Document:

Unassociated Document

    NOTE
      AND WARRANT PURCHASE AGREEMENT

    

    DATED
      MAY 16, 2008

    

    

    AMONG

    

    THIRD
      EYE CAPITAL CORPORATION, 

    AS
      AGENT,

    

    

    THE
      PURCHASERS FROM TIME TO TIME PARTY HERETO

    

    AND

    

    AE
      BIOFUELS, INC., 

    AS
      THE COMPANY

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    LIST
      OF EXHIBITS

    

    Exhibit
      A
      - Form of Note

    Exhibit
      B
      - Form of Warrants

     

    LIST
      OF SCHEDULES

    

    Disclosure
      Schedule

    

    Schedule
      A - Purchasers

    
      
        
        

      

      
        i

        
          

        

      

      
        
        

      

    

    

    NOTE
      AND WARRANT PURCHASE AGREEMENT

    

    THIS
      NOTE
      AND WARRANT PURCHASE AGREEMENT (this “Agreement”)
      is
      made as of May 16, 2008 among AE
      BIOFUELS, INC.,
      a
      Nevada corporation (the “Company”),
      THIRD
      EYE CAPITAL CORPORATION,
      an
      Ontario corporation, as agent (“Agent”)
      and
      the PURCHASERS
      from
      time to time parties hereto.

     

    The
      parties hereto agree as follows:

     

    SECTION
      1

     

    DEFINITIONS

     

    1.1
      Definitions.
      For the
      purposes of this Agreement, the following terms have the meanings set forth
      below (such meanings to be applicable to both the singular and plural forms
      of
      the terms defined):

    

    “Affiliate”
of
      any
      particular Person means any other Person directly or indirectly controlling,
      controlled by or under common control with such particular Person. The term
      “control”
means
      the possession, directly or indirectly, of the power to direct the management
      and policies of a Person whether through the ownership of voting securities,
      by
      contract or otherwise.

    

    “Business
      Day”
means
      any day other than a Saturday, Sunday or public holiday under the laws of the
      Toronto, Canada or the State of New York or other day on which banking
      institutions are authorized or obligated to close in Toronto, Canada or New
      York, New York. 

    

    “Change
      in Control’’ means
      an
      event or series of events by which any of the following occurs:

    

    (a) Eric
      McAfee ceases to be employed as Chief Executive Officer or Chairman of the
      Company;

     

    (b) any
      Person is or becomes the beneficial owner, directly or indirectly, of more
      than
      50% of the total voting power of all outstanding classes of voting capital
      stock
      of the Company;

     

    (c) the
      adoption of a plan relating to the liquidation or dissolution of the
      Company;

     

    (d) on
      any
      date, a majority of the Company’s Board of Directors does not consist of Persons
      (i) who were directors on the Closing Date (“Continuing
      Directors”)
      or
      (ii) whose election or nomination as directors was approved by at least 2/3
      of the directors then in office who are Continuing Directors or whose election
      or nomination was previously so approved;

    

    (e) the
      Company fails to own, directly or indirectly, 100% of each of the Significant
      Subsidiaries (other than Energy Enzymes, Inc.); 

    

    (f) any
      sale
      of all or substantially all of the Company’s assets or common stock;
      or

    

    (g) the
      execution by the Company or any of its Subsidiaries or Affiliates of any
      agreement or letter of intent with respect to any proposed transaction or event
      or series of transactions or events that, individually or in the aggregate,
      may
      reasonably be expected to result in any of the events in (a) through (f) above
      or the execution of any written agreement that, when fully performed by the
      parties thereto, would result in any of the events in (a) through (f)
      above.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Collateral”
      means
      collectively, all real, personal or mixed property and all types of tangible
      or
      intangible property and all other collateral and/or security granted and/or
      securities pledged to Agent, any Purchaser or any other Person pursuant to
      the
      Transaction Documents.

    

    “Common
      Stock”
means,
      collectively, the Voting Common Stock and any capital stock of any class of
      stock hereafter authorized that is not limited to a fixed sum or percentage
      of
      par or stated value in respect of the rights of the holders thereof to
      participate in dividends in the distribution of assets upon any liquidation,
      dissolution or winding up of the Company. 

    

    “Default
      Rate”
means
      that rate of interest per annum equal to 800 basis points per annum over the
      Interest Rate applicable to the Note.

     

    “Dividend”
means
      any distribution by a corporation, limited liability company or other entity
      with respect to its capital stock, membership interests or other ownership
      interests whether in cash, securities or other property.

    

    “Environmental
      Laws”
means
      any Law, including any common law, which relates to or otherwise imposes
      liability or standards of conduct concerning discharges, emissions, releases
      or
      threatened releases of noises, odors or any pollutants, contaminants or
      hazardous or toxic wastes, substances or materials, into air, water or
      groundwater, or land, or otherwise relating to the manufacture, processing,
      generation, distribution, use, treatment, storage, disposal, cleanup, transport
      or handling of pollutants, contaminants, or hazardous or toxic wastes,
      substances or materials, including, but not limited to CERCLA as amended, the
      Resource Conservation and Recovery Act of 1976, as amended, the Toxic Substances
      Control Act of 1976, as amended, the Federal Water Pollution Control Act
      Amendments of 1972, the Clean Water Act of 1977, as amended, the Oil Pollution
      Act of 1990, as amended, any so-called “Superlien” law, and any other similar
      Federal, state or local statutes.

    “Environmental
      Lien”
means
      any Lien, whether recorded or unrecorded, in favor of any Governmental
      Authority, relating to any liability of the Company or any of its Subsidiaries
      arising under any Environmental Laws.

    

    “ERISA”
means
      the Employee Retirement Income Security Act of 1974, as amended from time to
      time, and the rules and regulations promulgated thereunder from time to time
      in
      effect.

    

    “GAAP”
means
      generally accepted accounting principles accepted in the United States of
      America as promulgated by the Financial Accounting Standards Board, as in effect
      from time to time.

    

    “Governmental
      Authority(ies)”
      means
      any international, Federal, state, interstate, provincial, local, foreign court
      or governmental agency, authority, instrumentality, agency, bureau, board,
      commission, department or regulatory body.

    

    “Guarantee”
      means
      any guarantee of the payment or per-formance of any Indebtedness or other
      obligation and any other arrangement whereby credit is extended to one obligor
      on the basis of any promise of another Person, whether that promise is expressed
      in terms of an obligation to (i) pay the Indebtedness or other liabilities
      of such obligor, (ii) purchase an obligation owed by such obligor,
      (iii) purchase goods and services from such obligor pursuant to a
      take-or-pay contract, (iv) maintain the capital, working capital, solvency
      or general financial condition of such obligor, or (v) otherwise assure any
      creditor of such obligor against loss (including by way of an agreement to
      repurchase or reimburse), whether or not any such arrangement is listed on
      the
      balance sheet of such other Person or referred to in a footnote thereto, but
      shall not include endorsements of items for collection in the ordinary course
      of
      business. The amount of any Guarantee shall be equal to the amount of the
      obligation so guaranteed or otherwise supported or, if not a fixed or determined
      amount, the maximum amount guaranteed or supported.

    

    “Hazardous
      Material”
means
      any substances or materials that are, on the Closing Date, regulated under
      the
      Environmental Laws.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “Indebtedness”
means
      at a particular time, without duplication, (i) any indebtedness for
      borrowed money or issued in substitution for or exchange of indebtedness for
      borrowed money, (ii) any indebtedness evidenced by any note, bond,
      debenture or other debt security, (iii) any indebtedness for the deferred
      purchase price of property or services with respect to which a Person is liable,
      contingently or otherwise, as obligor or otherwise (other than trade payables
      and other current liabilities incurred in the ordinary course of business),
      (iv) any commitment by which a Person assures a creditor against loss
      (including, without limitation, contingent reimbursement obligations with
      respect to letters of credit), (v) any obligations for which a Person is
      obligated pursuant to a Guarantee, (vi) any obligations under capitalized
      leases with respect to which a Person is liable, contingently or otherwise,
      as
      obligor, guarantor or otherwise, or with respect to which obligations a Person
      assures a creditor against loss, (vii) any indebtedness secured by a Lien
      on a Person’s assets and (viii) any unsatisfied obligation for “with-drawal
      liability” to a “multiemployer plan” as such terms are defined under
      ERISA.

    

    “Investment”
as
      applied to any Person means (i) any direct or indirect purchase or other
      acquisition by such Person of any notes, obligations, instruments, stock,
      securities or ownership interest (including partnership interests, limited
      liability company membership interests and joint venture inter-ests) of any
      other Person or (ii) any capital contribution by such Person to any other
      Person.

    

    “IRC”
means
      the Internal Revenue Code of 1986, as amended, and any reference to any
      particular IRC section shall be interpreted to include any revision of or
      successor to that section regardless of how numbered or classified.

    

    “IRS’’
means
      the United States Internal Revenue Service.

    

    “Law”
means
      any federal, state, local or other law, rule, regulation or governmental
      requirement of any kind, and the rules, regulations, written interpretations
      and
      orders promulgated thereunder.

    

    “Lien”
or
      “Liens”
mean
      any mortgage, pledge, security interest, encumbrance, lien or charge of any
      kind
      (including, without limita-tion, any conditional sale or other title retention
      agreement or lease in the nature thereof), any sale of receivables with recourse
      against the Company or any Significant Subsidiary or Affiliate of the Company,
      or any filing or agreement to file a financing statement as debtor under the
      Uniform Commercial Code or any similar statute other than to reflect
      ownership by a third party of property leased to the Company or any of its
      direct or indirect Significant Subsidiaries under a lease that is not in the
      nature of a conditional sale or title retention agreement, or any subordination
      arrangement in favor of another Person (other than any subordination arising
      in
      the ordinary course of business).

    “Material
      Adverse Effect”
means
      (a) a material adverse effect upon the business, operations, properties,
      assets or financial condition of the Company and its Significant Subsidiaries,
      taken as a whole or (b) the impairment of the ability of the Company to
      perform any of its material obligations under any Transaction Document to
      which the Company or any Significant Subsidiary or Affiliate is a party or
      of
      Agent’s or any Purchaser’s to enforce any Transaction Document or collect any of
      the Indebtedness due Agent or any Purchaser. In determining whether any
      individual event would result in a Material Adverse Effect, notwithstanding
      that
      such event does not of itself have such effect, a Material Adverse Effect shall
      be deemed to have occurred if the cumulative effect of such event and all other
      then existing events would result in a Material Adverse Effect.

    

    “McAfee
      Capital Guaranty”
means
      the Guaranty from McAfee Capital LLC in favor of Agent for the benefit of
      Purchaser.

    

    “Most
      Recent Balance Sheet”
means
      a
      true and complete copy of the balance sheets of Borrower and its Significant
      Subsidiaries as at March 31, 2008 prepared in accordance with GAAP.

    

    “Mortgage”
means
      a
      mortgage, deed of trust, deed to secure debt or similar instrument creating
      a
      Lien on real property of the Company or any Significant Subsidiary in favor
      of
      Agent or Purchaser, as the same be amended, modified, supplemented or restated
      from time to time.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Officer’s
      Certificate”
means
      a
      certificate signed by the Company’s duly authorized officer on behalf of the
      Company.

    

    “Patriot
      Act”
      means
      the Uniting and Strengthening America by Providing Appropriate Tools Required
      to
      Intercept and Obstruct Terrorism Act of 2001, P.L. 107-56, as
      amended.

    

    “Permit”
shall
      mean any license, lease, power, permit, franchise, certificate, authorization
      or
      approval issued by a Governmental Authority.

    

    “Permitted
      Indebtedness”
means
      (i) any Indebtedness incurred or permitted pursuant to the terms of this
      Agreement, (ii) trade payables and other accounts payable of the Company
      and its Significant Subsidiaries incurred in the ordinary course of business,
      (iii) lease obligations and purchase money indebtedness, (iv) Indebtedness
      existing on the date hereof and set forth on the Most Recent Balance Sheet
      and
      (v) unsecured Indebtedness to Laird Q. Cagan.

    

    “Permitted
      Liens”
      means:

    

    
      	 	
              i.

            	
              liens
                for taxes, assessments or governmental charges that are not yet due
                and
                payable or which are being contested in good faith by appropriate
                proceedings and for which appropriate reserves (in the good faith
                judgment
                of the management of the Company) have been established in accordance
                with
                GAAP consistently applied;

            

    

    

    
      	 	
              ii.

            	
              deposits
                or pledges made in connection with, or to secure payment of, utilities
                or
                similar services, workers’ compensation, unemployment insurance, old age
                pensions or other social security
                obligations;

            

    

    

    
      	 	
              iii.

            	
              purchase
                money mortgages or liens on any property purchased after the date
                of this
                Agreement to be used by the Company in the normal course of its business
                and created or incurred simultaneously with the acquisition of such
                property, if such mortgages or liens are limited to the property
                so
                acquired;

            

    

    

    
      	 	
              iv.

            	
              interests
                or title of a lessor under any lease permitted by this
                Agreement;

            

    

    

    
      	 	
              v.

            	
              liens
                imposed by law which were incurred in the ordinary course of business,
                such as carriers’, mechanics’, materialmen’s or contractors’ liens or
                encumbrances or any similar lien or restriction and which (x) do
                not
                individually or in the aggregate materially detract from the value
                of the
                Collateral or (y) are being contested in good faith by appropriate
                proceedings; 

            

    

    

    
      	 	
              vi.

