dollars in cash or by check, (b) in whole or in part in shares of the
common stock of the Company already owned by the person or persons exercising
the option or shares subject to the option being exercised (subject to such
restrictions and guidelines as the Board may adopt from time to time), valued
at fair market value determine in accordance with the provisions of paragraph 6
or (c) consistent with applicable law, through the delivery of an assignment to
the Company of a sufficient amount of the proceeds from the sale to the broker
or selling agent to pay that amount to the Company, which sale shall be at the
participant’s direction at the time of exercise.  Notwithstanding the foregoing, the Committee
shall have the authority, in their absolute discretion to settle options that
are exercised by way of the “cashless exercise” method described in (c) of this
paragraph 9 through an issuance of the “net shares,” where the term “net shares”
is the number of shares that is equivalent in value to the fair market value of
the underlying stock on the exercise date, as determined in accordance with the
provisions of paragraph 5, less the exercise price.  The Company’s transfer agent shall, on behalf
of the Company, prepare a certificate or certificates representing such shares
acquired pursuant to exercise of the option, shall register the optionee as the
owner of such shares on the books of the Company and shall cause the fully
executed certificate(s) representing such shares to be delivered to the
optionee as soon as practicable after payment of the option price in full.  The holder of an option shall not have any
rights of a stockholder with respect to the shares covered by the option,
except to the extent that one or more certificates for such shares shall be
delivered to him or her upon the due exercise of the option.

7.             Restricted Stock.  Restricted stock awards under the Plan shall
consist of grants of shares of common stock of the Company subject to the terms
and conditions hereinafter provided.

(a)           Grant of Awards.  The Committee shall (i) select the
officers and key employees to whom restricted stock may from time to time be
granted, (ii) determine the number of shares to be covered by each award
granted, (iii) determine the issue price; (iv) determine the terms and
conditions (not inconsistent with the Plan) of any award granted hereunder, and
(v) prescribe the form of the agreement, legend or other instrument
necessary or advisable in the administration of awards under the Plan.  Restricted stock may be granted to Board
members in lieu of Board fees.

(b)           Terms and Conditions
of Awards.  Any restricted stock
award granted under the Plan shall be evidenced by a Restricted Stock Agreement
executed by the Company

 4
 

 

and the recipient, in such form as the Committee shall approve, which
agreement shall be subject to the following terms and conditions and shall
contain such additional terms and conditions not inconsistent with the Plan as
the Committee shall prescribe:

(1)           Number of
Shares Subject to an Award: 
The Restricted Stock Agreement shall specify the number of shares of
common stock subject to the Award.

(2)           Restriction
Period:  The period of
restriction applicable to each Award shall be established by the Committee but
may not be less than one year, unless the Committee determines otherwise.  The Restriction Period applicable to each
Award shall commence on the Award Date.

(3)           Consideration:  With respect to employees of the Company,
each recipient, as consideration for the grant of an award, shall remain in the
continuous employ of the Company for at least one year from the date of the
granting of such award, or as otherwise determined by the Committee, and any
shares covered by such an award shall lapse if the recipient does not remain in
the continuous employ of the Company for at least one year from the date of the
granting of the award, except as otherwise determined by the Committee.

(4)           Restriction
Criteria:  The Committee shall
establish the criteria upon which the Restriction Period shall be based.  Restrictions shall be based upon either or
both of (i) the continued employment of the recipient or (ii) the
attainment by the Company of one or more of the following measures of operating
performance:

	
  a. Earnings

  	
  d. Financial return ratios

  
	
   

  	
   

  
	
  b.
  Revenue

  	
  e. Total Stockholder Return

  
	
   

  	
   

  
	
  c.
  Operating or net cash flows

  	
  f. Market share

  

 

The Committee shall establish the
specific targets for the selected criteria and, in its judgment, can select
additional measures of performance. 
These targets may be set at a specific level or may be expressed as
relative to the comparable measure at comparison companies or a defined
index.  These targets may be based upon
the total Company, one or more business units of the Company or a defined
business unit that the executive has responsibility for or influence over.  In cases where objective performance criteria
are established, the Committee shall determine the extent to which the criteria
have been achieved and the corresponding level to which restrictions will be
removed from the Award or the extent to which a participant’s right to receive
an Award should be lapsed in cases where the performance criteria have not been
met and shall certify these determinations in writing.  The

 5
 

 

Committee may provide for the
determination of the attainment of such restrictions in installments where
deemed appropriate.