            	
              leases,
                subleases, easements, rights-of-way, restrictions and other similar
                charges and encumbrances not interfering with the ordinary conduct
                of the
                business of the Company and its Significant Subsidiaries or materially
                detracting from the value of the Collateral;

            

    

    

    
      	 	
              vii.

            	
              Liens
                outstanding on the date hereof (and renewals and extensions thereof)
                which
                secure Permitted Indebtedness and which are described in the attached
                “Indebtedness
                Schedule;”
                and

            

    

    

    
      	 	
              viii.

            	
              banker’s
                liens, rights of setoff and liens of securities intermediaries with
                respect to deposit accounts maintained in the ordinary course of
                business.

            

    

    “Person”
means
      an individual, a partnership, a corpora-tion, a limited liability company,
      an
      association, a joint stock company, a trust, a joint venture, an unincorporated
      organization and a governmental entity or any department, agency or political
      subdivision thereof.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Purchaser”
means
      any of the Persons from time to time named on Schedule
      A
      and
      their respective successors and permitted assigns, and “Purchasers” shall mean
      all of them collectively.

    

    “Qualified
      Holder”
means
      Purchaser as long as it holds any portion of the Notes or Underlying Common
      Stock and each other Person holding (i) at least 10% of the aggregate
      principal amount of the Notes then outstanding or (ii) at least 10% of the
      Underlying Common Stock then in existence. 

    

    “Release”
has
      the
      meaning set forth in CERCLA.

    

    “Restricted
      Securities
      means
      (i) the Securities issued hereunder, (ii) the Underlying Common Stock
      and (iii) any securities issued with respect to the securities referred to
      in clauses (i) or (ii) above by way of a stock dividend or stock split
      or in connection with a combination of shares, recapitalization, merger,
      consolidation or other reorganization. As to any particular Restricted
      Securities, such securities shall cease to be Restricted Securities when they
      have (a) been effectively registered under the Securities Act and disposed
      of in accordance with the registration statement covering them, (b) become
      eligible for sale pursuant to Rule 144(k) (or any similar provision then in
      force) under the Securities Act or (c) been otherwise transferred and new
      certificates for them not bearing the Securities Act legend set forth in
      Section 8.3 have been delivered by the Company in accordance with
      Section 5. Whenever any particular securities cease to be Restricted
      Securities, the holder thereof shall be entitled to receive from the Company,
      without expense, new securities of like tenor not bearing a Securities Act
      legend of the character set forth in Section 8.3. 

    

    “Security
      Agreement”
means
      any security executed by a Person in favor of Agent or any Purchaser to secure
      the Indebtedness under the Notes, as the same be amended, modified, supplemented
      or restated from time to time.

    

    “Securities”
has
      the
      meaning set forth in Section 2.1 hereof.

    

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, or any similar federal law then in
      force.

    

    “Securities
      and Exchange Commission”
      includes any governmental body or agency succeeding to the functions
      thereof.

    

    “Securities
      Exchange Act”
means
      the Securities Exchange Act of 1934, as amended, or any similar federal law
      then
      in force.

    

    “Significant
      Subsidiaries”
mean,
      collectively, American Ethanol, Inc., a Nevada corporation, Energy Enzymes,
      Inc., a Delaware corporation, Sutton Ethanol, LLC, a Nebraska limited liability
      company, Biofuels Marketing, Inc., a Delaware corporation, Danville Ethanol,
      Inc., an Illinois corporation and AE Biofuels, Inc., a Delaware
      corporation.

    

    “Subordinated
      Debt”
means
      any Indebtedness of the Company or any of its Significant Subsidiaries that
      is
      unsecured and subordinated by written contract in right of payment, liens,
      security and remedies to the Indebtedness evidenced by the Note.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    “Subsidiary”
means,
      with respect to any Person, any corporation, limited liability company,
      partnership, association or other business entity of which (i) if a
      corporation, a majority of the total voting power of shares of stock entitled
      (without regard to the occurrence of any contingency) to vote in the election
      of
      directors, managers or trustees thereof is at the time owned or controlled,
      directly or indirectly, by that Person or one or more of the other Subsidiaries
      of that Person or a combination thereof, or (ii) if a limited liability
      company, partnership, association or other business entity, a majority of the
      limited liability company, partnership or other similar ownership interest
      thereof is at the time owned or controlled, directly or indirectly, by any
      Person or one or more Subsidiaries of that Person or a combination thereof.
      For
      purposes hereof, a Person or Persons shall be deemed to have a majority
      ownership interest in a limited liability company, partnership, association
      or
      other business entity if such Person or Persons shall be allocated a majority
      of
      limited liability company, part-nership, association or other business entity
      gains or losses or shall be or control any managing director or general partner
      of such limited liability company, partnership, association or other business
      entity.

    

    “Transaction
      Documents”
means
      this Agreement, the Note, the Warrants, the McAfee Capital Guaranty, all
      Mortgages, any Security Agreement, any environmental indemnity agreements,
      any
      fee letter and all other documents executed and delivered in connection with
      any
      of the foregoing. 

    

    “Underlying
      Common Stock”
means
      (i) the stock issued or issuable upon exercise of the Warrants originally
      issued to Purchaser, or (ii) any Common Stock issued or issuable with
      respect to the securities referred to in clause (i) above by way of
      stock dividend or stock split or in connection with a combination of shares,
      recapitalization, merger, consolidation or other reorganization. For purposes
      of
      this Agreement and the Warrant, any Person who holds Warrants shall be deemed
      to
      be the holder of the Underlying Common Stock obtainable upon exercise of the
      Warrants in connection with the transfer thereof or otherwise regardless of
      any
      restric-tion or limitation on the exercise of the Warrants, such Underlying
      Common Stock shall be deemed to be in existence, and such Person shall be
      entitled to exercise the rights of a holder of Underlying Common Stock
      hereunder. As to any particular shares of Underlying Common Stock, such shares
      shall cease to be Underlying Common Stock when they have been
      (a) effectively registered under the Securities Act and disposed of in
      accordance with the registration statement covering them, (b) distributed
      to the public through a broker, dealer or market maker pursuant to Rule 144
      under the Securities Act (or any similar provision then in force) or
      (c) repurchased by the Company or any of its Subsidiaries.

    

    “Voting
      Common Stock”
means
      the Company’s Common Stock, par value $0.001 per share.

    

    “Wholly-Owned
      Subsidiary”
means,
      with respect to any Person, a Subsidiary of which all of the outstanding capital
      stock, membership interests or other ownership interests are owned by such
      Person or another Wholly-Owned Subsidiary of such Person.

    

    1.2
      Accounting Principles.
      The
      classification, character and amount of all assets, liabilities, capital
      accounts and reserves and of all items of income and expense to be determined,
      and any consolidation or other accounting computation to be made, and the
      interpretation of any definition containing any financial term, pursuant to
      this
      Agreement shall be determined and made in accordance with GAAP consistently
      applied, unless such principles are inconsistent with the express requirements
      of this Agreement; provided that if because of a change in GAAP after the date
      of this Agreement the Company would be required to alter a previously utilized
      accounting principle, method or policy in order to remain in compliance with
      GAAP, such determination shall continue to be made in accordance with the
      Company’s previous accounting principles, methods and policies.

     

    SECTION
      2

     

    AUTHORIZATION
      AND CLOSING

     

    
      	 	
              2.1

            	
              Authorization
                of the Note and Warrant.
                (A) the Company has authorized the issuance and sale to Purchaser
                of its
                10% Senior Secured Notes in an aggregate principal amount of $5,000,000,
                in form and substance as set forth in Exhibit A
                attached hereto (collectively, if more than one, the “Notes”, and
                individually, the “Note”), and (B) the Company has authorized the issuance
                and sale of its Warrants to acquire an aggregate of 250,000 shares
                of
                Common Stock of the Company in form and substance as set forth in
                Exhibit B
                attached hereto (collectively, the “Warrants”, and individually, a
                “Warrant”). The Notes and the Warrants are sometimes collectively referred
                to herein as the “Securities.” 

            

    

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

       

    

    
      	 	
              2.2

            	
              -Purchase
                and Sale of the Note and Warrant.
                At the Closing, (A) the Company shall sell to Purchaser and, subject
                to
                the terms and conditions set forth herein, Purchaser shall purchase
                from
                the Company one or more Notes in the aggregate principal amount of
                $5,000,000 at a price equal to $5,000,000, and (B) the Company shall
                sell
                to Purchaser one or more Warrants to purchase 250,000 shares of Common
                Stock for a purchase price equal to $3. 

            

    

     

    
      	 	
              2.3

            	
              -The
                Closing.
                The closing of the purchase and sale of the Note and the Warrants
                (the
                “Closing”) shall take place on May 16, 2008 (the “Closing Date”). At the
                Closing, the Company shall deliver to Purchaser one or more instruments
                evidencing the Notes and Warrants to be purchased by Purchaser, issued
                in
                the name of Purchaser or its nominee, upon payment of the purchase
                price
                thereof by wire transfer of immediately available funds as directed
                by the
                Company, in the aggregate amount equal to
                $5,000,000.

            

    

    SECTION
      3

     

    OBLIGATIONS
      OF THE COMPANY AT THE CLOSING

     

    The
      obligation of Purchaser to purchase and pay for the Securities at the Closing
      is
      subject to the fulfillment as of the Closing of the following conditions to
      Agent’s and Purchaser’s satisfaction in their sole discretion:

     

    
      	 	
              3.1

            	
              -Representations
                and Warranties; Covenants; No Event of Default.
                The representations and warranties contained in Section 6 hereof
                shall be true and correct at and as of the Closing as though then
                made,
                the Company shall have performed all of the covenants required to
                be
                performed by it hereunder and under the other documents, agreements
                and
                instruments executed in connection herewith that are to be complied
                with
                or performed by the Company and/or any of its Significant Subsidiaries
                on
                or prior to the Closing and there does not exist any state of facts
                that
                would constitute an Event of
                Default.

            

    

     

    
      	 	
              3.2

            	
              Securities
                Law Compliance.
                The Company shall have made all filings under all applicable federal
                and
                state securities laws necessary to consummate the issuance of the
                Note and
                Warrants pursuant to this
                Agreement.

            

    

     

    
      	 	
              3.3

            	
              -Opinions
                of Counsel.
                Agent shall have received from counsel for the Company an opinion,
                dated
                the date of the Closing and in form and substance reasonably
                satisfactory to Agent.

            

    

     

    
      	 	
              3.4

            	
              -Closing
                Documents.
                The Company shall have delivered or caused to be delivered to Agent
                and
                Purchaser all of the following
                documents:

            

    

     

    
      	 	
              i.

            	
              a
                Note in the principal amount of $5,000,000, duly completed and executed
                by
                the Company;

            

    

     

    
      	 	
              ii.

            	
              the
                Warrants to purchase 250,000 shares of Common Stock, duly completed
                and
                executed by the Company; 

            

    

     

    
      	 	
              iii.

            	
              the
                McAfee Capital Guaranty, Mortgages for certain real property located
                in
                Nebraska and Illinois, a Security Agreement covering certain machinery
                and
                equipment of Energy Enzyme, Inc.’s cellulosic ethanol demonstration
                facility in Montana and an Environmental Indemnity Agreement.
                

            

    

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    
      	 	
              iv.

            	
              an
                Officer’s Certificate, dated the date of the Closing, stating that the
                conditions specified in this Section 3 have been fully
                satisfied;

            

    

     

    
      	 	
              v.

            	
              certified
                copies of the resolutions duly adopted by the Company’s and each other
                Significant Subsidiary’s and McAfee Capital LLC’s board of directors or
                board of managers, as applicable, authorizing the execution, delivery
                and
                performance of the Transaction Documents to which such entity is
                a party
                and each of the other agreements contemplated hereby and thereby,
                the
                issuance and sale of the Securities, the reservation for issuance
                upon
                exercise of the Warrants, and the consummation of all other transactions
                contemplated by this Agreement, as
                applicable;

            

    

     

    
      	 	
              vi.

            	
              a
                certificate of the secretary or manager of the Company and/or each
                Significant Subsidiary and/or McAfee Capital LLC, as the case may
                be,
                certifying the names and the signatures of the officers of such entity
                authorized to sign this Agreement, the Note, the Warrants, the Guaranty
                and each of the other agreements, documents and instruments contemplated
                hereby to which such entity is a
                party;

            

    

     

    
      	 	
              vii.

            	
              certified
                copies of the Certificate of Incorporation, Certificate of Formation,
                Limited Liability Company Agreement or Operating Agreement and bylaws,
                as
                applicable, of the Company and each Significant Subsidiary and McAfee
                Capital LLC, as applicable, each as in effect at the
                Closing;

            

    

     

    
      	 	
              viii.

            	
              a
                certificate of good standing of the Company and each Significant
                Subsidiary and McAfee Capital LLC, dated not more than ten days prior
                to
                the Closing, issued by from each such entity’s state of incorporation or
                organization;

            

    

     

    
      	 	
              ix.

            	
              copies
                of all third party and governmental consents, approvals and filings
                required in connection with the consummation of the transactions
                hereunder
                (including, without limitation, all blue sky law filings and waivers
                of
                all preemptive rights (except for preemptive rights granted in the
                Transaction Documents) and rights of first refusal);
                

            

    

     

    
      	 	
              x.

            	
              insurance
                certificates naming Agent and Purchaser as additional insured and
                first
                loss payee on all property and liability insurance policies of the
                Company
                and its Significant Subsidiaries pertaining to the
                Collateral;

            

    

     

    
      	 	
              xi.

            	
              such
                other documents relating to the transactions contemplated by this
                Agreement or any other Transaction Documents as Agent or its special
                counsel may reasonably request.

            

    

     

    
      	 	
              3.5

            	
              -Proceedings.
                All corporate and other proceedings taken or required to be taken
                by the
                Company in connection with the transactions contemplated hereby to
                be
                consummated at or prior to the Closing and all documents incident
                thereto
                shall be reasonably satisfactory in form and substance to Agent and
                its special counsel.

            

    

     

    
      	
            	3.6	
              Closing
                Fees and Expenses.
                The Company shall have (i) paid to Agent and Purchaser the fees set
                forth in a fee letter of even date herewith from Agent to the Company,
                and
                (ii) reimbursed Purchaser for fees and expenses as provided in
                Section 8.1 hereof.

            

    

     

    
      	 	
              3.7

            	
              -Compliance
                with Applicable Laws.
                The purchase of the Note and Warrants by Purchaser hereunder shall
                not be
                prohibited by any applicable law or governmental rule or regulation
                and
                shall not subject Purchaser to any penalty, liability or, in Purchaser’s
                sole judgment, other onerous condition under or pursuant to any applicable
                law or governmental rule or regulation, and the purchase of the Note
                and
                Warrants by Purchaser hereunder shall be permitted by laws, rules
                and
                regulations of the jurisdictions and Governmental Authorities and
                agencies
                to which Purchaser is subject.

            

    

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    SECTION
      4

     

    PAYMENT
      OF THE NOTES

     

    
      	
              4.1

            	
              Interest
                Rate.
                The interest rate on the principal balance of the Note outstanding
                from
                time to time shall accrue at the rate of ten percent (10%) per annum
                or
                (if less) at the highest rate then permitted under applicable law
                (computed on the basis of a 365-day year and the actual number of
                days
                elapsed in any year) (the “Interest Rate”) on the unpaid principal amount
                of the Note outstanding from time to time from and including the
                Closing
                Date until the date paid.

            

    

     

    
      	
              4.2

            	
              Payment
                of Interest.
                The Company shall pay to the holder of the Note accrued interest
                on the
                first Business Day of each calendar quarter (each an “Interest Payment
                Date”), beginning June 1, 2008, at the Interest Rate. On the Maturity
                Date
                (defined below) interest on the principal balance of the Note outstanding
                from the immediately preceding Interest Payment Date through and
                including
                the Maturity Date shall be payable at the Interest Rate. Interest
                shall
                accrue on any principal payment due under this Note and, to the extent
                permitted by applicable law, on any interest that has not been paid
                on the
                date on which it is due and payable until such time as payment therefor
                is
                actually delivered to the holder of the
                Note.

            

    

     

    
      	
              4.3

            	
              Payment
                at Maturity.
                On May 15, 2009 (the “Maturity Date”), the Company will pay the entire
                then outstanding principal amount of the Notes together with all
                accrued
                and unpaid interest thereon.

            

    

     

    
      	4.4	
              Optional
                Prepayments.
                The Company may, at any time and from time to time upon not less
                than 120
                days’ prior written notice to Agent, prepay all or any portion (in whole
                number multiples of $100,000 only) of the outstanding principal amount
                of
                the Note (if more than one Note is outstanding, pro rata among the
                holders
                of the Notes on the basis of the outstanding principal amount of
                the Note
                held by each holder). In connection with each prepayment of principal
                under the Note, the Company shall also pay all accrued and unpaid
                interest
                on the principal amount of the Note being
                repaid.

            

    

     

    
      
        
          	4.5	
                  Mandatory
                    Prepayments.
                    On the Maturity Date, upon a Change of Control or upon the occurrence
                    and
                    during the continuation beyond all applicable grace or cure periods
                    of an
                    Event of Default (as hereinafter defined), the Company shall
                    (a) prepay
                    all of the Notes
                    for an amount equal to the then outstanding principal balance
                    plus all
                    accrued but unpaid interest thereon, and (b) pay
                    in
                    full all of the other obligations owing to Agent and Purchaser
                    under or in
                    connection with this Agreement, which amount shall be calculated
                    on the
                    date of prepayment and be payable in cash on demand in immediately
                    available funds on such date.

                

        

      

    

     

    COVENANTS

     

    
      5.1 
        Financial
        Statements.
        The
        Company shall deliver to Agent
        as soon
        as available and in any event within fifteen (15) calendar days after the
        end of
        each calendar month, unaudited consolidated financial statements of the Company
        consisting of a balance sheet and statements of income, retained earnings
        and
        cash flows and owners’ equity as of the end of such calendar month, all
        certified on behalf of the Company by an authorized officer as being complete
        and correct and fairly presenting, in accordance with GAAP, the financial
        position and the results of operations of the Company, subject to normal
        year-end adjustments and the absence of footnote disclosure.

    

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    
      5.2 
        Inspection
        of Property.
        The
        Company and each of its Subsidiaries shall permit any representatives designated
        by any Qualified Holder, upon reasonable notice and during normal business
        hours
        and at such other times as any such holder may reasonably request, to
        (i) visit and inspect any of the properties of the Company or any of its
        Subsidiaries and (ii) examine the corporate and financial records of the
        Company and its Subsidiaries and make copies thereof or extracts therefrom;
        provided,
        however,
        so long
        as no Event of Default has occurred and is continuing, the Company shall
        only be
        responsible for payment of the expenses and costs of one such visit, inspection
        and examination per year.

    

     

    
      5.3 
        [Intentionally
        Omitted].

    

     

    
      5.4 
        Note
        Restrictive Covenants.
        So long
        as all or any portion of the Note remains outstanding, the Company shall
        not:

    

     

    (i) create,
      incur, assume or suffer to exist, or permit any Significant Subsidiary to
      create, incur, assume or suffer to exist, any Indebtedness other than Permitted
      Indebtedness;

     

    (ii) sell,
      lease or otherwise dispose of, or permit any of its Significant Subsidiaries
      to
      sell, lease or otherwise dispose of, in any way, any Collateral;

     

    (iii) permit
      any Liens on any Collateral other than Liens in favor of Purchaser and Permitted
      Liens;

     

    (iv) change
      or
      alter the use of the Collateral or permit the Collateral to waste or permit
      any
      Collateral or portion thereof to be leased or to assign or permit the assignment
      of any of the Company’s or any Significant Subsidiary’s right, title or interest
      in and to any rents or profits arising, directly or indirectly, from the
      Collateral;

     

    (v) directly
      or indirectly declare or pay any Dividends by the Significant
      Subsidiaries;

     

    (vi) directly
      or indirectly make, or permit the Company to directly or indirectly redeem,
      purchase or make, or permit any of its Significant Subsidiaries to redeem,
      purchase or make, any payments with respect to any stock appreciation rights,
      phantom stock plans or similar rights or plans or set aside funds for any of
      the
      foregoing;

     

    (vii) make
      any
      loans or advances to, or Guarantees for the benefit of, any Person, except
      for
      (i) reasonable advances to employees and reasonable extensions of credit to
      suppliers and other trade creditors, in each case only in the ordinary course
      of
      business and consistent with past practices, (ii) Permitted Indebtedness,
      (iii) Investments having a stated maturity no greater than one year from
      the date the Company makes such Investment in (1) obligations of the United
      States government or any agency thereof or obligations guaranteed by the United
      States government, (2) certificates of deposit of commercial banks having
      combined capital and surplus of at least $50 million, (3) commercial paper
      with a rating of at least “Prime-1” by Moody’s Investors Service, Inc.,
      (4) U.S. Treasury Bills subject to repurchase agreements,
      (5) short-term obligations issued by or guaranteed by the U.S. Government
      or an agency thereof, (6) investments in open-end diversified investment
      Company of recognized financial standing investing solely in short-term money
      market instruments consisting of securities issued or guaranteed by the U.S.
      Government or its agencies or instrumentalities, time deposits and certificates
      of deposit issued by domestic banks or London branches of domestic banks,
      bankers’ acceptances, repurchase agreements, high grade commercial paper and the
      like, or (7) accounts, chattel paper and notes receivable created by the
      Company in the ordinary course of business;

     

    (viii) merge
      or
      consolidate with any Person, permit any of its Significant Subsidiaries to
      merge
      or consolidate with any Person, except that any Wholly-Owned Subsidiary may
      be
      merged or consolidated with or into the Company or another Wholly-Owned
      Subsidiary; or acquire, or permit any of its Significant Subsidiaries to
      acquire, all or any substantial part of the assets or properties of any Person;
      or otherwise alter, or permit any of its Significant Subsidiaries to alter,
      its
      legal status;

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (ix) liquidate,
      dissolve or effect a recapitalization or reorganization in any form of
      transaction (including, without limitation, any reorganization after which
      the
      Company becomes a Subsidiary of another Person);

     

    (x) enter
      into, become subject to, amend, modify or waive any agreement or instrument
      which by its terms would (under any circumstances) restrict (i) the
      repayment of any Indebtedness evidenced by the Note or (ii) the Company’s
      or any Significant Subsidiary’s right to perform the provisions of any of
      the Transaction Documents or the Securities;

     

    (xi) change
      its fiscal year;

     

    (xii) prepay
      any principal or interest on any Indebtedness other than the Indebtedness
      evidenced by the Notes.

    (xiii) issue
      or
      sell any membership interests or other equity interests, or rights to acquire
      shares of the capital stock or other equity interests, of any of its Significant
      Subsidiaries to any Person other than the Company or a Wholly-Owned
      Subsidiary;

     

    (xiv) make
      any
      amendment to its Articles or Certificate of Incorporation, or bylaws, as
      applicable, which violate or breach any of the provisions thereof.

     

    
      5.5 
        Affirmative
        Covenants.
        The
        Company shall, and the Company shall cause each of its Significant Subsidiaries
        to:

    

     

    a) Preservation
      of Existence, etc.
      Cause
      to be done all things reasonably necessary to maintain, preserve and renew
      its
      corporate or limited liability company existence, rights, franchises, privileges
      and qualifications and all material licenses, authorizations and permits
      necessary to the conduct of its businesses, except that any Wholly-Owned
      Subsidiary may be merged or consolidated with or liquidated into the Company
      or
      another Wholly-Owned Subsidiary.

     

    b) -Maintenance
      of Properties.
      Maintain and keep its material properties, including without limitation all
      Collateral, in good repair, working order and condition (ordinary wear, tear
      and
      obsolescence excepted), and from time to time make all necessary or desirable
      repairs, renewals and replacements, so that its businesses may be properly
      and
      advantageously conducted in all material respects at all times.

     

    c) -Payment
      of Taxes.
      Pay and
      discharge when payable all taxes, assessments and governmental charges imposed
      upon its properties or upon it or its income or profits (in each case before
      the
      same becomes delinquent and before penalties accrue thereon) and all material
      claims for labor, materials or supplies which if unpaid would by law become
      a
      Lien upon any of its property, unless and to the extent that the same are being
      contested in good faith and by appropriate proceedings and adequate reserves
      (as
      determined in accordance with GAAP consistently applied) have been established
      on its books with respect thereto and such contest acts to suspend collection
      of
      same.

     

    d) -Compliance
      with Obligations.
      Comply
      with all other material obligations which it incurs pursuant to any contract
      or
      agreement, whether oral or written, express or implied, as such obligations
      become due, unless and to the extent that the same are being contested in good
      faith and by appropriate proceedings and adequate reserves (as determined in
      accordance with GAAP consistently applied) have been established on its books
      with respect thereto or except to the extent that such failure to comply could
      not reasonably be expected to result in a Material Adverse Effect.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    e) Compliance
      with Laws; Permits.
      Comply
      with all applicable laws, rules and regulations of all Governmental Authorities,
      including, without limitation, maintaining and preserving in full force and
      effect all Permits, the violation of which would reasonably be expected to
      have
      a Material Adverse Effect. 

     

    f) -Environmental
      Matters.
      Comply
      in all material respects with all Environmental Laws and all permits, licenses
      or other authorizations issued thereunder; respond immediately to any unlawful
      Release or threatened Release of any Hazardous Material, substance or waste
      in a
      manner which complies in all material respects with all applicable Environmental
      Laws and reasonably mitigates any risk to human health or the environment:
      and
      provide such documents or information, or conduct at its own cost such studies
      or assessments, relating to matters arising under the Environmental Laws as
      any
      Purchaser may reasonably request.

     

    g) -Maintenance
      of Insurance: Payment of Proceeds.
      Apply
      for and continue in force with good and responsible insurance Company adequate
      insurance covering risks of such types and covering casualties, risks and
      contingencies of such types and in such amounts as are customary for prudent
      corporations of similar size engaged in similar lines of business, but in no
      event less than such amounts that were maintained as of the
      Closing.

     

    h) -Books
      and Records.
      Maintain proper books of record and account which present fairly in all material
      respects its financial condition and results of operations and make provisions
      on its financial statements for all such proper reserves as in each case are
      required in accordance with GAAP consistently applied.

     

    
      5.6 
        Financial
        Covenants.
        So long
        as any portion of the Note remains outstanding, the Company shall, and shall
        cause each of its Significant Subsidiaries to comply with the following
        financial covenants: 

    

     

    a) Current
      Ratio.
      The
      Company shall at all times maintain on a consolidated basis a ratio of current
      assets to current liabilities (exclusive of any Indebtedness under the Notes)
      of
      at least 1.10:1 as of the end of each month.