(c)           Terms and Conditions
of Restrictions and Forfeitures.  The
shares of common stock awarded pursuant to the Plan shall be subject to the
following restrictions and conditions:

(1)           During the Restriction
Period, the participant will not be permitted to sell, transfer, pledge or
assign restricted stock awarded under this Plan.

(2)           Except as provided in
Section 7(c)(1), or as the Committee may otherwise determine, the participant
shall have all of the rights of a stockholder of the Company, including the
right to vote the shares and receive dividends and other distributions provided
that distributions in the form of stock shall be subject to the same
restrictions as the underlying restricted stock.

(3)           In the event of a
participant’s retirement, death or disability prior to the end of the
Restriction Period for a participant who has satisfied the one year employment
requirement of Section 7(b)(3) with respect to an award prior to retirement,
death or disability, or as otherwise determined by the Committee, the
participant, or the participant’s estate, shall be entitled to receive that
proportion (to the nearest whole share) of the number of shares subject to the
Award granted as the number of months of the Restriction Period which have
elapsed since the Award date to the date at which the participant’s retirement,
death or disability occurs, bears to the total number of months in the
Restriction Period.  The participant’s
right to receive any remaining shares shall be canceled and forfeited and the
shares will be deemed to be reacquired by the Company.

(4)           In the event of a
participant’s retirement, death, disability or in cases of special
circumstances as determined by the Committee, the Committee may, in its sole
discretion when it finds that such an action would be in the best interests of
the Company, accelerate or waive in whole or in part any or all remaining time
based restrictions with respect to all or part of such participant’s restricted
stock.

(5)           Upon termination of
employment for any reason during the Restriction Period, subject to the
provisions of paragraph (3) above or in the event that the participant fails
promptly to pay or make satisfactory arrangements as to the withholding taxes
as provided in the following paragraph, all shares still subject to restriction
shall be forfeited by the participant and will be deemed to be reacquired by
the Company.

(6)           A participant may, at
any time prior to the expiration of the Restriction Period, waive all rights to
receive all or some of the shares of a restricted stock Award by delivering to
the Company a written notice of such waiver.

 6
 

 

(7)           Notwithstanding the
other provisions of this Section 7, the Committee may adopt rules that would permit
a gift by a participant of restricted shares to members of the participant’s
immediate family (spouse, parents, children, stepchildren, grandchildren or
legal dependants) or to a trust whose beneficiary or beneficiaries shall be
either such a person or persons or the participant.

(8)           Any attempt to dispose
of restricted stock in a manner contrary to the restrictions shall be
ineffective.

8.             Acceleration
Upon Change in Control.  The
Committee may, in its discretion, provide that unvested awards will accelerate
upon the occurrence of a Change in Control. 
The terms of such acceleration shall be specifically set out in an
agreement upon the grant of an award or pursuant to an employment, severance or
similar agreement.

“Change in Control” shall
mean any of the following occurrences:

(a) any “person,” as such
term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the
Company or any trustee or other fiduciary holding securities under an employee
benefit plan of the Company), is or becomes the “beneficial owner” (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 50% or more of the combined voting power of the
Company’s then outstanding securities;

(b) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (a), (c) or (d) of this definition)
whose election by the Board of Directors or nomination for election by the
Company’s stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof;

(c) the stockholders of
the Company approve a merger or consolidation of the Company with any other
entity, other than (i) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation or (ii) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no “person” (as hereinabove defined) acquires
more than 50% of the combined voting power of the Company’s then outstanding
securities; or

(d) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially
all of the Company’s assets.

9.             Legend on
Certificates.  The certificates
representing restricted shares or shares issued pursuant to the exercise of an
option granted hereunder shall carry such appropriate

 7
 

 

legend, and such written instructions shall be given
to the Company’s transfer agent, as may be deemed necessary or advisable by
counsel to the Company in order to comply with the requirements of the
Securities Act of 1933 or any state securities laws.

10.           Representations of
Optionee.  If requested by the
Company, the optionee shall deliver to the Company written representations and
warranties upon exercise of the option that are necessary to show compliance
with Federal and state securities laws, including representations and
warranties to the effect that a purchase of shares under the option is made for
investment and not with a view to their distribution (as that term is used in
the Securities Act of 1933).

11.           Agreement.  Each option or restricted stock award granted
under the provisions of this Plan shall be evidenced by an agreement, which
agreement shall be duly executed and delivered on behalf of the Company and by
the grantee to whom such award is granted. 
The agreement shall contain such terms, provisions and conditions not
inconsistent with this Plan as may be determined by the committee and the
officer executing it.