     

    b) Stock
      Market Capitalization.
      The
      Company shall at all times maintain an aggregate dollar market value of all
      of
      the Company's outstanding shares of at least $100,000,000 as of the end of
      each
      month.

    
      5.7 
        Underlying
        Common Stock Restrictive Covenants.
        So long
        as any shares of Underlying Common Stock exists, the Company shall
        not:

    

     

    (i) liquidate,
      dissolve or effect a recapitalization or reorganization in any form of
      transaction (including, without limitation, any reorganization into a limited
      liability company, a partnership or any other non-corporate entity that is
      treated as a partnership for federal income tax purposes and any reorganization
      after which the Company becomes a Subsidiary of another Person); or

     

    (ii) make
      any
      amendment to the Certificate or Articles of Incorporation or bylaws, violate
      or
      breach any of the provisions thereof that would adversely affect in any respect
      any rights or remedies of Agent or Purchaser or any relative rights and
      priorities of the Common Stock.

     

    5.8 Compliance
      with Agreements.
      The
      Company shall perform and observe all of its obligations, and shall cause
      each of its Significant Subsidiaries to perform and observe all of its
      respective obligations (i) to each holder of the Notes, (ii) to each
      holder of the Warrants and Underlying Common Stock set forth herein and therein
      and (iii) under each of the agreements contemplated hereby.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    5.9 Use
      of
      Proceeds.
      The
      Company shall not permit any of its Subsidiaries to, use any proceeds from
      the
      sale of the Note hereunder, directly or indirectly, for the purposes of
      purchasing or carrying any “margin securities” within the meaning of
      Regulation T promulgated by the Board of Governors of the Federal Reserve
      Board or for the purpose of arranging for the extension of credit secured,
      directly or indi-rectly, in whole or in part by collateral that includes any
      “margin securities.”

     

    SECTION
      6

     

    REPRESENTATIONS
      AND WARRANTIES

     

    As
      a
      material inducement to Agent and Purchaser to enter into this Agreement and
      for
      Purchaser to purchase the Note, the Company hereby represents and warrants
      that
      except as set forth in the Disclosure Schedule to be made part of this Agreement
      upon delivery thereof to Purchaser on or prior to the Closing (“Disclosure
      Schedule”) which exceptions shall be deemed part of the representations and
      warranties made hereunder, the Company represents and warrants to Agent and
      Purchaser the following as of the date of this Agreement (which representations
      and warranties shall survive the execution and delivery of this Agreement):
      

     

    6.1 Organization,
      Corporate Power and Licenses.
      The
      Company is a corporation duly organized, validly existing and in good standing
      under the laws of the State of Nevada and is qualified to do business in every
      jurisdiction in which its ownership of property or conduct of business requires
      it to qualify, except for jurisdictions in which the failure to so qualify
      has
      not had and could not have a Material Adverse Effect. The Company possesses
      all
      requisite corporate power and authority and all material licenses, permits
      and
      authorizations necessary to own and operate its properties, to carry on its
      businesses as now conducted and presently proposed to be conducted and to carry
      out the transactions contemplated by this Agreement. The copies of the Company’s
      and its Significant Subsidiaries’ charter documents and bylaws or applicable
      constituent documents which have been furnished to Agent’s special counsel
      reflect all amendments made thereto at any time prior to the date of this
      Agreement and are correct and complete.

     

    6.2 Capitalization
      and Related Matters. 

     

    (i)
       Capitalization.
      The
      authorized capital stock of the Company, immediately prior to the Closing,
      is as
      set forth on the Disclosure Schedule. Except as set forth on the Disclosure
      Schedule, as of the date hereof and immediately prior to the Closing, neither
      the Company nor any of its Significant Subsidiaries has outstanding any stock
      or
      securities convertible or exchangeable for any shares of its capital stock
      or
      containing any profit participation features, or any rights or options to
      subscribe for or to purchase its capital stock or any stock or securities
      convertible into or exchangeable for its capital stock or any stock appreciation
      rights or phantom stock plans, except for the Warrants. As of the Closing,
      neither the Company nor any of its Significant Subsidiaries shall be subject
      to
      any obligation (contingent or otherwise) to repurchase or otherwise acquire
      or
      retire any shares of its capital stock or any warrants, options or other rights
      to acquire its capital stock, except as set forth on the Capitalization
      Schedule. All of the outstanding shares of the Company’s capital stock have been
      validly issued, are fully paid and nonassessable and the Common Stock of the
      Company issuable upon exercise of the Warrants will, when issued, be duly
      authorized and validly issued, fully paid and nonassessable.

     

    (ii)
       There
      are
      no statutory or contractual preemptive rights or rights of refusal with respect
      to the issuance of the Securities hereunder or the issuance of the Common Stock
      upon exercise of the Warrants. The Company has not violated any applicable
      federal or state securities laws in connection with the offer, sale or issuance
      of any of its capital stock, and the offer, sale and issuance of the Securities
      hereunder and the issuance of the Common Stock upon the exercise of the Warrants
      do not require registra-tion under the Securities Act or any applicable state
      securities laws. 

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (iii)
       To
      the
      Company’s knowledge, there are no agreements between the Company’s equity
      holders with respect to the voting or transfer of such Company’s capital stock
      or with respect to any other aspect of such Company’s affairs, except for the
      Company’s Articles of Incorporation and Bylaws.

     

    6.3 Subsidiaries;
      Investments.
      The
      Disclosure Schedule correctly sets forth the name of each Significant Subsidiary
      of the Company and the jurisdiction of its organization or incorporation. Each
      Significant Subsidiary of the Company is duly organized, validly existing and
      in
      good standing under the laws of the jurisdiction of its organization or
      incorporation, possesses all requisite limited liability company or corporate,
      as the case may be, power and authority and all material licenses, permits
      and
      authorizations necessary to own its properties and to carry on its businesses
      as
      now being conducted and as presently proposed to be conducted and is qualified
      to do business in every jurisdiction in which its ownership of property or
      the
      conduct of business requires it to qualify, except for jurisdictions in which
      the failure to so qualify has not had and could not have a Material Adverse
      Effect. All of the outstanding membership interests or shares of capital stock,
      as the case may be, of each Significant Subsidiary of the Company are validly
      issued, fully paid and nonassessable, and all such membership interests or
      shares are owned by the Company or another Significant Subsidiary of the Company
      free and clear of any Lien other than Permitted Liens and not subject to any
      option or right to purchase any such membership interests. Except as set forth
      on the Disclosure Schedule, neither the Company nor any Significant Subsidiary
      of such Company owns or holds the right to acquire any membership interests
      or
      shares of stock or any other security or interest in any other
      Person.

     

    6.4 Authorization;
      No Breach.
      The
      execution, delivery and performance of each of the Transaction Documents and
      all
      other agreements and instruments contemplated hereby to which the Company is
      a
      party have been duly authorized by the Company. Each of the Transaction
      Documents and all other agreements and instruments contemplated hereby to which
      the Company is a party each constitutes a valid and binding obligation of the
      Company enforceable in accordance with its terms, except (i) to the extent
      rights to indemnity and contribution may be limited by applicable state or
      federal securities laws or other public policy underlying such laws, (ii)
      enforceability may be limited by applicable bankruptcy, insolvency,
      reorganization, fraudulent conveyance, moratorium or similar laws affecting
      creditors’ rights generally and (iii) enforceability may be limited by general
      principles of equity. The execution and delivery by the Company of each of
      the
      Transaction Documents and all other agreements and instruments contemplated
      hereby to which the Company is a party, the offering, sale and issuance of
      the
      Securities hereunder, the issuance by the Company of the Common Stock upon
      exercise of the Warrants, and the consummation of the transactions contemplated
      thereby and the fulfillment of and compliance with the respective terms hereof
      and thereof by the Company, as applicable, do not and shall not
      (i) conflict with or result in a breach of the terms, conditions or
      provisions of, (ii) constitute a default under, (iii) result in the
      creation of any Lien, security interest, charge or encumbrance upon the
      Company’s capital stock or assets pursuant to, (iv) give any third party
      the right to modify, terminate or accelerate any obligation under,
      (v) result in a violation of, or (vi) require any authorization,
      consent, approval, exemption or other action by or notice or declaration to,
      or
      filing with, any court or administrative or governmental body or agency pursuant
      to, the articles of incorporation, bylaws or other charter documents of the
      Company, or any law, statute, rule or regulation to which the Company or any
      of
      its Significant Subsidiaries is subject (including, without limitation, any
      usury laws applicable to the Note), or any material agreement or instrument
      or
      any order, judgment or decree to which Company or any of its Significant
      Subsidiaries is subject.  

     

    6.5 Absence
      of Undisclosed Liabilities.
      Neither
      the Company nor any of its Subsidiaries have any material obligation or
      liability (whether accrued, absolute, contingent, unliquidated or otherwise,
      whether or not known to the Company or any of its Subsidiaries, whether due
      or
      to become due and regardless of when asserted) arising out of transactions
      entered into at or prior to the Closing, or any action or inaction at or prior
      to the Closing, or any state of facts existing at or prior to the Closing except
      for (i) liabilities and obligations shown on the Most Recent Balance Sheet,
      (ii)
      liabilities under any agreements, contracts, commitments, licenses or leases
      which have arisen prior to the date of the Most Recent Balance Sheet and which
      are not required under GAAP to be reflected in a balance sheet or the notes
      thereto, (iii) liabilities incurred in the ordinary course of business since
      the
      Most Recent Balance Sheet and/pr (iv) other liabilities that are, individually
      or in the aggregate, immaterial.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    6.6
      No
      Material Adverse Change.
      Since
      March 31, 2008, there has been no material adverse change in the financial
      condition, operating results, assets, liabilities, operations, business,
      employee relations or customer or supplier relations of the Company and its
      Significant Subsidiaries taken as a whole.

     

    6.7
      Assets.
      The
      Company and its Subsidiaries have good and marketable title to, or a valid
      leasehold interest in, and valid title to, all Collateral owned by them, located
      on their premises or shown on their most recent balance sheet delivered to
      Agent
      or Purchaser or acquired thereafter, free and clear of all Liens except
      Permitted Liens. 

     

    6.8 Litigation,
      Etc.
      Except
      as set forth on the Disclosure Schedule, there are no actions, suits,
      pro-ceedings, orders, investigations or claims pending or, to the Company’s
      knowledge, threatened against or affecting the Company or any of its Significant
      Subsidiaries (or to the Company’s knowledge, pending or threatened against or
      affecting any of the officers, directors or employees of the Company and its
      Significant Subsidiaries with respect to their respective businesses or proposed
      business activities), or pending or threatened by the Company or any of its
      Significant Subsidiaries against any third party, at law or in equity, or before
      or by any Governmental Authority (including, without limitation, any actions,
      suit, proceedings or investigations with respect to the transactions
      contemplated by this Agreement). Neither the Company nor any of its Significant
      Subsidiaries is subject to any judgment, order or decree of any court or other
      Governmental Authority.

    6.9 Brokers.
      Except
      as set forth on the Disclosure Schedule there are no claims for brokerage
      commis-sions, finders’ fees or similar compensation in connection with the
      transactions contemplated by this Agreement. The Company shall pay, and hold
      Agent and Purchaser harmless against, any liability, loss or expense (including,
      without limitation, reasonable attorneys’ fees and out-of-pocket expenses)
      arising in connection with any such claim.

     

    6.10 Governmental
      Consent, etc.
      No
      permit, consent, approval or authorization of, or declaration to or filing
      with,
      any Governmental Authority is required in connection with the execu-tion,
      delivery and performance by the Company of this Agreement or the other
      agreements contemplated hereby, or the consummation by the Company of any other
      transactions contemplated hereby or thereby, except as may have been made or
      obtained prior to the date of this Agreement or obtained after the Closing
      in
      accordance with the terms of the Transaction Documents.

     

    6.11 Insurance.
      Neither
      the Company nor any of its Significant Subsidiaries is in default with respect
      to its obligations under any insurance policy maintained by it, and neither
      the
      Company nor any of its Significant Subsidiaries has been denied coverage. The
      insurance coverage of the Company and its Subsidiaries is customary for prudent
      corporations of similar size engaged in similar lines of business. 

     

    6.12 Employees.
      The
      Company is not aware that any executive or key employee of such Company or
      any
      of its Significant Subsidiaries or any group of employees of such Company or
      any
      of its Significant Subsidiaries has any plans to terminate employment with
      such
      Company or any of its Significant Subsidiaries. The Company and its Significant
      Subsidiaries has complied in all material respects with all laws relating to
      the
      employment of labor (including, without limitation, provisions thereof relating
      to wages, hours, equal opportunity, collective bargaining and the payment of
      social security and other taxes), and the Company is not aware that it or any
      of
      its Significant Subsidiaries has any material labor relations problems
      (including, without limitation, any union organization activities, threatened
      or
      actual strikes or work stoppages or material grievances). Neither the Company,
      its Significant Subsidiaries nor, to the Company’s knowledge, any of its
      employees is subject to any noncompete, nondisclosure, confidentiality,
      employment, consulting or similar agreements relating to, affecting or in
      conflict with the present or proposed business activities of the Company and
      its
      Significant Subsidiaries, except for agreements between the Company and its
      present and former employees. 

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    6.13 Compliance
      with Laws.
      Neither
      the Company nor any of its Significant Subsidiaries has violated any law or
      any
      governmental regulation or requirement which violation has had or would
      reasonably be expected to have a Material Adverse Effect, and neither the
      Company nor any of its Significant Subsidiaries has received notice of any
      such
      violation.

     

    6.14 Environmental
      and Safety Matters.
      To the
      Company’s knowledge: (a) the Company and its Significant Subsidiaries have in
      all material respects complied with and are currently in com-pliance in all
      material respects with all Environmental Laws, and neither the Company nor
      its
      Significant Subsidiaries have received any oral or written notice, report or
      information regarding any liabilities (whether accrued, absolute, contingent,
      unliquidated or otherwise) or any corrective, investigatory response or remedial
      obligations arising under Environmental Laws which relate to the Company or
      its
      Significant Subsidiaries or any of their properties or facilities. (b) Without
      limiting the generality of the fore-going, the Company and its Significant
      Subsidiaries have obtained and complied in all material respects, and are
      currently in compliance in all material respects, with all permits, licenses
      and
      other authorizations that may be required pursuant to any Environmental Laws
      for
      the occupancy of their properties or facilities or the operation of their
      businesses. (c) No Environmental Lien has attached to any property owned, leased
      or operated by the Company or any of its Significant Subsidiaries.

     

    6.15 Affiliated
      Transactions.
      No
      officer, director, stockholder or Affiliate of the Company or any of its
      Significant Subsidiaries or any individual known to be related by blood,
      marriage or adoption to any such individual or any entity in which any such
      Person or individual owns any beneficial interest, is a party to any agreement,
      contract, commitment, transaction or arrangement with the Company or any of
      its
      Significant Subsidiaries or has any material interest in any material property
      used by the Company or any of its Significant Subsidiaries.

     

    6.16 Solvency,
      etc.
      The
      Company is not “insolvent,” nor will the Company’s incurrence of obligations,
      direct or contingent, to repay the Indebtedness evidenced by the Note render
      the
      Company or any Significant Subsidiary “insolvent.” 

     

    6.17 Investment
      Company.
      The
      Company is not an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company,” as such
      terms are defined in the Investment Company Act of 1940, as amended. The
      purchase of the Securities, the application of the proceeds and repayment
      thereof by the Company and the consummation of the transactions contemplated
      by
      this Agreement will not violate any provision of such act or any rule,
      regulation or order issued by the Securities and Exchange Commission
      thereunder.

    6.18 Margin
      Regulations.
      The
      Company does not own any “margin security”, as the term is defined in
      Regulation U of the Federal Reserve Board, and the proceeds of the Note
      will be used only for the purposes contemplated hereunder. None of the proceeds
      of the Note will be used, directly or indirectly, for the purpose of purchasing
      or carrying any margin security, for the purpose of reducing or retiring any
      indebtedness which was originally incurred to purchase or carry any margin
      security or for any other purpose which might cause any of the securities
      purchased under this Agreement to be considered “purpose credit” within the
      meaning of Regulations T, U or X of the Federal Reserve Board. The purchase
      of the Note will not constitute a violation of such Regulations T, U or
      X.

     

    6.19 Disclosure.
      Neither
      this Agreement nor any of the exhibits, schedules, attachments, written
      statements, documents, certificates or other items prepared or supplied to
      Agent
      or any Purchaser by or on behalf of the Company or any Significant Subsidiary
      with respect to the transactions contemplated hereby contain any untrue
      statement of a material fact or omit a material fact necessary to make each
      statement contained herein or therein not misleading. There is no fact which
      the
      Company or any Significant Subsidiary has not disclosed to Agent or Purchaser
      in
      writing and of which any of its officers, directors or executive employees
      is
      aware (other than general economic conditions) and which has had or would
      reasonably be expected to have a Material Adverse Effect.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    SECTION
      7

     

    

     

    EVENTS
      OF DEFAULT

     

    7.1 Definitions.
      An
      Event of Default shall be deemed to have occurred if:

     

    
      	
              (i)

            	
              the
                Company fails to pay when due and payable (whether at maturity or
                otherwise) the full amount of interest then accrued on the Note or
                the
                full amount of any principal payment (together with any applicable
                premium) on the Note;

            

    

     

    
      	
              (ii)

            	
              The
                Company or any Significant Subsidiary fail to perform or observe
                any
                affirmative covenant contained herein, in the Note or any other agreement
                between or among Agent and/or Purchaser and the Company and/or such
                Significant Subsidiary and such failure continues for a period of
                10 days;
                or the Company or any Significant Subsidiary breaches or fails to
                abide by
                any negative covenant contained herein, in the Note, or any other
                agreement between or among Agent, Purchaser and the Company and/or
                such
                Significant Subsidiary; 

            

    

     

    
      	
              (iii)

            	
              any
                representation, warranty or information con-tained herein or required
                to
                be furnished to any holder of the Note pursuant to or in connection
                with
                this Agreement, or any writing furnished by the Company to any holder
                of
                the Note, is false or misleading in any material respect on the date
                made
                or furnished;

            

    

     

    
      	
              (iv)

            	
              The
                Company or any of its Significant Subsidiaries makes an assignment
                for the
                benefit of creditors or admits in writing its inability to pay its
                debts
                generally as they become due; or an order, judgment, decree or injunction
                is entered adjudicating the Company or any of its Significant Subsidiaries
                bankrupt or insolvent; or an order, judgment, decree or injunction
                is
                entered against the Company or any of its Significant Subsidiaries
                requiring the dissolution or split up of the Company or any of its
                Significant Subsidiaries or preventing the Company or any of its
                Significant Subsidiaries from conducting all or any material part
                of its
                or their business; or any order for relief with respect to the Company
                or
                any of its Significant Subsidiaries is entered under federal bankruptcy
                laws; or the Company or any of its Significant Subsidiaries petitions
                or
                applies to any tribunal for the appointment of a custodian, trustee,
                assignee, receiver, liquidator or sequestrator (or similar official)
                of
                the Company or any of its Significant Subsidiaries, of any substantial
                part of the assets of the Company or any of its Significant Subsidiaries,
                or for the winding up or liquidation of the Company’s or any of its
                Significant ubsidiaries’ affairs, or commences any proceeding (other than
                a proceeding for the voluntary liquidation and dissolution of any
                of the
                Company’s Significant Subsidiaries) relating to the Company or any of its
                Significant Subsidiaries under any bankruptcy reorganization, arrangement,
                insolvency, readjustment of debt, dissolution, liquidation or similar
                law
                of any jurisdiction now or hereafter in effect; or any such petition
                or
                application is filed, or any such proceeding is commenced, against
                the
                Company or any of its Significant Subsidiaries and either (i)  the
                Company or any of its Significant Subsidiaries by any act indicates
                its
                approval thereof, consent thereto or acquies-cence therein or
                (ii) such petition, application or proceeding is not dismissed within
                45 days;

            

    

     

    
      	
              (v)

            	
              a
                final judgment in excess of $250,000 is rendered against the Company
                or
                any of its Significant Subsidiaries and, within 60 days after entry
                thereof, such judgment is not discharged in full or fully bonded
                over or
                execution thereof stayed pending appeal, or within 60 days after
                the
                expiration of any such stay, such judgment is not discharged in
                full;

            

    

     

    
      	
              (vi)

            	
              the
                Company or any of its Significant Subsidiaries defaults (i) in
                payment of any amounts under any indenture, loan agreement or other
                instrument under which any evidence of Indebtedness of the Company
                or any
                of its Significant Subsidiaries exceeding $100,000 in principal amount
                has
                been or hereafter may be issued, (ii) in compliance with the terms,
                covenants or other provisions of any such indenture, loan agreement
                or
                other instrument and the effect of such default in compliance is
                to permit
                the acceleration of the stated maturity of such Indebtedness (whether
                or
                not actually accelerated) or (in the case of demand obligations)
                results
                in demand for payment of such
                Indebtedness;

            

    

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    
      	
              (vii)

            	
              the
                Company or any of its Significant Subsidiaries shall default in the
                performance or observance of any provision of any agreement or commitment
                (other than those relating to Indebtedness) and such default has
                or might
                have a Material Adverse Effect;

            

    

     

    
      	
              (viii)

            	
              a
                Change in Control shall occur;

            

    

     

    
      	
              (ix)

            	
              any
                of this Agreement, the Note, the Warrants, the McAfee Capital Guaranty,
                the Security Agreement, the Mortgages or any other Transaction Documents
                shall cease to be in full force and effect or declared to be null
                and void
                by a court of competent jurisdiction or there shall occur any default
                or
                event of default under any of the Transaction
                Documents;

            

    

     

    
      	
              (x)

            	
              McAfee
                Capital LLC shall fail to observe or perform any covenant, condition
                or
                agreement in the McAfee Capital Guaranty or the McAfee Capital Guaranty
                shall be revoked by McAfee Capital
                LLC.

            

    

     

    The
      foregoing shall constitute Events of Default whatever the reason or cause for
      any such Event of Default and whether it is voluntary or involuntary or is
      effected by operation of law or pursuant to any judgment, decree or order of
      any
      court or any order, rule or regulation of any administrative or governmental
      body.

     

    7.2 Consequences
      of Events of Default.

     

    
      	
              (i)

            	
              Upon
                the occurrence and during the continuance of an Event of Default,
                the
                interest rate on the Note shall increase to the Default Rate. Any
                increase
                of the interest rate resulting from the operation of this subparagraph
                shall terminate as of the close of business on the date on which
                no Events
                of Default exist (subject to subsequent increases pursuant to this
                subparagraph).

            

    

     

    
      	
              (ii)

            	
              Upon
                the occurrence and during the continuance of an Event of Default,
                Agent
                may (and at the request of Purchaser shall) (i) declare all Indebtedness
                evidenced by the Note to be immediately due and payable (including
                all
                accrued and unpaid interest and any interest at the Default Rate),
                whereupon all such Indebtedness shall become due and payable, without
                presentment, demand, protest or further notice of any kind, all of
                which
                are expressly waived by the Company, and (ii) exercise all rights
                and
                remedies available under this Agreement, any other Transaction Documents
                and applicable law and Agent or Purchaser may proceed to protect
                and
                enforce its rights by an action at law, suit in equity or other
                appropriate proceeding, whether for the specific performance of any
                agreement contained in any Transaction Document, or for an injunction
                against a violation of any of the terms thereof, or in aid of the
                exercise
                of any power granted thereby or by law or otherwise. The Company
                acknowledges, and the parties hereto agree, that each holder of a
                Note has
                the right to maintain its investment in the Note free from repayment
                by
                the Company (except as herein specifically provided for) and that
                the
                provision for payment of an interest premium by the Company in the
                event
                that the Note is prepaid or are accelerated as a result of an Event
                of
                Default, is intended to provide compensation for the deprivation
                of such
                right under such circumstances.

            

    

     

    7.3
       Right
      of Setoff.
      To the
      extent permitted by law, 

     

    
      	
              (i)

            	
              in
                the case an Event of Default shall occur and be continuing or shall
                exist,
                Purchaser shall have the right, in addition to all other rights and
                remedies available to it, without notice to the Company, to setoff
                against
                and to appropriate and apply to the unpaid balance of the Note, all
                accrued interest thereon and all other obligations of the Company
                hereunder and under the Note and the Warrants, any debt owing to,
                and any
                other funds held in any manner for the account of the Company by
                Agent or
                Purchaser, including, without limitation, all funds in all deposit
                accounts (general or special) now or hereafter maintained by the
                Company
                for its own account with Agent or Purchaser and Agent and Purchaser
                are
                hereby granted a security interest in and lien on all such debts
                (including, without limitation, all such deposit accounts) for such
                purpose; and

            

    

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

       

    

    
      	
              (ii)

            	
              such
                right shall exist whether or not Agent or Purchaser shall have made
                any
                demand under this Agreement, the Note or the Warrants and whether
                or not
                the Note, the Warrants and such other obligations are matured or
                unmatured.