12.           Termination and
Amendment of Plan.  Awards may no
longer be granted under this Plan after May 27, 2014, and this Plan shall
terminate when all options granted or to be granted hereunder are no longer
outstanding.  The Board may at any time
terminate this Plan or make such modification or amendment thereof as it deems
advisable; provided, however, that if stockholder approval of the
Plan is required by law, the Board may not, without approval by the affirmative
vote of the holders of a majority of the shares of common stock present in
person or by proxy and voting on such matter at a meeting, (a) increase the
maximum number of shares for which awards may be granted under this Plan
(except by adjustment pursuant to Section 8), (b) materially modify the
requirements as to eligibility to participate in this Plan, (c) materially
increase benefits accruing to option holders under this Plan or (d) amend this
Plan in any manner which would cause Rule 16b-3 under the Securities Exchange
Act (or any successor or amended provision thereof) to become inapplicable to
this Plan Termination or any modification or amendment of this Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.

13.           Reorganization or
Liquidation of the Company.  In the
event of (a) the complete liquidation of the Company, (b) a merger,
reorganization, or consolidation of the Company with any other corporation
(other than a Subsidiary of the Company) in which the Company is not the
surviving corporation, or (c) the sale of all or substantially all of the
Company’s assets, any unvested restricted stock and unexercised options then
outstanding shall be deemed canceled as of the effective date of such event
unless the surviving corporation in any such merger, reorganization or
consolidation or the acquiring corporation in any such sale elects to assume
the unvested restricted stock and unexercised options under the Plan or to
issue substitute unvested restricted stock and options in place thereof.  Notwithstanding anything in this Plan or any
option agreement to the contrary, the Company shall not be deemed to have been
liquidated by reason of the merger or consolidation of the Company with or into
a Subsidiary of the Company in a transaction in which the Company is not the
surviving corporation.  The Company shall
give each optionee at least thirty (30) days prior written notice of the
anticipated effective date of any such liquidation, merger, reorganization,
consolidation or sale.  Notwithstanding
anything in this Plan or in any Stock Option Agreement to the contrary, (i) all
Option exercises effected during

 8
 

 

the 30-day period prior to the effective date of any such merger,
reorganization , consolidation or sale, shall be deemed to be effective
immediately prior to the closing of such liquidation, merger, reorganization,
consolidation or sale and (ii), if the Company abandons or otherwise fails to
close any such liquidation, merger, reorganization, consolidation or sale, then
(a) all exercises during the foregoing 30-day period shall cease to be effective
ab initio and (b) the outstanding options shall be exercisable as otherwise
determined under the applicable option agreement and without consideration of
this paragraph 12 or the corresponding provisions of any option agreement.

14.           Withholding of
Income Taxes.  The Company shall make
appropriate provisions for the payment of any Federal, state or local taxes or
any other charges that may be required by law to be withheld by reason of a
grant or the issuance of shares of common stock pursuant to the Plan.    At the election of the optionee or
restricted stockholder, the withholding obligation may be satisfied: (a)
through payment in United States dollars in cash or check, (b) through the
optionee’s or restricted stockholder’s surrender of shares of common stock that
the optionee or restricted stockholder had owned for more than six (6) months
prior to the date of such transfer, (c) by authorizing a Company-approved third
party to sell the shares (or a sufficient portion of the shares) acquired upon exercise
of the option and remit to the Company a sufficient portion of the sale
proceeds to pay any tax withholding resulting from such exercise, and (d)
through the Company’s retention of shares of common stock which would otherwise
be issued as a result of the exercise of the option or the award of the
restricted stock.  Notwithstanding the
foregoing, in the case where optionee elects tax withholding alternative (c),
the Committee shall have the authority, in their absolute discretion to satisfy
the employer tax withholding holding through the Company’s retention of shares
of common stock which would otherwise be issued as a result of the exercise of
the option.

15.           Compliance with
Regulations.  It is the Company’s
intent that the Plan comply in all respects with Rule 16b-3 under the
Securities Exchange Act of 1934 (or any successor or amended provision thereof)
and any applicable Securities and Exchange Commission interpretations
thereof.  If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.

16.           Governing Law.  The validity and construction of this Plan
and the instruments evidencing options shall be governed by the laws of the
State of Delaware, without giving effect to the principles of conflicts of law
thereof.

Approved by Board of
Directors of the Company, as amended: August 31, 2006.

 9

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