            

    

     

    SECTION
      8

     

    MISCELLANEOUS

     

    8.1 Expenses.
      The
      Company shall pay, and hold Agent and each Purchaser and all other holders
      of
      the Note and the Warrants harmless against liability for the payment of, and
      reimburse on demand as and when incurred from and against, (i) (x) all
      reasonable costs and expenses incurred by each of them in connection with their
      due diligence review of the Company and its Subsidiaries, (y) all
      reasonable costs and expenses incurred by each of them in connection with the
      preparation, negotiation, execution and interpretation of this Agreement, the
      Note, the Warrants, the Transaction Documents and the other agreements
      contemplated hereby and thereby, and the consummation of all of the transactions
      contemplated hereby and thereby (including, without limitation, all fees and
      expenses of environmental consultants and accountants and all reasonable fees
      and expenses of legal counsel) and (z) all UCC searches, title searches,
      recording, registration and filing fees, stamp and other taxes which may be
      payable in respect of the execution and delivery of this Agreement or the
      issuance, delivery or acquisition of the Note, the Warrants, any shares of
      Common Stock issuable upon the exercise of the Warrants or any of the
      Transaction Documents, which costs and expenses shall be payable at the Closing
      or, if the Closing does not occur, payable upon demand, up to a maximum not
      to
      exceed $30,000, (ii) all reasonable fees and expenses (including, without
      limitation, all reasonable fees and expenses of legal counsel) incurred with
      respect to any amendments or waivers (whether or not the same become effective)
      under or in respect of each of the Transaction Documents and the other
      agreements and instruments contemplated hereby and thereby, (including, without
      limitation, in connection with any proposed merger, sale or recapitalization
      of
      any of the Company or its Significant Subsidiaries) and (iii) the
      reasonable fees and expenses (including, without limitation, all reasonable
      fees
      and expenses of legal counsel) incurred with respect to the interpretation
      and
      enforcement of the rights granted under each of the Transaction Documents and
      the agreements or instrument contemplated hereby and thereby (including costs
      of
      collection). If the Company fails to pay when due any amounts due Agent and
      Purchaser or fail to comply with any of its obligations pursuant to this
      Agreement or any other agreement, document or instrument executed or delivered
      in connection herewith, the Company shall, upon demand by Agent and Purchaser,
      pay to Purchaser such further amounts as shall be sufficient to cover the cost
      and expense (including, but not limited to reasonable attorneys’ fees) incurred
      by or on behalf of Agent or Purchaser in collecting all such amounts due or
      in
      otherwise enforcing Agent’s and Purchaser’s rights and remedies hereunder. The
      Company also agrees to pay to Agent and Purchaser all costs and expenses
      incurred by them, including reasonable compensation to its attorneys for all
      services rendered, in connection with the investigation of any Event of Default
      and enforcement of its rights hereunder or under any Transaction
      Documents.

    8.2 Remedies.
      Each
      holder of the Note and the Warrants shall have all rights and remedies set
      forth
      in this Agreement, the Note, the Warrants, the other Transaction Documents
      and
      all rights and remedies which such holders have been granted at any time under
      any other agreement or contract and all of the rights such holders have under
      any law or in equity. No remedy hereunder or thereunder conferred is intended
      to
      be exclusive of any other remedy, and each and every such remedy shall be
      cumulative and shall be in addition to every other remedy given hereunder or
      thereunder or now or hereafter existing at law or in equity or by statute or
      otherwise. Any Person having any rights under any provision of this Agreement
      shall be entitled to enforce such rights specifically (without posting a bond
      or
      other security), to recover damages by reason of any breach of any provision
      of
      this Agreement and to exercise all other rights granted by law.

     

    8.3 Purchaser’s
      Representations.
      Purchaser hereby represents and warrants to the Company that:

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    
      	
              a)

            	
              It
                is not a “U.S. Person” (as defined in Rule 902 of Regulation S under the
                Securities Act) and it understands that no action has been or will
                be
                taken in any jurisdiction by the Company that would permit a public
                offering of the Securities in any country or jurisdiction where action
                for
                that purpose is required. It is not acquiring the Securities for
                the
                account or benefit of any U.S. persons except in accordance with
                exemption
                from registration requirements of the Securities Act or in a transaction
                not subject thereto.

            

    

     

    
      	
              b)

            	
              It
                is not acquiring the Securities with a view to any distribution thereof
                that would violate the Securities Act or the securities laws of any
                state
                of the United States of America or any other applicable
                jurisdiction.

            

    

     

    
      	
              c)

            	
              It
                (A) agrees that it will not offer, sell or otherwise transfer any
                of the
                Securities nor, unless in compliance with the Securities Act, engage
                in
                hedging transactions involving such securities, on or prior to (x)
                the
                date which is 40 days (in the case of the Notes) or one year (in
                the case
                of the Warrants) after the later of the date of the commencement
                of the
                offering and the date of original issuance (or of any predecessor
                of any
                Securities proposed to be transferred by the Purchaser) and (y) such
                later
                date, if any, as may be required by applicable law, except (a) to
                the
                Company, (b) pursuant to a registration statement that has been declared
                effective under the Securities Act, (c) for so long as any Securities
                are
                eligible for resale pursuant to Rule 144A under the Securities Act,
                to a
                person it reasonably believes is a “qualified institutional buyer” as
                defined in Rule 144A that purchases for its own account or for the
                account
                of another qualified institutional buyer to whom notice is given
                that the
                transfer is being made in reliance on Rule 144A, (d) pursuant to
                offers
                and sales to Persons who are not “U.S. Persons” (within the meaning of
                Regulation S) that occur outside the United States of America within
                the
                meaning of Regulation S or (e) pursuant to any other available exemption
                from the registration requirements of the Securities Act, and (B)
                agrees
                that it will give to each person to whom such Securities are transferred
                a
                notice substantially to the effect of this paragraph.
                

            

    

     

    
      	
              d)

            	
              The
                Purchaser acknowledges that the Securities are “restricted securities” as
                defined in Rule 144 under the Securities Act and subject to resale
                restrictions during the period set forth in Rule
                144.

            

    

     

    
      	
              e)

            	
              No
                form of “directed selling efforts” (as defined in Rule 902 of Regulation S
                under the Securities Act), general solicitation or general advertising
                in
                violation of the Securities Act has been or will be used nor will
                any
                offers by means of any directed selling efforts in the United States
                of
                America be made by the Purchaser or any of its representatives in
                connection with the offer and sale of any of the
                Notes.

            

    

    
      	
              f)

            	
              The
                Securities to be acquired by the Purchaser will be acquired for investment
                for the Purchaser’s own account, not as a nominee or agent, and not with a
                view to the resale or distribution of any part thereof, and the Purchaser
                has no present intention of selling, granting any participation in,
                or
                otherwise distributing the same. The Purchaser does not presently
                have any
                contract, undertaking, agreement or arrangement with any Person,
                directly
                or indirectly, to sell, transfer, distribute or grant participations
                to
                such Person or to any third Person, with respect to any of the Securities.
                

            

    

     

    
      	
              g)

            	
              The
                execution, delivery and performance by it of this Agreement and the
                consummation by it of the transactions contemplated by the Transaction
                Documents, including, without limitation, the purchase of the Securities:
                (a) is within its power and authority and has been duly authorized
                by all
                necessary action; (b) does not contravene the terms of its constitutional
                documents or any amendment thereof; and (c) shall not violate, constitute
                a breach of or a default (with the passage of time or otherwise)
                under, or
                require the consent of any person or a Governmental Authority (other
                than
                consents already obtained which are in full force and effect) under
                or
                pursuant to (i) any bond, debenture, note or other evidence of
                indebtedness, indenture, mortgage, deed of trust, lease or any other
                agreement or instrument to which the Purchaser is a party or by which
                the
                Purchaser or its property is bound, or (ii) any statute, rule, regulation,
                law or ordinance, or any judgment, decree or order applicable to
                the
                Purchaser or any of its properties, other than in each of clause
                (i) and
                (ii) such violations, breaches or defaults that would not, individually
                or
                in aggregate, have a Material Adverse Effect on the ability of the
                Purchaser to perform its obligations
                hereunder.

            

    

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    
      	
              h)

            	
              This
                Agreement and the other Transaction Documents to which it is a party
                have
                been duly executed and delivered by it and assuming that it is binding
                on
                and enforceable against the Company, this Agreement constitutes the
                Purchaser’s legal, valid and binding obligation enforceable against the
                Purchaser in accordance with its terms, except (i) as limited by
                applicable bankruptcy, insolvency, reorganization, moratorium and
                other
                laws of general application affecting enforcement of creditors’ rights
                generally and (ii) as limited by laws relating to the availability
                of
                specific performance, injunctive relief or other equitable
                remedies.

            

    

     

    
      	
              i)

            	
              Each
                certificate or instrument representing Restricted Securities shall
                be
                imprinted with a legend in substantially the following form: 

            

    

    

    “The
      securities represented by this certificate may not be offered, sold, pledged
      or
      otherwise transferred or assigned to any US Person and every purchaser of the
      securities represented by this certificate will be required to certify that
      it
      is not a US Person and is not acquiring the securities for the account or
      benefit of any US Person.

    The
      securities represented by this certificate were originally issued on May ____,
      2008 and have not been registered under the Securities Act of 1933, as amended.
      The transfer of the securities represented by this certificate is subject to
      the
      conditions specified in the Note and Warrant Purchase Agreement, dated as of
      May
      ___, 2008 and as amended and modified from time to time, between the Company
      named therein and certain investors, and the Company reserves the right to
      refuse the transfer of such securities until such conditions have been fulfilled
      with respect to such transfer. A copy of such conditions shall be furnished
      by
      the Company to the holder hereof upon written request and without
      charge.”

    

    8.4
       Amendments
      and Waivers. Except
      as
      otherwise expressly provided herein, the provisions of this Agreement and the
      Note may be amended or waived and the Company may take any action herein
      prohibited, or omit to perform any act herein required to be performed by it,
      only if the Company has obtained the written consent of Agent and the holders
      of
      a majority of the outstanding principal amount of the Note; provided that no
      such action shall change (i) the rate at which or the manner in which
      interest accrues on the Note or the time at which such interest becomes payable
      or (ii) any provision relating to the scheduled payments or prepayments of
      principal on the Note, without the written consent of the holders of the
      outstanding principal amount of the Note. No other course of dealing between
      the
      Company and the holder of any Warrant or Underlying Common Stock or any delay
      in
      exercising any rights hereunder or under the Note, the Warrants or otherwise
      shall operate as a waiver of any rights of any such holders.

     

    8.5 Survival
      of Agreement; Indemnities. All covenants, agreements, representations and
      warranties contained in this Agreement or the Note or made in writing by the
      Company in connection herewith or therewith shall survive the execution and
      delivery of this Agreement and the consummation of the transactions contemplated
      hereby, regardless of any investigation made by Agent or Purchaser or on their
      behalf. In addition, notwithstanding the repayment of all amounts pursuant
      to
      this Agreement or the Note, the obligations of the Company pursuant to
      Sections 8.1, 8.14, 8.17, 8.18 and 8.19 shall survive the repayment of the
      Note, and the obligations of the Company pursuant to Sections 8.1, 8.17,
      8.18 and 8.19 shall survive indefinitely. 

     

    8.6 No
      Setoffs, etc. All payments hereunder and under the Note shall be made by the
      Company without setoff, offset, deduction or counterclaim, free and clear of
      all
      taxes, levies, imports, duties, fees and charges, and without any withholding,
      restriction or conditions imposed by any Governmental Authority. If the Company
      shall be required by any law to deduct, setoff or withhold any amount from
      or in
      respect of any payment to Agent or Purchaser hereunder or under the Note or
      the
      Warrants, then the amount so payable to Agent or Purchaser shall be increased
      as
      may be necessary so that, after making all required deductions, setoffs and
      withholdings, Agent or Purchaser shall receive an amount equal to the sum it
      would have received had no such deductions, setoffs or withholding been
      made.

    8.7 Successors
      and Assigns; Purchaser’s Syndication Rights. Except as otherwise expressly
      provided herein, all covenants and agreements contained in this Agreement by
      or
      on behalf of any of the parties hereto shall bind and inure to the benefit
      of
      the respective successors and assigns of the parties hereto whether or not
      so
      expressed or not; provided that the Company shall not assign any of its rights
      or obligations under this Agreement or the Note or the Warrants without the
      prior written consent of Purchaser or any holder of the Note; provided further,
      that Purchaser may sell, transfer, assign or syndicate all or any portion of
      the
      Note or Warrants to a non-US Person upon the prior written consent of the
      Company (which consent shall not be unreasonably withheld), except that
      Purchaser shall not be restricted in any way from selling all or a portion
      of
      the Note or the Warrants (and shall not be required to obtain any such consent)
      if such sale (i) is to any of its Affiliates or (ii) is required or requested
      by
      any Governmental Authority. In addition, and whether or not any express
      assignment has been made, the provisions of this Agreement which are for
      Purchaser’s benefit as a purchaser or holder of the Note or the Warrants or the
      Underlying Common Stock are also for the benefit of, and enforceable by, any
      subsequent holder of such Note, Warrants and Underlying Common
      Stock.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    8.8 Aggregation.
      For purposes of this Agreement and any registration agreement, all holdings
      of
      any portion of the Note by Persons who are Affiliates of each other shall be
      aggregated for purposes of meeting any threshold tests under this Agreement
      and
      any such registration agreement.

     

    8.9 Severability.
      Whenever possible, each provision of this Agreement shall be interpreted in
      such
      manner as to be effec-tive and valid under applicable law, but if any provision
      of this Agreement is held to be prohibited by or invalid under applicable law,
      such provision shall be ineffective only to the extent of such prohibition
      or
      invalidity, without invalidating the remainder of this Agreement.

     

    8.10 Counterparts.
      This Agreement may be executed in two or more counterparts, any one of which
      need not contain the signatures of more than one party, but all such
      counterparts taken together shall constitute one and the same
      Agreement.

     

    8.11 Descriptive
      Headings; Interpretation. The descrip-tive headings of this Agreement, the
      Note and the Warrants are inserted for convenience only and do not constitute
      a
      substantive part of this Agreement. The use of the word “including” in this
      Agreement, the Note and the Warrants shall be by way of example rather than
      by
      limitation.

     

    8.12 Governing
      Law.THIS
      AGREEMENT AND THE NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
      THIS
      AGREEMENT AND THE NOTE HAVE BEEN DELIVERED IN AND IN ALL RESPECTS, EXCEPT AS
      SET
      FORTH BELOW, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
      WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 AND SECTION
      5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING TO THE MAXIMUM
      EXTENT PERMITTED BY APPLICABLE LAW, ALL OTHER CONFLICTS OF LAWS PRINCIPLES
      AND
      CHOICE OF LAW RULES OF THE STATE OF NEW YORK.

     

    8.13 Notices. All
      notices, demands or other communica-tions to be given or delivered under or
      by
      reason of the provisions of this Agreement shall be in writing and shall be
      deemed to have been given when delivered personally to the recipient, sent
      to
      the recipient by reputable overnight courier service (charges prepaid) or mailed
      to the recipient by certified or registered mail, return receipt requested
      and
      postage prepaid. Such notices, demands and other communications shall be sent
      to
      Agent and to the Company at the address indicated below:

    

      
        	
                To
                  the Company:

              	
                AE
                  Biofuels, Inc.

              
	 	
                20400
                  Stevens Creek Boulevard, Suite 700

              
	 	
                Cupertino,
                  California 95014 

              
	 	
                Attention:
                  Mr. Eric A. McAfee, Chairman and Chief Executive
                  Officer

              
	 	 	 
	
                With
                  copies to:

              	
                ____________________________

              	 
	 	
                ____________________________

              	 
	 	____________________________	 
	 	
                Attention:____________________

              	 
	 	 	 

      

       

    

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    
      
        	
                To
                  Agent:

              	
                Third
                  Eye Capital Corporation

              
	 	
                Brookfield
                  Place, TD Canada Trust Tower

              
	 	
                161
                  Bay Street, Suite 3820

              
	 	
                Toronto,
                  Canada ON M5J 2S1

              
	 	
                Attention:
                  Vice President - Credit

              
	 	 
	
                With
                  a copy to:

              	
                DLA
                  Piper US LLP

              
	 	
                203
                  North LaSalle Street

              
	 	
                Suite
                  1800

              
	 	
                Chicago,
                  Illinois 60601

              
	 	
                Attention:
                  Jennifer Homer

              

      

       

    

    or
      to
      such other address or to the attention of such other person as the recipient
      party has specified by prior written notice to the sending party.

    

    8.14 [Intentionally
      Omitted].

     

    8.15 No
      Strict Construction.
      The
      parties hereto have participated jointly in the negotiation and drafting of
      this
      Agreement. In the event an ambiguity or question of intent or interpretation
      arises, this Agreement shall be construed as if drafted jointly by the parties
      hereto, and no presumption or burden of proof shall arise favoring or
      disfavoring any party by virtue of the authorship of any of the provisions
      of
      this Agreement.

     

    8.16 Complete
      Agreement.
      This
      Agreement, those documents expressly referred to herein and other documents
      of
      even date herewith, embody the complete agreement and understanding among the
      parties and supersede any prior agreements or representations by or among the
      parties, written or oral, which may have related to the subject matter hereof
      in
      any way.

     

    8.17 Indemnification.
      In
      consideration of Agent’s and Purchaser’s execution and delivery of this
      Agreement and Purchaser’s acquiring the Note and the Warrants hereunder and in
      addition to all of the Company’ other obligations under this Agreement and in
      addition to all other rights and remedies available at law or in equity, the
      Company and its Significant Subsidiaries shall defend, protect and indemnify
      Agent, Purchaser and each other holder of the Note, the Warrants or the
      Underlying Common Stock and all of their respective officers, directors,
      managers, members, shareholders, partners, affiliates, employees, agents,
      attorneys, representatives, successors and assigns (including, without
      limitation, those retained in connection with the transactions contemplated
      by
      this Agreement) (collectively, the “Indemnitees”), and save and hold each of
      them harmless against, and pay on behalf of or reimburse such party on demand
      as
      and when incurred from and against any and all actions, causes of action, suits,
      claims, losses (including diminutions in value and consequential damages),
      costs, penalties, fees, liabilities and damages, and expenses in connection
      therewith (irrespective of whether any such Indemnitee is a party to the action
      for which indemnification hereunder is sought), including reasonable attorneys’
fees and disbursements interest and penalties and all amounts paid in
      investigation, defense or settlement of any of the foregoing and claims relating
      to any of the foregoing (the “Indemnified Liabilities”) incurred by the
      Indemnitees or any of them as a result of, or arising out of, or relating to
      (i) any transaction financed or to be financed in whole or in part,
      directly or indirectly, with the proceeds of the issuance of the Note or the
      Warrants or (ii) the execution, delivery, performance or enforcement of
      this Agreement, the Transaction Documents and any other instrument, document
      or
      agreement executed pursuant hereto or thereto by any of the Indemnitees, except
      and solely to the extent that any such Indemnified Liabilities are caused by
      the
      particular Indemnitee’s gross negli-gence or willful misconduct. 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.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

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

     

    8.19
       Jurisdiction
      and Venue.
      Each of
      the parties (i) submits to the jurisdiction of any state or Federal court
      sitting in New York, New York in any legal suit, action or proceeding arising
      out of or relating to this Agreement, the Note or the Warrants, (ii) agrees
      that all claims in respect of the action or proceeding may be heard or
      determined in any such court and (iii) agrees not to bring any action or
      proceeding arising out of or relating to this Agreement, the Note or the
      Warrants in any other court. Each of the parties waives any defense of
      inconvenient forum to the maintenance of any action or proceeding so brought
      and
      waives any bond, surety or other security that might be required of any other
      party with respect thereto. Any party may make service on any other party by
      sending or delivering a copy of the process to the party to be served at the
      address and in the manner provided for the giving of notices in
      Section 8.13. Each party agrees that a final judgment in any action or
      proceeding so brought shall be conclusive and may be enforced by suit on the
      judgment or in any other manner provided by law. Nothing herein shall affect
      the
      right to serve process in any other manner permitted by law or shall limit
      the
      right of Agent, Purchaser or holders of Underlying Common Stock to bring
      proceedings against the Company in the courts of any other jurisdiction and
      the
      exclusive choice of forum set forth in this Section shall not be deemed to
      preclude the enforcement by Agent, Purchaser or any holder of the Note, the
      Warrants or the Underlying Common Stock of any judgment obtained in any other
      forum or the taking by Agent, Purchaser or any holder of the Note, the Warrants
      or the Underlying Common Stock of any action to enforce the same in any other
      appropriate jurisdiction, and the Company hereby waives the right to
      collaterally attack any such judgment or action.

    8.20
      Acknowledgements.
      The
      Company hereby acknowledges that:

     

    
      	 	
              a)

            	
              Neither
                Agent nor Purchaser have any fiduciary relationship with or duty
                to the
                Company arising out of or in connection with this Agreement or any
                of the
                other Transaction Documents, and the relationship between Agent and
                Purchaser, on one hand, and the Company, on the other hand, in connection
                herewith or therewith is solely that of debtor and creditor;
                and

            

    

     

    
      	 	
              b)

            	
              no
                joint venture is created hereby or by the other Transaction Documents
                or
                otherwise exists by virtue of the transactions contemplated
                hereby.

            

    

     

    8.21
      Waiver
      of Right to Jury Trial.
      THE
      COMPANY, AGENT AND EACH HOLDER OF THE NOTE AND THE WARRANTS HEREBY WAIVES,
      TO
      THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN
      ANY
      COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT,
      THE
      NOTE OR THE WARRANTS OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION
      OR
      ENFORCEMENT THEREOF. THE COMPANY AGREES THAT THIS SECTION 8.21 IS A
      SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND ACKNOWLEDGES THAT PURCHASER
      WOULD NOT PURCHASE THE NOTE OR THE WARRANTS HEREUNDER IF THIS SECTION 8.21
      WERE NOT PART OF THIS AGREEMENT.

     

    8.22
      Agent.
      Purchaser hereby designates and appoints Third Eye Capital Corporation as the
      administrative agent, payment agent and collateral agent under this Agreement
      and the other Transaction Documents and Purchaser hereby irrevocably authorizes
      Third Eye Capital Corporation, as Agent for Purchaser, to take such action
      or to
      refrain from taking such action on its behalf under the provisions of this
      Agreement and the other Transaction Documents and to exercise such powers and
      perform such duties as are delegated to Agent by the terms of this Agreement
      and
      the other Transaction Documents, together with such other powers as are
      reasonably incidental thereto. Agent may perform any of its duties hereunder,
      or
      under the Transaction Documents, by or through its agents, employees or
      sub-agents. Agent shall have no duties, obligations or responsibilities except
      those expressly set forth in this Agreement or in the other Transaction
      Documents. Purchaser shall make its own independent investigation of the
      financial condition and affairs of the Company in connection with the extension
      of credit hereunder. Neither Agent nor any of its officers, directors, managers,
      members, equity owners, employees, attorneys or agents shall be liable to
      Purchaser for any action lawfully taken or omitted by them hereunder or under
      any of the other Transaction Documents, or in connection herewith or therewith;
      provided that the foregoing shall not prevent Agent from being be liable to
      the
      extent of its own gross negligence or willful misconduct as determined by a
      court of competent jurisdiction on a final and nonappealable basis. Agent may
      resign from the performance of all or part of its functions and duties hereunder
      at any time by giving at least thirty (30) calendar days’ prior written notice
      to Purchaser. Such resignation shall take effect upon the acceptance by a
      successor Agent of appointment. Upon the acceptance of any appointment as Agent
      under the Transaction Documents by a successor Agent, such successor Agent
      shall
      thereupon succeed to and become vested with all the rights, powers, privileges
      and duties of the retiring Agent and, upon the earlier of such acceptance or
      the
      effective date of the retiring Agent’s resignation, the retiring Agent shall be
      discharged from its duties and obligations under the Transaction Documents,
      provided that any indemnity rights or other rights in favor of such retiring
      Agent shall continue after and survive such resignation and succession.
      Purchaser agrees that any action taken by Agent in accordance with the
      provisions of this Agreement or of the other Transaction Documents relating
      to
      the Collateral, and the exercise by Agent of the powers set forth herein or
      therein, together with such other powers as are reasonably incidental thereto,
      shall be authorized and binding upon Purchaser and Agent.

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    8.23
      USA
      Patriot Act Notice.
      Federal
      law requires all financial institutions to obtain, verify and record information
      that identifies each person who opens an account or obtains a loan. Agent or
      Purchaser may ask for the Company’s legal name, address, tax ID number or social
      security number and other identifying information. Agent or Purchaser may also
      ask for additional information or documentation or take other actions reasonably
      necessary to verify the identity of the Company, any Significant Subsidiary,
      guarantors or other related persons.
      

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      the
      parties hereto have executed this Agreement on the date first written
      above.

    

      
        	 	 	 	 
	
                COMPANY:

              	
                AE
                  BIOFUELS, INC.

              
	 	 	 	 
	 	 	 	 
	 	
                By:
                  

              	
                /s/
                  Eric A. McAfee

              
	 	
                Its: 

              	
                Chief
                  Executive Officer and Chairman of the
                  Board

              

      

    

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    
      

        
          	 	 	 	 
	
                  AGENT: 

                	THIRD
                  EYE CAPITAL CORPORATION
	 	 	 	 
	 	 	 	 
	 	
                  By:
                    

                	
                   /s/
                    David G. Alexander

                
	 	
                  Its: 

                	
                  Managing
                    Director

                

        

      

      

        
          	 	 	 	 
	
                  PURCHASER:

                	THIRD
                  EYE CAPITAL ABL OPPORTUNITIES FUND
	 	 	 	 
	 	By:
                  Third Eye Capital ABL Opportunities SARL, its Managing General
                  Partner 
	 	 	 	 
	 	
                  By:
                    

                	
                  /s/
                    Arif Bhalwani

                
	 	
                  Its: 

                	
                  Manager

                
	 	 	 
	 	By:
	/s/
                  Robert DeNormandie
	 	Its:
	Manager

        

      

    

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

    

    FORM
      OF NOTE

    

    THIS
      NOTE
      MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED OR ASSIGNED TO ANY
      US
      PERSON AND EVERY PURCHASER OR SUBSEQUENT HOLDER OF THIS NOTE WILL BE REQUIRED
      TO
      CERTIFY THAT IT IS NOT A US PERSON AND IS NOT ACQUIRING THE SECURITIES FOR
      THE
      ACCOUNT OR BENEFIT OF ANY US PERSON.

     

    THE
      NOTE
      EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES
      ACT
      OF 1933, AS AMENDED (THE “SECURITIES
      ACT”)
      AND
      MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE
      WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY OTHER APPLICABLE
      REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY OTHER APPLICABLE
      SECURITIES LAW, INCLUDING STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION
      THEREFROM, OR IN A TRANSACTION NOT SUBJECT THERETO. 

     

    NOTE

    

      
        	
                $5,000,000

              	
                May
                  16, 2008

              

      

    

     

    FOR
      VALUE
      RECEIVED, the undersigned, AE
      BIOFUELS, INC.,
      a
      Nevada corporation (the “Company”),
      hereby unconditionally promises to pay to THIRD
      EYE CAPITAL ABL OPPORTUNITIES FUND
      (the
“Note
      Holder”),
      or
      registered assigns, at the office of
      _____________________________________________________________ or at such other
      address as may be specified by the Note Holder, in lawful money of the United
      States of America and in immediately available funds, $5,000,000 (Five Million
      and 00/100 Dollars) in installments in the amounts and on the dates as set
      forth in the Note Purchase Agreement (defined below).
      The
      Company agrees to pay interest in like money at such office on the unpaid
      principal amount hereof from time to time outstanding at the interest rates
      and
      on the dates specified in the Note Purchase Agreement.

     

    This
      Note
      (a) is one of the Notes referred to in the Note and Warrant Purchase
      Agreement dated as of May 16, 2008 (as amended, supplemented or otherwise
      modified from time to time, the “Note
      Purchase Agreement”),
      among
      the Company, Third Eye Capital Corporation, as Agent, and the Note Holder,
      (b) is subject to the provisions of the Note Purchase Agreement and
      (c) is subject to mandatory prepayment in whole or in part as provided in
      the Note Purchase Agreement and the other Transaction Documents. Reference
      is
      hereby made to the Transaction Documents for a description of the properties
      and
      assets in which a security interest has been granted, the nature and extent
      of
      the security, the terms and conditions upon which the security interests were
      granted and the rights of the holder of this Note in respect
      thereof.

     

    Upon
      the
      occurrence and during the continuance of any one or more Events of Default,
      all
      amounts then remaining unpaid on this Note shall become, or may be declared
      to
      be, immediately due and payable, all as provided in the Note Purchase Agreement.
      
       

      
        
          
          

        

        
          1-1

          
            

          

        

        
          
          

        

      

    

     

    All
      parties now and hereafter liable with respect to this Note, whether maker,
      principal, surety, guarantor, endorser or otherwise, hereby waive presentment,
      demand, protest and all other notices of any kind.

     

    Unless
      otherwise defined herein, terms defined in the Note Purchase Agreement and
      used
      herein shall have the meanings given to them in the Note Purchase
      Agreement.

     

    This
      Note
      is hereby expressly limited so that in no contingency or event whatsoever,
      whether by acceleration of maturity of the indebtedness evidenced hereby or
      otherwise, shall the amount paid or agreed to be paid to the holder of this
      Note
      for the use, forbearance or detention of the money advanced or to be advanced
      hereunder exceed the highest lawful rate permissible under the laws of the
      State
      of New York. If, from any circumstances whatsoever, fulfillment of any provision
      of this Note shall, at the time performance of such provisions shall be due,
      involve the payment of interest in excess of that authorized by law, the
      obligation to be fulfilled shall be reduced to the limit so authorized by law,
      and if, from any circumstances, the holder of this Note shall ever receive
      as
      interest an amount which would exceed the highest lawful rate, such amount
      which
      would be excessive interest shall be applied to the reduction of the unpaid
      principal balance of the indebtedness evidenced hereby and not to the payment
      of
      interest.

    THIS
      NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS NOTE HAVE BEEN
      DELIVERED IN AND IN ALL RESPECTS, EXCEPT AS SET FORTH BELOW,
SHALL
      BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS
      OF
      THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 AND SECTION 5-1402 OF THE NEW
      YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING TO THE MAXIMUM EXTENT PERMITTED
      BY
      APPLICABLE LAW, ALL OTHER CONFLICTS OF LAWS PRINCIPLES AND CHOICE OF LAW RULES
      OF THE STATE OF NEW YORK.

     

    
      
        
        

      

      
        1-2

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the undersigned authorized officer of the Company has executed
      this Note as of the date first set forth above.

     

    
      	 	
              AE
                BIOFUELS, INC.

            
	 	 	 	 
	 	 	 	 
	 	
              By:

            	
               
                

            	 
	 	
              Name:

            	  
	 
	 	
              Title:Unassociated Document

    STOCK
      OPTION AGREEMENT

    July
      18, 2007

    

    THIS
      STOCK OPTION AGREEMENT
      (“Agreement”) is entered into by and between AMARILLO BIOSCIENCES, INC. (“ABI”),
      and COMMONWEALTH ASSOCIATES as Optionee (“Optionee”), as contemplated by that
      certain Consulting Agreement of even date, between ABI and
      Optionee.

     

    WHEREAS,
      ABI and
      Optionee desire to enter into this Agreement to evidence the grant of options,
      and to set forth the terms of the Options granted to Optionee; 

     

    THEREFORE,
      in
      consideration of the mutual covenants and agreements herein expressed, and
      for
      other good and adequate consideration the receipt and sufficiency of which
      are
      evidenced by the execution hereof, ABI and Optionee hereby agree as
      follows:

     

    I.

    ADDITIONAL
      DEFINITIONS

    

    “33
      Act”
shall mean the Securities Act of 1933.

     

    II.

    THE
      AWARD

    

    This
      Agreement shall evidence the grant and award to Optionee of Options to purchase
      following shares of the voting common stock of ABI (the “Shares”): 

     

    
      	
              Number
                of Shares

            	
              Effective
                Date of Grant

            	
              Exercise
                Price

            
	 	 	 
	
              1,000,000

            	
              July
                18 , 2007

            	
              $0.20

            

    

    

    The
      Options vest immediately, and are exercisable during a period of twelve (12)
      months from the date of this Agreement. 

     

    III.

    REORGANIZATION
      OF ABI

     

    In
      the
      event of a Reorganization of ABI as defined below, Optionee shall be given
      notice of such details of the Reorganization as are available to ABI, and shall
      have a period of thirty (30) days after receipt of such notice during which
      to
      exercise the Options. If Optionee does not exercise the Options within said
      thirty (30) day period, the Options shall lapse in their entirety, and be of
      no
      further force or effect.

     

    As
      used
      herein, “Reorganization” shall be any merger, consolidation, conversion,
      combination, split-up, or sale of all or substantially all of the assets of
      ABI
      which has been approved by the shareholders, or any combination of the
      foregoing.

     

    IV.

    ADJUSTMENTS

     

    In
      the
      event of any change in the outstanding Common Stock by reason of a stock
      dividend or distribution, stock split, reverse stock split, reclassification,
      or
      other similar event (excepting, however, any Reorganization as defined in
      Article III, above), the number of shares of Common Stock subject to Options,
      and the Option Price of the Options, shall be appropriately
      adjusted.

     

    
      
        

          Stock
            Option Agreement

          July
            18,
            2007

        

      

      
        Page
          1 of 4

        
          

        

      

      
        
        

      

       

    

    V.

    GENERAL
      RESTRICTIONS

     

    Upon
      exercise of any of the Stock Options by Optionee, the Shares shall be issued
      to
      Optionee subject to any applicable restrictions under federal or state
      securities laws and regulations promulgated thereunder, and Optionee agrees
      to
      accept the Shares subject to such restrictions, and bearing any required or
      appropriate legends. There is no assurance that a market for the Shares will
      be
      available, although at the time of this Agreement, the common stock of ABI
      is
      traded on the over-the-counter bulletin board. Currently, Rule 144 promulgated
      under the 33 Act is available to permit sale of shares held for at least one
      (1)
      year; however, there is no assurance that ABI’s securities will continue to
      qualify for resale pursuant to Rule 144, and if at some point ABI should cease
      filing public reports under the Securities and Exchange Act of 1934, Rule 144
      would no longer be available. By entering into this Stock Option Agreement,
      ABI
      makes no representation that its securities will continue to qualify for resale
      under Rule 144, nor that its securities will continue to be traded on the
      over-the-counter bulletin board, or any other exchange. 

     

    VI.

    ASSIGNABILITY

     

    The
      Options shall not be assignable or transferable by Optionee except to a person
      or entity approved by ABI in writing.

     

    Although
      limited transferability is allowed under the above-described conditions,
      Optionee should consult with competent tax and securities counsel before
      transferring options. It may be necessary to make appropriate disclosures to
      transferees, regarding lack of marketability. In addition, transfers of Options
      for value may cause Optionee to recognize taxable income.

     

    VII.

    ISSUANCE
      OF SHARES

     

    As
      soon
      as practicable after receipt of payment, ABI shall deliver to the Optionee
      a
      certificate or certificates evidencing the Shares. The Optionee shall become
      a
      shareholder of ABI with respect to common stock represented by certificates
      so
      issued and as such shall be fully entitled to receive dividends, to vote and
      to
      exercise all other rights of a shareholder. 

     

    VIII.

    RULE
      16b-3 EXEMPTION

     

    The
      Options shall comply with the applicable provisions of Rule 16b-3 promulgated
      under the Securities and Exchange act of 1934, or any successor provision,
      and
      shall be deemed to contain such additional conditions or restrictions as may
      be
      required thereunder to qualify for the maximum exemption from Section 16 of
      the
      1934 Act with respect to transactions regarding the Options or the underlying
      common stock.

     

    IX.

    REGISTRATION
      RIGHTS

     

    If
      at any
      time prior to the expiration of five (5) years from the date of this Agreement
      ABI files a registration statement under the 33 Act (including a post-effective
      amendment to a previous registration statement) which relates to a current
      offering of securities of any security holder of ABI (except in connection
      with
      an offering on Forms S-4 or S-8, or any other inappropriate form(s)), ABI shall
      offer to Optionee the opportunity to register or qualify the Shares by inclusion
      in the registration statement. ABI shall give 30 days prior written notice
      to
      Optionee of ABI’s intention to file a registration statement under the 33 Act,
      which notice shall constitute an offer to Optionee to have its Shares included
      in such registration statement, and Optionee shall notify ABI in writing within
      ten days thereafter if Optionee desires to accept such offer. Neither the
      delivery of such notice nor the acceptance by Optionee of such offer shall
      obligate ABI to file such registration statement and, notwithstanding the actual
      filing of the registration statement, ABI may at any time prior to its
      effectiveness elect not to pursue the registration without liability to
      Optionee. 

     

    
      
        

          Stock
            Option Agreement

          July
            18,
            2007

        

      

      
        Page
          2 of 4

        
          

        

      

      
        
        

      

       

    

    In
      the
      event of any registration under the 33 Act of any of the Shares pursuant to
      this
      Article, Optionee shall be responsible for the registration costs associated
      with the blue sky registration of the Shares in any state in which ABI is not
      already registering shares of its common stock.

     

    In
      the
      event of any registration under the 33 Act of any of the Shares underlying
      this
      Option, Optionee will be responsible for ensuring that the Shares are sold
      in
      strict compliance with the registration statement (including, without
      limitation, the plan of distribution to be included therein) and all other
      applicable federal and state securities laws and regulations.

     

    The
      Shares underlying this Option may be excluded from a registration statement
      at
      the reasonable election of ABI in the event all information essential for ABI
      and its counsel to prepare the registration statement is not furnished by
      Optionee, after Optionee, upon written request of ABI or its counsel, has been
      given a reasonable amount of time (not less than ten business days from the
      date
      such request has been sent to Optionee) to transmit the requested information
      to
      ABI and/or its counsel. 

     

    In
      the
      event of any registration of the Shares under the 33 Act pursuant to this
      Article, Optionee agrees to indemnify and hold harmless ABI and each affiliate
      and controlling person, as defined by the 33 Act, of ABI, each officer or
      employee of ABI who signs the registration statement, each director of ABI,
      each
      underwriter, and any and all affiliates and controlling persons, as defined
      by
      the 33 Act, of such persons against any and all losses, claims, damages or
      liabilities and will reimburse ABI and each of the foregoing persons for any
      losses, claims, damages or liabilities and for any legal or any other expenses
      incurred by each such person, if the statement or omission in respect of which
      such loss, claim, damage or liabilities is asserted was made in reliance upon
      and in conformity with information furnished to ABI in writing, by Optionee
      or
      on Optionee’s behalf specifically for use in connection with the preparation of
      such registration statement or the related prospectus.

     

    X.

    NO
      RIGHTS AS A SHAREHOLDER

     

    Optionee
      shall have no rights as a shareholder with respect to the Shares unless and
      until certificates evidencing the Shares shall have been issued to
      Optionee.

     

    XI.

    TAX
      WITHHOLDING

     

    Upon
      the
      exercise of any of the Options, ABI shall have the right to require Optionee
      to
      pay to ABI the amount of any taxes that are required by law to be withheld
      with
      respect to such exercise. 

     

    
      
        

          Stock
            Option Agreement

          July
            18,
            2007

        

      

      
        Page
          3 of 4

        
          

        

      

      
        
        

      

       

    

    XII.

    TAX
      CONSIDERATIONS

     

    ABI
      does
      not and will not render tax advice to Optionee. Optionee represents that he
      will
      consult his own tax advisor with respect to the tax aspects of both the exercise
      of the Options, and the disposition of the Shares. The Options are not qualified
      stock options within the meaning of the Internal Revenue Code of 1986, and
      therefore, the exercise of the Options may be expected to be a taxable
      event.

     

    XIII.

    ENTIRE
      AGREEMENT

     

    This
      Agreement is the only such agreement in force between ABI and Optionee regarding
      options granted on the dates of grant hereinbefore shown. 

     

    IN
      WITNESS WHEREOF, this Agreement is executed as of the date first above
      written.

     

    
      	 	 	 
	 	ABI:
	 	 
	 	AMARILLO BIOSCIENCES, INC.
	 
 	 
 	 
 
	 	By:  	/s/ Joseph
              M.
              Cummins 
	 	
              
Joseph
              M. Cummins, CEO and President
	 	 

    
      	 	 	 
	 	OPTIONEE:
	 	 
	 	COMMONWEALTH ASSOCIATES
	 
 	 
 	 
 
	 	By:  	/s/ Robert
              O. Sullivan
	 	
              

              Robert
                O’Sullivan, CEO and President

            
	 	 

    

     

    
      
        

          Stock
            Option Agreement

          July
            18,
            2007

        

      

      
        Page
          4 of 4

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00142-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00142-of-00352.parquet"}]]